What They'll Never Tell You About the Music Business

by Peter M Thall

  1. Should the writer register the entire original publishing agreement that contains the reversion clause?

  2. Should the writer have added to the original publishing agreement for later use an affidavit saying that the conditions set forth in the clause have been met and that therefore the copyrights have reverted to him or her?

  3. Should the writer have required the music publishing company to execute (sign) for later use an assignment of copyright for filing in Washington should the conditions of reversion occur?

  The third procedure may be the most efficient. The assignment can be held in escrow by one of the parties’ attorneys together with a precise set of instructions as to when the attorneys can release the document to the songwriter for filing in the US Copyright Office. In this way, when the songwriter’s relationship with the music publisher is long over, and the copyrights have reverted, the songwriter does not have to go back to the music publisher, hat in hand, and ask that the formal assignment document be signed—something to be avoided if at all possible. If you are going to be a self-publisher and you are depending on rights reverting to you from your established publisher after a period of years, you must be very careful to follow the formalities of the copyright law. If you fail to follow them, a third party may be able—in all innocence—to walk off with your copyrights. If that happens, your only recourse may be to sue your original publishing company, which, by then, may have disappeared from the face of the earth. Unfortunately, unless the conditions of reversion are unconditional, it is not likely that you will be able to follow the “most efficient” procedure; instead, you will have to fend for yourself by following either option 1 or option 2.

  THE VALUE OF THE COPYRIGHT

  How can the value of copyrights be measured? Let us say that a recording artist writes ten songs per album and records five albums over five years—one each year—all of which sell 500,000 copies (gold in the United States). Although, as we have seen, there is a difference between “sold” records and “royalty-bearing net sales.” Let us assume that each one of these records is a royalty-bearing record. Let us also assume that each song’s length is under five minutes in duration so that we do not have to deal with the “long” copyright rate. Finally, let us assume that the artist’s agreement with his or her record company requires that each song be licensed for three-fourths of the statutory rate with a maximum per album cost often times three-fourths of the statutory rate. The mechanical royalty income per record sold will be:

  Current rate ($0.091 per song) × 10 × 75% = $0.6825

  For each album selling 500,000 copies, the record company will have paid $341,250 in mechanical royalties. For the five albums—with a sales figure of 2.5 million units—the total is $1,706,250.

  The writer and publisher share this $1,706,250 on a 50/50 basis; both get $853,125. In a typical situation, 50% of the publisher’s share (or 25% of the total), amounting to $426,563, is paid to the writer’s own publishing company and the remaining 50% of the publisher’s share (25% of the total), also $426,563, is retained by the administrating publisher. So, absent any advances that the administrating publisher may be able to recoup from the writer’s or the writer’s publishing company’s shares, this works out to $853,125 for the writer, $426,563 for the writer’s publishing company, and $426,563 for the administrating publisher.

  Returning to the sales of just one of the five albums, we have a writer’s share of $170,025, an original publisher’s share of $85,313, and an administrating publisher’s share of $85,313. A rule of thumb in catalogue acquisition is that a buyer will pay anywhere from five to ten times the net publisher’s share of earnings of a group of musical compositions. If the writer wishes to sell his or her 50% publisher’s share, on the basis of a five times earnings calculation, that means that he or she can sell it for $426,563 (that is, 5 × $85,313). On the basis of ten times earnings, the amount is $853,125. On the basis of fifteen times earnings, the amount is $1,279,695. So, for an investment (therefore merely a recoupable advance) that business managers deem to be nothing more than a short-term loan (which, in this example, will certainly have been paid back), the copublisher has acquired from the songwriter an asset that is worth anywhere from $426,563 (5 × 85,313) to $1,279,695 (15 × 85,313)—after one album!

  The administrating publishing company has it even better because it, and not the writer’s company, actually controls the administration rights. Companies purchasing other companies’ copyrights will pay a premium to the company that can assign to them the control of the copyrights (along with right to collect the writer’s and copublisher’s share) rather than just a passive interest in earnings. Different copyrights generate different kinds of income, and buyers who think that these copyrights may have a better financial life in their hands than in the original copublisher’s hands may choose to pay more—as much as fifteen times earnings.

  Note that to keep it simple, I have intentionally excluded from these calculations other forms of copyright-generated income, such as performance income, which can be substantial; income from licensing synchronization rights, which can also be substantial—particularly if the songs are used in films or in commercials; income from print licensing; income from cover recordings; etc. The net publisher’s share of all of these other forms of income would similarly be multiplied by from five to fifteen times earnings. And don’t forget, if a buyer becomes the administrating publisher, the buyer will have the right to use (read: “invest”) the writer’s share and the writer’s own publishing company’s copublisher share until it has to account for and pay these shares to the writer and copublisher.

  Of course, the writer’s own publishing company’s 50% copublisher share is also worth approximately the same as the administrating copublisher’s share, with two important caveats. First, the writer may be contractually obligated not to sell that share to anyone except to the administrating copublisher. Second, to a potential buyer, the writer’s own publishing company’s share would be of considerably less value than the administrating publisher’s 50% copublisher share. That is because the former does not come unencumbered; it is still administered by the administrating copublisher, and the buyer would have to have faith that the administrating copublisher could be trusted to do a good job and to account regularly and honestly—a leap of faith that a buyer would not necessarily want to make.

  THE IMPACT OF ADMINISTRATING COSTS ON TRUE EARNINGS

  When a publisher acquires administrative control over the copyrights it represents, it is free to enter into foreign agreements for representation (which it will have to do in order to responsibly collect mechanical and performance royalties earned in foreign countries) in return for which it may be able to obtain advances. However, it will not have to share these with the writer whose songs are being parlayed into these foreign deals. Conversely, a self-published writer will have lost an opportunity to fund his or her career, and will have to remain dependent on the goodwill of others, including the outside publishing company, for support.

  Furthermore, when an administrating publisher enters into such agreements, it will establish a fixed percentage for its own subpublishers to retain—a percentage that customarily exceeds 15% and can be as much as 25%. (As noted on this page, these subpublishers are often affiliates or divisions of the administrating publisher.) Conversely, a songwriter who retains control of administration of his or her own copyrights is likely not to have to give away as much as a large administrating publisher would give away in return for the services it requires of the foreign publishers. For example, an important writer–self-publisher who has not entered into an agreement with an administrating publisher, but who nonetheless needs collection agents (subpublishers) in different countries, can give these subpublishers the right (and obligation) to collect income attributable to the compositions in return for anywhere from 90% to 95% to 100% of what they collect. Letting them retain 10% is tacit recognition that subpublishers have a job to do that takes time, staff, expertise, and
experience; where the songwriter is also the recording artist, letting subpublishers retain 5% gives them a small “taste” of the earnings that have been generated not by their efforts, but by those of the artist and the artist’s record company; zero gives them nothing but the right to use the money they collect for a short time and the “prestige” of saying they represent the important writer’s catalogue.

  THE COST OF GIVING AWAY A “PIECE” OF THE PUBLISHING

  We saw in chapter 2, this page, what giving away a “couple of points” can do by way of crushing an artist’s income possibilities. Similarly, giving to others one’s songs, administration rights, or copyrights can have serious deleterious effects on the writer’s career. Nowhere is this more true than with the songwriter who is also a recording artist. It is worth mentioning here—once again—that a recording artist’s record royalties for a given body of songs may be minimal. Remember, the artist has to pay—out of what would otherwise be received as record royalties—recording costs, video production costs, tour support, equipment loans, at least one-half of the costs of independent promotion, and, nowadays, a growing list of costs that used to be paid by the record companies. The possibility that all recording royalties will be totally absorbed by recoupment of these costs is unfortunately quite real, particularly when one considers that the recording costs, etc., for the follow-up album will undoubtedly be debited to the artist’s account before any royalty from the prior album becomes payable. Thus, in many cases, the song income is likely to be the largest percentage of a songwriter–performing artist’s earnings.

  Most people have one career. I do. But a person who is not only a songwriter but an artist and a performer as well, has three careers and such a person should not mortgage one for another if he or she can help it. At a minimum, the recording artist–writer–performer should be fully aware of the consequences. As we have seen, there are ways to give, while keeping.

  —

  In conclusion, there are a host of reasons why one would want to retain one’s copyrights and, in particular, administrating control over them. Irving Berlin was perhaps the first writer who saw the value in doing so. Even though he lost almost all of his savings in the 1929 stock market crash, his continuous earnings from the copyrights he retained kept him and his family solvent and permitted him the peace of mind to continue to be a productive songwriter. While self-publishing is not brain surgery, it is extremely complex, and if you are seriously considering taking on the challenge, you should most definitely make sure that your attorney is equipped to meet the challenges. Self-publishing is not for everyone, but for some, it can be a lifesaver.

  16 • INTERNET ENTREPRENEURSHIP

  Doing It Yourself

  So, the lunatics have taken over the asylum?

  —ATTRIBUTED TO RICHARD A. ROWLAND, PRESIDENT OF METRO PICTURES

  Clearly, the Internet is transforming the manner in which music is promoted and sold. How now can it be used to assist fledgling recording artists to come to the attention of a public eager for the creative wares bursting forth all over the world—a public that is willing to part with money, thereby making the effort worthwhile financially?

  Enter the high-octane world of Internet commerce. Never have the relationships among art, technology, and money been so complex. For several years now, those composers and performers who desire to communicate with eventual fans have had a variety of means open to them via the Internet: their own websites; use of ringtones, apps, and other mobile methods of communication; links to others’ sites; clever use of Facebook and Twitter; Instagram or Snapchat; the new, new, new MySpace; fulfillment sites through which one’s CDs, sheet music, and merchandise may be sold in hard-copy form; sites that highlight and even review new music; webzines; and the ubiquitous sites through which one’s music may be uploaded, downloaded, streamed, and otherwise transmitted to and among computers and computer-compatible devices. So you can see, it’s not easy to sell music online. Sure, sound quality is poor, but who cares? Many Internet entrepreneurs fall back to the “old-fashioned” technique of simple emails in order to divert consumers’ attention to their product. And believe it or not, such methods are actually quite effective.

  One truth has evolved from the recent period during which the myth of “opportunity for all” gained a certain credibility: traditional resources must still be assembled and utilized. And here is the $64 million question: Do you want to make a living, or do you want to try to compete with the majors?

  You will note that my point of view in this chapter jumps back and forth between advocating the do-it-yourself approach and warning that many artists would be foolish to try to become entrepreneurs. Perhaps this is endemic to the field of law, where attorneys must be able to see all sides. But I think that it has just as much to do with the inherent complexities of the Internet and of e-commerce. In any case, there is much to think about before embarking on this kind of pursuit, and I will explore some of the issues you will have to consider before doing so.

  COMPETING WITH THE BIG BOYS

  At whatever level you decide to compete, you will need money, facilities for writing, rehearsing, and recording; good songs; tour equipment; clothes; a techie (or two or three); maybe a van; cowriters; producers; engineers; videos; etc. In short, you’ll need to get for yourself everything customarily provided by a record company.

  And, if this is not daunting enough, don’t forget that you still need to obtain the services of the same types of professionals any working artist (whether individual, group, or band) traditionally requires: personal managers, accountants, and lawyers of various disciplines—music business lawyers, trademark lawyers, possibly immigration lawyers, and, where minors are involved, lawyers knowledgeable in the area of minority contracts. You may even need to consult corporate and tax lawyers. These professionals will be necessary to help you budget your recording; to organize your expenditures, receipts, check stubs, etc., for the purpose of preparing and eventually defending tax returns; to form affiliations for you with applicable unions, if appropriate; to negotiate your partnership and internal band agreements; to negotiate agreements with cowriters, with studios providing services for promises of future payment, with investors providing money for promises of future payment, with trademark services (including clearance of band names for the E-commerce, the unions, and the various states and countries of the world in which a conflicting name may already exist), with photographers regarding ownership and use of photographs for promotion, advertising, merchandise, and artwork on CDs and digital downloads, and with unions.

  You will need to develop databases and print and distribute flyers, mailings, posters, and other merchandise. You will need assistance in mixing, mastering, and manufacturing or otherwise distributing your musical output. You will have to deal with encryption technology and requirements both for your own protection and that of your Internet distributors. You will have to seek reviews and mention in the press. You will have to identify, negotiate with, and service foreign companies with whom you hope to ally yourself for the exploitation of your products outside the United States. You will have to either deal with the venues yourself or find people who will do this for you—both agents and managers. You might even have to release your record via free download, foregoing all financial return from this segment of your career, but hopefully expanding your fan base, hoping that there will be more—and better—records in your future for release more traditionally—whether via major traditional labels or indie labels—all the while playing and thousand gigs and selling some merchandise, and eventually making a living doing what you do best.

  You think all this sounds a lot like a record company? You’re right. Sure, the Internet is a wonderful new outlet for the discovery and dissemination of new music, but it is a whole lot easier to be on the receiving end than on the selling and distributing end. It always has been.

  ARTIST, SONGWRITER, PERFORMER—AND E-COMMERCE EXPERT?

  Artist, songwriter, performer. Enough pr
ofessions to keep three people busy. Yet many of our music industry creators are all three. But if you are going to exploit your music via the Internet, you will have to add a new profession: e-commerce expert. And much of what you will have to know is mysteriously similar to what you used to depend on your record company and publishing company to handle for you.

  However you cut it, you used to have one item on your plate: your music. Now you have two: your music and your website. Both have to be marketed and promoted, and the expertise and services required to succeed in one are actually quite different from what is required to succeed in the other. Search engines (some of which charge per hit), newsgroups, other bands’ sites, banner ads, reciprocal links, common interest sites, affiliated sites—all are Internet destinations that you will want to feature your product.

  And, if you want your website to distribute your music as well, you should be aware that outside of the United States, the sale and exploitation of product can range from expensive to prohibitive. Licensing the manufacture and sale of hard goods overseas is complex enough: royalties, accountings, tax systems, the sometimes idiosyncratic procedures of foreign rights societies, the infrastructures of other countries governing how music is delivered to consumers—all these have been in place for decades, and old systems do not dissolve overnight. Selling music products overseas via the Internet can be even more complex.