Manage for Success: Digital Music Licensing (Newsletter #15, July 2002)

A subscriber to this newsletter recently asked me to discuss digital licensing of music catalogs. I’ve pondered his request for a few weeks and have come to the following conclusion. Do as little as possible -- at least for the time-being.

Let me explain.

The music industry is currently in a highly confused state. The outright stealing of music, thanks to Napster, Gnutella, and their ilk, have created a situation where many people -- not just kids -- assume that music is out there free for the asking, merely by downloading a song from someone else's hard drive. That much of this music was originally released by major labels has created the false assumption that since someone has already bought it and placed it on their computer, that that was sufficient compensation. Besides, some may think, the majors are huge and are sitting on lots of dough, so why would they need my piddling contribution?

The fact is that it's not only labels who don't get properly compensated, it's also artists and music publishers. And since many artists write their own music, they get doubly screwed, because they don't get their share when their publishers aren't paid. I'll discuss the prevailing situation between the majors and many artists further on.

Music "stolen" from smaller, independent labels has made it even tougher for them to stay in business than has been true for the majors. It's bad enough that industry sales are off ten percent from last year, but small labels have suffered disproportionately -- they need every nickel and dime they can make in order to stay alive. Rampant piracy hurts the little guy the most.

Now, if someone really wants to play music on their computer, and can't afford to buy an entire CD, there are legitimate, legal alternatives. Many labels allow you to listen to excerpts and then download single songs from their web sites for a reasonable fee. And more and more legitimate download sources are available. They include, among others, Liquid Audio, EMusic, Digital Pressure, etc.

The majors are beginning to permit legal downloads through two conglomerated web sites: MusicNet and Pressplay. These require a subscription which allows one to stream or download a limited number of selections for a stated monthly fee.

As a label owner what should you do? Well, you can offer selected songs to be downloaded from your site at what you considerable to be an equitable fee. Of course you'll have to decide what that fee should be and what format you'll utilize. For example, a three-minute song on a CD will take up about 30 megabytes of data -- prohibitive if you use a dial-up modem. Therefore many labels use a form of compression called MP3 which was promulgated some years ago by the Moving Picture Experts Group. That same song will take up only about 3 megs of space -- much easier to download. I suggest you give an interested customer a chance to audition at least 30 seconds to a minute of the song using some form of streaming technology such as Real Audio, QuickTime, or Windows Media Player, but only in a highly compressed, non-storable fashion.

Another possibility is to grant a non-exclusive license to Liquid Media or one of the other web-based companies mentioned earlier. Keep the term relatively short -- perhaps only a year or two. But be sure you get a fair deal -- in other words, sufficient royalty per song to justify your costs and to warrant the hassle involved. You might even request a guarantee, but you're unlikely to get one unless you're offering a sizable catalog of desirable songs.

Making some of your music available this way and at a nominal cost to consumers may reduce instances of piracy, yet bring in additional modest income. But as I indicated above, any deals you make should be non-exclusive and short-term.

Of course, if you're uncomfortable licensing your music, don't do it! No one can force you into a deal unless it's one which you feel is fair and evenhanded.

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Solutions Unlimited has guided many clients through the deal-making process, suggesting terms that are fair and equable to both sides. Why not have me do the same thing for you.

I also have many decades of experience planning, budgeting, and fixing record industry management problems. Don't hesitate to call me to discuss your particular situation and how I can help you.

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Now to the matter of problems between many major labels and some of their artists. The majors are notorious for complex deals -- contracts usually exceed seventy-five pages -- and even though advances may appear to be generous, artists may not see any money afterwards. This is due to countless charges against royalties.

The cost to make a recording is almost always fully deducted from royalties, but also many marketing costs, such as tour support, radio promotion, and sometimes even publicity are subtracted. All this is stated in the contract, but a naive artist with an attorney unfamiliar with record industry practice may not argue the terms. Many labels have "standard" packaging deductions that are usually 25 percent for CDs, and some pay on only 90 percent of sales. Then there's the matter of "free goods" -- a deduction of ten to fifteen percent -- sometimes more -- specified in many contracts that, in theory, makes it easier for a label to make deals selling to large accounts. All of these deductions may be legal, but are they ethical?

There's also the problem that many labels specify options -- for the label, not the artist -- that call for an artist to make up to seven albums over a period of time. It's usually intended that it be for one release per year, but in the case of singer-songwriters who may not be prolific, the seven albums may take ten or more years to accomplish -- a period that many artists not unreasonably consider to be indentured servitude!

The fact is, labels act not only as banker in these deals by fronting all the costs, but they also have a stake in the artist's future success. When a label has spent a million or two and has gotten an artist to where she's becoming successful, the label feels that it should gain from that success. That's why they try to make long-term deals.

However, these long deals are now a matter of debate in the California legislature and the U. S. Congress, so expect to see several new laws requiring substantial changes in future deals.

Bear all this in mind when you make your next contract with an artist. Try to work it out so that both the artist and the label share the risk -- and the bounty.

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Copyright 2002 by Keith Holzman, Solutions Unlimited. All rights reserved.