 Taking
a Glance
at Other Income
Streams
in the Music Industry...2007
by Dina
LaPolt, Esq.* - March
2007
Back to The
Academy
In addition to income generated
from traditional record sales, music used in films and television, and sources
from music publishing, there are other income streams (some new and some not so
new) available to the music industry. Please note that although the information contained in this article has
been updated, it may be obsolete in a few months time as the music industry is
changing so rapidly that those of us who work in it can hardly keep up! However, the one fact that remains constant
is that music is now available
everywhere. Today music is
available through digital download services such as iTunes, eMusic, and Napster;
streaming interactive subscription services such as Rhapsody and MusicNet as
well as non-interactive subscription services via MusicChoice, Sirius, and XM Satellite;
video games such as Grand Theft Auto and Madden Football as well as through your
cell phone. In addition, there are
many Internet destination sites that are music driven and visited by millions
and millions of people everyday such as MySpace
(who, incidentally, just announced that they are working with SnoCap to try and launch a music
download service that would let musicians sell music directly from their profiles
and their fans’ profiles).
In an effort to keep the
confusion at a minimum, below are just a few of the descriptions for
some of these formats and the breakdown of some of the income paid to artists
and songwriters and others.
Digital
Downloads
According to Billboard Magazine, U.S.
album sales dropped to 588.2 million in 2006 which is a 5% decrease from the
619 million copies scanned in 2005 which is the first time since 1993 that the U.S.
sales figure has slipped below the 600 million mark. However, as grim as the foregoing may seem,
the increase in U.S. digital sales hit an all time high especially the week
after Christmas 2006 with a whopping 30.1 million tracks sold according to Nielsen Soundscan (582 million downloads
sold total for 2006). This is a 51% increase from the 19.9 million
digital tracks sold during the last week of the year in 2005. In addition, Fergie’s popular hit single,
“Fergalicious” also set a new record for the most tracks sold in a single week
with 249,000 downloads.
Although there are numerous
digital download services available throughout the world, the most prominent
seems to be Apple’s iTunes. Through mass
marketing campaigns that extend throughout the world which feature such
globally recognized artists such as Eminem, U2, and the Black Eyed Peas, iTunes is offered via both PC and Mac computers which is then
downloaded to a handheld device called an iPod. By September 2006, iTunes reported a total of 1.5 billion downloads sold. In addition, indie-only specialist, eMusic, announced they have just surpassed
the 100 million mark at the end of 2006. Pursuant to the iTunes agreement with the record labels, the iTunes share of income is $0.29 cents out of each $0.99 download.
The following sets forth the way
in which many of the record labels in the U.S. pay third parties with respect
to each $0.99 download assuming that the
recording agreement allocated the artist an “all in” royalty rate of 15% (i.e.,
which includes a producer royalty of 3%,
leaving a “net artist” rate of 12%):
Artist iTunes Royalty
(with
wholesale
markup)
$0.99 download single song
price to the consumer
less $0.29 to Apple
left $0.70 x 130% (wholesale
markup)
x 12% (net artist net rate) = $0.1092 cents per download
Producer iTunes Royalty
(with
wholesale
markup)
$0.99
download single song price to the consumer
less $0.29 to Apple
left $0.70 x 130% (wholesale
markup)
x 3% (producer rate) = $0.027cents per download.
Artist iTunes Royalty
(without
wholesale
markup)
$0.99 download single song
price to the consumer
less $0.29 to Apple
left $0.70 x 12% (net artist net rate) = $0.084 cents per download
Producer iTunes Royalty
(without
wholesale
markup)
$0.99
download single song price to the consumer
less $0.29 to Apple
left $0.70 x 3% (producer rate) = $0.021cents
per download.
Although not widely practiced,
there are some labels that take this further by first deducting the mechanical
royalty from the $0.70 cents prior to calculating the iTunes royalty which is then paid to the
artist and the producer which results in a lower royalty rate as follows:
Artist iTunes Royalty
(with
wholesale
markup)
$0.99 download single song
price to the consumer
less $0.29 to Apple
left $0.70 less a digital mechanical royalty of $0.091 cents
left $0.609 x 130% ( wholesale
markup)
x 12% (net artist net rate) = $0.095
Artist iTunes Royalty
(without
wholesale
markup)
$0.99 download single song
price to the consumer
less $0.29 to Apple
left $0.70 less a digital mechanical royalty of $0.091 cents
left $0.609 x 12% (net artist net rate) = $0.073
With respect to mechanical royalties paid for
digital distributions of musical compositions, although this may change in the
future, record companies in the U.S. have been using a notice of compulsory license when
notifying music publishers of their intention to offer digital downloads of
musical compositions. This ‘notice’ usually lists the record company,
the recording artist, the name of the musical composition, the identity of the
songwriters and music publishers, and the expected distribution date of the
‘digital phonograph delivery’ of the song. These compulsory licenses are typically referred to as “DPD Licenses”
and they are paid at the maximum statutory rate which is currently .091 cents
for songs under 5 minutes or
1.65 cents per minute if the
song is over 5 minutes. For recordings
produced pursuant to contracts entered after 1995, the law prohibits a
controlled composition provision of the artists’ contract from discounting the
compulsory DPD rate, so even if there is a controlled composition clause in the
contract, the singer-songwriter should receive the entire .091 cents
Can Unsigned Artists
be digitally distributed through iTunes?
An artist who has not signed to a
major or independent record label can still get their music distributed via iTunes by a number of various companies
also affiliated with Apple. The two that
I will mention in this article are cdbaby.com
and iFanz.com. Out of the $0.70 cents remaining after
Apple takes its $0.29 share, cdbaby only takes a 9% fee for each download, passing
through to its artists a whopping 91% of the income! iFanz charges 40% per download.
In both cases, the artist is responsible
for all third party payments including any royalties payable to producers of
the recordings and digital mechanical royalties which are paid to owners and/or
controllers of the musical compositions contained in each recording. With respect to digital mechanical
royalties, the online service (i.e., iTunes),
like a physical retailer, pays these
royalties to the record companies (who own and control the recordings
containing the songs) who in turn pay either the songwriters, music publishers
or the Harry Fox Agency who in turn pays the music publishers.
Webcasting
Royalties
There
are two types of licenses available for either interactive or non-interactive
services. See below for a brief
description of both:
A. Interactive Subscription Services
“Interactive”
services enable the consumer to interact with the service to hear a specific
recording and to create personalized radio stations and play lists.
Examples:
Rhapsody (through RealNetworks) and Napster.
For a monthly subscription fee, these
types of services offer continual non interrupted interactive streaming of music,
which also allows the user to download tracks to a CD for a separate fee,
sometimes as low as $0.79 per download.
- Some music providers such as Yahoo also offer the streaming of music
for free (downloads are separate) because they are funded through
advertisers. As result, the streaming of
music is interrupted by its advertisers’ ads.
- Specifically, with respect to Rhapsody, once logged on, it plays all
day long and the user can create personalized radio
stations.
- Although
some notable artists are missing on Rhapsody
and some other prominent subscription services (e.g., The Beatles, Led Zeppelin, and AC/DC), they
are rapidly increasing content every day.
- Generally,
these services pay $0.01 to the record label each time a recording is
streamed.
- With respect to downloading, generally
the iTunes royalty formula applies.
Although permanent royalty rates are still being
worked out between the record labels and some of their artists as the industry
evolves more into the digital realm, a partial list of interactive digital
subscription services and information pertaining to approximate royalty rates
and fees can be found by logging onto www.cdbaby.net. Once logged on, click on “Sell Your Music”
and then click on “Partner Companies.” As a matter of fact, the information presented on the www.cdbaby.net website is very informative
with respect to digital distribution of music and I even urge many of my
colleagues to review this information.
B.
Internet
Radio Stations and Non-Interactive Subscription Services
Terrestrial radio is a
“regular” radio station – No performance royalties are paid to recording
artists or owners and controllers of sound recordings. Performance royalties are only paid to
songwriters and music publishers through ASCAP, BMI and SESAC.
- Very few terrestrial radio stations
have corresponding Internet radio stations that broadcast the station over the
Internet waves. (According to Ron Gertz of Royalty Logic, only about 600 radio stations out of 16,000 were
making Internet simulcasts as of September 2006)
- Under the Digital Millennium
Copyright Act of 1995 (“DMCA”), Congress provided for a “Webcasting Royalty” to
be paid to the owners and/or exclusive licensees of master recordings being
streamed.
-
Webcasting royalties are only paid for
“non-interactive” radio and subscription services.
Unlike Rhapsody and Napster’s interactive services, the
consumer cannot pick and choose which particular songs or artists he wants to
hear.
-
The two FCC-approved non-interactive satellite
digital subscription services are XM
Satellite and Sirius.
- In addition to Sirius
and XM, there are also
non-interactive music subscription services available via most digital cable
television lines and similar services via satellite transmission for DirecTV
and Dish Network. These services, referred to as “pre-existing satellite
subscription services” (or “PES”) are MusicChoice and Muzak. Originally, there
was a third PES service, DMX but they filed for bankruptcy and Capstar
purchased some of their assets. It is currently under dispute whether or not
Capstar can be a “PES” since it is not a successor to DMX. Other services,
including Sirius, who are now providing background music channels to DirectTV
and Dish Network have also taken the position that they can be a PES even
though all PES services were named in the original 1995 statute. NOTE:
The foregoing information could be obsolete very soon.
All these services must pay the statutory performance
license fees for the master recording and must also pay the performance right
organizations for the performance of the musical compositions
Public
Performance Royalties for Internet Licenses
A) The Master Recording
With respect to the
non-interactive subscription services and Internet radio stations, there are
currently two collection societies that collect money for owners (or those who
have the right to collect for the owners) of the master recordings and featured
artists. These two collection societies
are SoundExchange and Royalty Logic.
SoundExchange
was the first performing rights organization in the U.S. to collect and distribute royalties to sound recording copyright owners and
featured artists and they are a not-for-profit organization governed by a board
of artist representatives and major and independent label representatives.
Royalty Logic,
based in Los Angeles, is an
independent performing rights organization for the negotiation, licensing,
collection and distribution of digital performance royalties payable to
featured performing artists and sound recording copyright owners. Royalty Logic is actively engaged in
promoting regulations to maximize license fee collections and royalty
distributions on behalf of affiliates at the lowest possible cost.
WHO JOINS?
- Record
companies or any owner/controller of sound recordings; and
- Recording
artists, etc.
Featured recording artists have the same right to
designate a collective as the sound recording copyright owner (i.e., their
record company). Therefore, an artist
can choose to be represented by a different collective than the artist’s record
company.
THE PROFIT SPLIT
The law provides that the statutory license revenues be split as follows:
- 50% to the
owner of the master recording (i.e., most often the record company)
- 45% to the featured artist*
- 5% to the non-featured musicians and vocalists (paid
to the independent administrators who are responsible for paying the
non-featured performers. Union membership is not required for payment)
*Please note
that it has become industry custom to share a portion of the featured artist’s
royalty with the producer of the sound recording through a letter of direction
which is attached as an exhibit to the producer agreement between the recording
artist and the producer.
SoundExchange and Royalty Logic
receive license revenues from satellite, cable and Internet radio with licenses
for both commercial and non-commercial services, which include track level
accounting of performances to its members and the most up-to-date information
on streaming and digital transmissions.
More information can be found at www.soundexchange.com and www.royaltylogic.com
B) The Musical Composition
With respect to the musical
composition, there are three (3) performing rights organizations in the U.S.
-- ASCAP, BMI, and SESAC.
ASCAP, BMI, and SESAC collect
public performance income with respect to musical compositions and all have various licenses that allow these
Internet services, whether interactive or non-interactive, to perform all of
the songs in each of their repertory.
These Internet licenses do not
allow the reproduction or distribution of the songs (which would be handled through
the record company) nor do they allow the pubic performance of the master
recordings (which would be handled through SoundExchange).
Types of Public Performance
Internet Licenses
The following applies to the
public performance of songs via the Internet BUT please note that a lot of
these licenses are still in their “experimental stages” Accordingly, please regularly check the
website of your respective performing rights organization to make sure they
have the most up to date and accurate information.
ASCAP currently offers
three (3) types of Internet licenses. The first is a non-interactive license
that does not allow consumers to download or otherwise select particular
songs. The second type of license is an
interactive license that does allow consumers to download or otherwise select
particular songs. ASCAP’s third type of license authorizes the public
performance of its songs in its repertory via wireless devices such as mobile
phones. The fees paid to ASCAP by these
Internet sites are based on revenue or activity of each Internet service. For more information please log onto the
ASCAP website at www.ASCAP.com and click on “Customer Licenses” on
the left side of the page.
BMI’s main license type
is one where fees are computed on a “gross revenue calculation” where music is
the primary feature of the particular site or a "music area calculation”
where
music is only a part of the total website traffic for that particular
site. For more information go to www.BMI.com.
SESAC also offers a license
that provides for fees based on the number of monthly page requests as well as
whether or not there is advertising on the site. For more information go to www.SESAC.com.
The above
information is excerpted from the music business person’s bible, Music, Money and Success: The Insider’s Guide to Making Money in the
Music Industry (4th
edition) by Jeffrey Brabec and Todd Brabec.
Music
Used in Video Games and on Your
Mobile Phone
A) Music in Video Games
It
appears as if the video game industry has followed the model used by the film
industry when it comes to licensing music for video games. Accordingly, with few exceptions, most game
companies license music as a ‘buy-out’ as opposed to paying a royalty per each
game sold like is customary for CDs.
Buy-outs are somewhere between $5,000 to $10,000 per master
recording and $5,000 to $10,000 for the musical composition embodied on the
master recording which is then divided up among the songwriters and/or music
publishers relative to each parties’ copyright ownership interest.
Most of these licenses tend to be
short term usually spanning 5 to 10
years with some stating that they are for the ‘term of copyright’ or for as
long the game is distributed. The
territory is usually the world unless the artist has a lot of leverage. Additionally, there may be language
providing for the game to be available on-line as well as any other ‘new media’
format that is developed in the future.
Beware of language in these
agreements that grant the game company the right to release the music in the
game on an audio only CD or a DVD. If
this language is in the agreement try to take it out or at the very least try
to pre-negotiate the royalties for the CD like obtaining a full mechanical
royalty for the song (usually it will be 75% of the statutory rate) and a ‘most
favored nations’ artist royalty rate for the master recording.
B)
The
MobileTone formerly known as the “RingTone”
The downloading of music on
cell phones has become a relatively new source of
income for record companies and their recording artists. Prior to being able to download an actual master recording on to a cell
phone (for purposes of this article we will refer to the downloading of master
recordings on cell phones as MobileTones), a consumer could only download a ‘re-play’ of
that recording which was referred to as a RingTone and only songwriters, music publishers, and performance
rights societies made any money from the traditional RingTone.
explanation of “who gets what” for every
MobileTone download, it is important to understand how monies were paid out
for the traditional RingTone. Because the traditional RingTone was a re-play (i.e.,
re-creation) of a song contained on a recording, there was no use of the actual
recording which is usually owned by the record company. Accordingly, record companies and their
recording artists were not entitled to any sound recording royalties for the
downloading of the traditional RingTone
(although crafty record company lawyers attempted to try and stop music
publishers and their songwriting recording artists from licensing the right to
re-create their songs for RingTones
by limiting the re-recording provision in the recording agreement, few record
companies were successful at this). The
“traditional” RingTone was either
a monophonic tone (i.e., single
tone) or polyphonic tone (i.e., many
tones) whereby the actual song was recreated
through a series of tones/notes, most of
them through MIDI (i.e., musical instrument digital interface) as opposed to
the download of the actual master
recording featuring the artist’s performances. Accordingly, only songwriters, music publishers, and performing rights
societies (i.e., ASCAP, BMI, and SESAC) were receiving any income from
traditional RingTones.
With respect to the old RingTone deals, an agreement was made
between the cell phone carrier (such as Verizon or Cingular) or a third
party cell phone aggregator (such as
Xingy or Hudson) and music publishers and/or songwriters for the
re-creation (i.e., re-play) of a song either monophonically (archaic) or
polyphonically (preferred). The terms
of these agreements were short ranging from 1 to 3 years. Although most of the deals were worldwide, the
music publisher would most often try to limit the deal to the U.S. and Canada. The
traditional way in which the phone carriers (or third party aggregators) paid royalties to the owners and controllers
of musical compositions in the U.S. was the greater of ten cents
($0.10) or ten percent (10%) of the RingTone
price paid by the consumer. Accordingly, there was always a floor of ten cents ($0.10) per RingTone which is a step up from what
songwriters and publishers were used to being paid for each song contained on record
albums pursuant to the statutory rates set by the U.S. Copyright Office (currently
the rate is $0.091 cents for under 5
minutes of playing time). Accordingly, if a RingTone sold for $2.49 then
the royalty paid to the owners and controllers of that particular musical
composition would be $0.25 cents. In
addition, many of these older RingTone
deals were contingent on the company’s also obtaining licenses from the
respective public performance organization (i.e., ASCAP, BMI, or SESAC), and
those monies will flow to the publisher and songwriter as well.
Finally in the
later part of 2005 and in 2006, the U.S.
caught up with the rest of the world with respect to the 3G technology required
on the cell phone in order to download the actual master recording (and other
content) on cell phones. (As stated above, we will refer to master recording
downloads on cell phones as MobileTones as opposed to RingTones). Because the technology has advanced so
quickly, cell phone carriers now can provide customized cell phones which offer
a number of personalized services such as music shops, music video channels,
buying tickets to concerts through mobile ticketing, visual radio,
personalization content such as wallpaper and imaging featuring your favorite
artist, and editorial content. For
these mobile deals, it is important to note that the
cell phone carrier (i.e. Verizon, Cingular, etc) receives fifty percent (50%)
of the fee paid by the consumer for each MobileTone
downloaded. Accordingly, if a MobileTone costs $2.49 to download then the carrier receives
$1.25. Please note that sometime in
2006, the carrier started paying the public performance societies (i.e., BMI,
ASCAP, and SESAC) directly out of their fifty percent (50%) share ($1.25) (see below) but this had not always been
the case. Early on the public
performance societies were being paid out of the remaining $1.24 along with
everyone else! Of course this resulted
in a lower royalty paid to the recording artist.
With
respect to the licensing of the song contained on the MobileTone, it is important
to remember that the old RingTone deals allocated music
publishers and songwriters a mechanical royalty equal to ten percent (10%)
of the retail price to the consumer so they were
getting really used to a $0.25 cent royalty for every Ringtone sold for $2.49. Of
course, as you can imagine, record companies flipped out when
they were told by music publishers that the mechanical royalty for a MobileTone was $0.25 cents per
download! REMEMBER, record companies are used to paying
the minimum statutory rate (many times less!) for songs embodied on albums.
As noted above, the current the minimum
statutory rate is currently .091 cents for songs under 5 minutes of
playing time. For the record company,
that is a $0.16 cent increase per MobileTone! The
key point is that this ‘mechanical royalty’ was freely negotiated between the
parties because the MobileTone was
considered a derivative work, outside the compulsory license system of Section
115 of the U.S. Copyright Act.
Fortuitously for the labels, the newly created Copyright
Royalty Board ("CRB") had been engaged in a ‘mechanical rate setting procedure’
since the beginning of 2006 to set the mechanical royalty rate for all Section
115 uses. The record companies argued
that MobileTones are not derivatives
but instead “cover versions” of songs which would make them subject to the
compulsory license requirements. Before
the labels could attempt to try and enforce their position, they needed the CRB
to rule on the matter and the RIAA (lobby group in Washington
for the major labels) demanded such a ruling from the CRB who referred the
question to the Copyright Office. On October
16, 2006, the Copyright Office ruled that a MobileTone is subject to the Section 115 compulsory license
system. Currently, the CRB will now
proceed to set mechanical royalty rates for MobileTones
which could be as low as the $0.91 (or lower if the labels get their way!) that
is currently paid for cover versions of songs. The
songwriters and publishers, represented ostensibly by the National Music
Publisher’s Association (NMPA), reacted very negatively to this
ruling, as it effectively reduces their MobileTone
income by over sixty percent (60%). In a weird quirk in the rules, the
songwriter/publisher interests cannot appeal this decision to the DC Circuit
Court until after the CRB sets the mechanical rate, which could happen sometime
in 2007. Naturally, this has become a highly contentious issue between
the RIAA and the NMPA. And this may not even be the most
contentious issue raised before the CRB. In a daring move, the
RIAA is also seeking a decrease in the rate for all Section 115 mechanical
uses. Their filing asks for a return to the statutory rate as set in the
year 1981. This would apply to both physical and online/satellite
product. The statutory mechanical rate has never been reduced. If
the RIAA succeeds, all songwriters and publishers will be faced with an
unprecedented decrease in statutory revenue.
Portions of the foregoing section were
contributed by Jay Rosenthal, Esq., co-legal counsel to the Recording Artist’s
Coalition. Jay can be reached at JRose13@aol.com.
Current MobileTone Royalty
Breakdown:
As for the other royalty
participants of the MobileTone, here
is a hypothetical breakdown:
Retail price to
the consumer: $2.49
Less
$1.25 to the
carrier (i.e., Cingular, Verizon, etc) (representing 50% of retail)
(carrier pays the performing
rights societies [ASCAP, BMI, or SESAC] 5% of retail which equals $0.12.5 cents per download)
Leaves $1.24
Less $0.25
to the music publishers/
songwriters (representing 10% of retail)
NOTE: As of October 16, 2006 the US
Copyright Office ruled that compositions contained in MobileTones (formerly the RingTone)
is subject to compulsory licensing. We
are waiting for new rates to be determined!
Leaves
.99 cents to
record company (then record company the Artist a portion of this amount- see below)
c publishing and songwriter community, record companies
are also having a battle with some of their recordings artists as to whether MobileTones (and downloads) constitute a sale or a license. Under the terms of a recording agreement,
when the record company ‘licenses’ a recording featuring its artists’ performance,
the artist is entitled to fifty percent (50%) of net as opposed to an artist
royalty. Obviously paying an artist fifty percent (50%) of the $0.99 cents the
record company is receiving for MobileTones
(or fifty percent (50%) of what the record company is receiving from iTunes) amounts to far more than what
they are paying their artists. Unfortunately,
the “sale vs. license” battle is one in which the recording artists are
losing. See
below:
Sale vs. a
License?
Sale:
.99 ‘net’ to record company for a MobileTone download multiplied by the
Artist net royalty rate as follows:
EXAMPLE:
$0.99 x 12% = $0.1188 paid to
the artist if the Artist
License:
Artist receives
50% of the .99 ‘net’ to record company for MobileTone
download as follows:
EXAMPLE: 50% of .99 cents = $0.495 cents
By the time this article is
published, much of the information in the article may have already changed as
the music industry is moving at such a rapid pace. The good news is that there are plenty of
new opportunities for artists- both signed and unsigned. For
the most up to date information pertaining to the music industry, please visit
the following websites:
www.soundexhange.com
www.royaltylogic.com
www.ascap.com
www.bmi.com
www.sesac.com
www.cdbaby.net
www.billboard.com
www.copyright.gov
www.recordingartistscoalition.com
---
* Dina LaPolt is an entertainment attorney at LaPolt
Law, P.C. in Los Angeles. LaPolt Law
is a boutique entertainment firm that specializes in representing clients in
the music, merchandising, film,
television, and book publishing industries. The firm's clientele include recording artists, artist and producer
owned record companies, music publishers, producers, managers, film production
companies, directors, writers, authors, and actors. In addition to practicing law, Dina teaches
"Legal and Practical Aspects of the Recording and Publishing Industries"
in the Entertainment Studies Department at UCLA Extension, she is an instructor
of Music Contracts at the Musician's Institute in Hollywood, speaks
regularly on panels at music industry conferences all over the country, and
still has time to perform in her all girl rock band. On the film production side, Dina was the
Co-Producer of the 2005 Academy Award nominated feature documentary film
entitled, Tupac: Resurrection. For more information on Dina LaPolt or her firm, please log on to www.LaPoltLaw.com
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