Entrepreneurship in the Music Industry

The Legislation

Online music streaming has become more readily accessible and plentiful over recent years. With the evolution of technology and the expansion of ways to listen to music, licensing and paying royalties to songwriters and artists has become increasingly difficult. New legislation is attempting to pave the way and make these processes more streamlined and efficient in order to bring the music industry into the 21st century.

The Orrin G. Hatch-Bob Goodlatte Music Modernization Act (“The Act”) was signed into law on October 11, 2018 as a bipartisan piece of legislation. The Act was introduced in order to improve legal licensing of music by digital services and was intended to benefit songwriters, publishers, artists, record labels, libraries, and the public. The Act is separated into three main titles: Music Licensing Modernization, Classics Protection and Access, and Allocation for Music Producers.

Title I of the Act establishes a blanket licensing system for digital music service providers to give the public access to activities such as permanent downloads, limited downloads, and interactive music streaming. This is only applicable to digital music though, and physical copies of music (CDs, vinyl, tapes, etc.) will still be licensed for use per-work. This will make is easier for music copyright holders to receive royalties when their music is streamed. Essentially, the Register of Copyrights designates a non-profit collections society as the licensing collective to preside over the blanket licenses, as well as distribute royalties to publishers and songwriters. This collective entity will maintain a database of digital sound recordings that will be available to the public.

Title II of The Act extends remedies to pre-1972 sound recordings, bringing these works into the federal copyright system. Pre-1972 sound recordings were not protected by copyright law. Artists and composers will now receive royalties on sound recordings made prior to 1972. There will also be a process established for lawfully engaging in noncommercial uses of these works. Title III of the Act allows producers to receive part of the royalties collected for uses of sound recordings. This section also sought to increase royalties paid to audio engineers for the sound recordings they worked on.

Benefits of the Act

The Act modernizes the licensing system by having all licensing done electronically rather than sending individual Notice of Intentions to each publisher for each share of each song. Also, unclaimed royalties will fund the process, instead of being claimed by the digital service providers. Essentially, digital service providers will pay for maintaining the database by forwarding these unclaimed royalties and will have an easier time obtaining blanket licenses. Additionally, digital service providers must pay licensing fees for using songs that were recorded and released before 1972.

Performing rights organizations such as The American Society of Composers, Authors, and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”), the predecessors of The Act, are organized to collect licenses from artists, store them in a collective database, and then provide these licenses to broadcasters and other users in exchange for a fee. However, these organizations have been unable to keep up with the rapidly changing environment of music streaming. ASCAP and BMI supported the Music Modernization Act because it will aid them in offering licenses from a large, comprehensible database and they recognize the need to pay artists and other contributors fairly for their music.

What this Means for Entrepreneurs

Entrepreneurs in the music industry should be aware of The Act and the effects it may have on their business. The Act is not going to impact consumers of music streaming and is aimed at being fair to songwriters and other players in the music industry. With the evolution of music streaming sites, such as Spotify, revenues for music streaming and downloads have skyrocketed, but the holders of the sound recording copyrights have not received their fair share of the royalties. For example, if a song has 100 million streams this will generate revenue in the multi-millions of dollars. However, only about 5% or less goes to the music publishers, with the bulk of the revenue going to labels and singers. The portion going to publishers (songwriters) is called mechanical royalties and is often split several ways. Basically, the labels and singers are receiving more in royalties than songwriters and the Act aims to remedy this.

The licensing system and royalty payments will be streamlined, making it easier for artists to get paid for the use of their music. The existence of a centralized database of music licenses in which major publishers and streaming sites will participate will help all players in the music industry by providing structure. Independent record labels and other entrepreneurs in the music industry should keep up to date with changing laws in the entertainment field. Independent record labels will be affected, if not already, by streaming sites and will receive royalty payments from theses sites using licenses the label owns. These labels must also be cognizant of the royalty payments their artists receive and ensure they adequately reflect the percentage due to not only the singer but also the songwriter.

Overall, the changes will take place on a scale larger than independent record labels. However, The Act changes the face of copyright in the music industry arena, and it is important for all musicians and labels to maintain an understanding of their place in the industry.

 

 

Sources:

https://www.billboard.com/articles/business/8216857/music-modernization-act-what-is-it-why-does-it-matter-jordan-bromley

https://www.soundexchange.com/advocacy/music-modernization-act/

https://www.theverge.com/2018/10/11/17963804/music-modernization-act-mma-copyright-law-bill-labels-congress

https://www.copyright.gov/music-modernization/

http://www.copyright.com/blog/music-modernization-act-introduced-house-senate/

https://www.ascap.com/about-us/stand-with-songwriters

https://blog.songtrust.com/what-is-the-music-modernization-act

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depositphotos.com

What are Distribution Channels?

Distribution channels are defined as the systems by means of which goods reach the consumer, and though there are various channels available to retailers, the four main methods for record labels are: distributors, record stores, online digital sales, and online record sales.

Distributors

Independent record labels can team up with either physical or online distributors to transport and sell records. Prior to making an agreement with record labels, distributors will want to know how many artists a label has signed and whether the label has successful marketing in place. Contractually, distributors will want to lock in a label, typically for 2-4 years, and will require an exclusivity clause in such contracts, meaning the label will not make an agreement with any other distributors to sell its records. However, if the label wants to utilize alternative distribution channels in addition to using a distributor, it is crucial to not agree to an exclusivity contract.

Another type of deal that can be negotiated with distributors is called a “Manufacturing and Distribution Deal,” which provides for the distributor to manufacture/press the records in addition to distributing them for future sale. However, with this deal comes the possible consequence that the label may lose control over the quality of the pressing and the business might not receive payment for the records sold until the exact quantity of records sold is known. Also, the label will have to pay for records to be scrapped when they are returned as unsold, which can make this option costly and contractually burdensome.

Physical Record Stores

 Some independent record labels opt to open physical record stores to sell records from artists they have signed. While selling from a local record store increases the label’s visibility to the public and may increase total revenue, there are various legal implications that opening a retail store has on a label. While online stores typically do not need many employees, a physical retail store will need to employ individuals to run the daily operations. The label will therefore have ongoing costs of salaries, benefits, and insurance to ensure that the employees are legally protected.

The store will need to apply for certain licenses and permits before opening. Zoning may be an issue for a record store because of the noise that may come from crowds and loud music. Music licensing is also important because in order to play music inside the store, the label must first acquire permission from the license holder. If the store wants to play music by artists that the label has signed, then, depending on the artist’s contract, the label may already hold the license. If not, the store will need to obtain the license. However, if the store plays music by artists not under the label, it is possible to obtain a “blanket license” which will allow the store to play music from a catalog of artists and songs.

Online Digital Sales

Digital distribution involves a third-party service selling digital songs, like iTunes or similar platforms. Labels are responsible for uploading the music and negotiating an agreement with the platform to ensure that they receive fair compensation for sales. It is crucial to negotiate a non-exclusivity clause to be able to sell digital songs and records on other platforms, or else the label will be obligated to sell digital records and songs solely through the one platform.

Licensing is also important in the realm of digital sales and will require an agreement between the digital platform and the label to give the seller rights to promote and sell the music to consumers. Labels have the option of becoming a member of the Association of Independent Music, a global trade body called the World Independent Network, which established a global music licensing agency for independent record labels known as Merlin. Merlin holds the collection of global digital licensing records and songs and gives labels access to worldwide licensing once they become members.

Labels may also find it helpful to work with digital distributors who work on their behalf to handle relationships with digital retailers, music sites, ISPs and overseas markets since they have distribution deals in place with global digital service providers. Digital distributors take care of royalty tracking and reporting, so it knows how much the label owes individual artists in royalty payments from those sales. These digital distributors will enter into agreements with third-party retailers on the label’s behalf, so the label need not be legally bound to third-party contracts.

Online Record Sales

            Selling records and other forms of music online may save a record label from paying the various costs associated with selling from a physical store. However, sales tax is one issue that entrepreneurs of any industry should understand prior to engaging in online sales. A recent Supreme Court case, South Dakota v. Wayfair, Inc., established the new legal rule for charging sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. Essentially, online retailers may charge sales tax on purchases, depending on the state the purchaser is in, even if the online retailer has no store located in that state. However, once sales tax is charged, the online retailer must remit the tax earned through purchases to the states from which it was collected by the patron.

Conclusion

            Independent record labels have smaller distribution ranges than the major U.S. labels, so determining the most efficient distribution channel is crucial. Because independent record labels tend to be more artist-focused, they often make agreements with artists that include “split-territory” clauses which allow the artist to sign with another label, solely for distribution purposes. It is best for these labels to explore all options in terms of distribution and decide what works best with their style and resources.

 

 

 

 

Sources:

http://blog.sonicbids.com/how-to-be-your-own-record-label-distribution

https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf

https://www.soundonsound.com/music-business/start-your-own-record-label

http://www.academia.edu/17974415/Independent_record_labels_Rough_Trade_Records

https://www.entrepreneurship.org/articles/2004/01/understanding-legal-and-structural-issues-in-establishing-sales-and-distribution-channels

https://www.nasdaq.com/article/the-big-three-how-the-internet-disrupts-record-label-revenue-cm721240

https://www.shipstation.com/blog/handling-your-business/should-you-open-a-bricks-and-mortar-store/

https://howtostartanllc.com/business-ideas/record-store#legal

 

 

Royalties:

As small businesses, independent record labels need all the money they can get to put back into their business. Royalties detract from profits but are necessary when creating a contract with artists/bands. Artists will not work for free and labels should ensure that the artist will continue doing business with them.

How Does It Work?

Artists are paid a percentage of each album sold, which is determined, and negotiated, by the artist and the label in the recording agreement. Typically, the percentage ranges between 10% and 20%, with newer artists seeing the lower end of the range. The artist or band may receive an advance in royalties prior to the label making money from CD sales, with this advance being returned to the label, a process called “recoupment.” When the time comes for the artist to receive royalty payments, the band manager also takes a percentage, and the remaining money is divided among any band members.

This system can be problematic to artists whose albums do not go “gold” (500,000 albums sold) or “platinum” (1,000,000 albums sold), and labels only have a 1-in-20 chance of producing a gold or platinum album. So, when deciding on how to calculate royalties, a record label owner needs to consider: the percentage, how this percentage is calculated (wholesale or retail), any recording expenses imposed on the artists, and any advances paid as well as if they want the artist to stay with them.

If this royalty system does not sound right for your label, you might consider a mutually beneficial approach. Independent labels sometimes split the net profits of an album (either 50/50 or otherwise) with the artist. To determine net profits, the label takes the gross sales of albums sold and deducts its direct costs which include production costs, packaging and shipping, marketing, storage, legal, taxes, and personnel costs.

Another thing to remember is that royalties are paid to the recording artist as well as the songwriter. If these artists are separate people, then the royalties are going to be smaller for both individuals. The recording artist and songwriter are paid royalties from CD sales, but only the songwriter receives royalties when the recording artist gives a public performance.

Royalties is a key provision in the recording agreement and artists in the music industry are typically unhappy with the traditional system which favors the label’s success over the artist’s. If you are in the business to make money as well as build relationships, then it may be in the label’s best interest to negotiate fairly.

Recording Contracts:

Why Does My Label Need Contracts?

Recording contracts between the label and the artist are extremely important because they establish the professional relationship between the two parties and are legally binding. While it may be tempting to find a contract template online to use for your label, it is crucial to understand what every provision in the agreement means. It is also important to understand that contracts are between the artist and the label as a company, not between the artist and the label owner. Labels also need to realize that these agreements create specific obligations for both parties. Basically, artists agree to record an album in exchange for royalties.

Arguably, the most important clause in the contract is “exclusivity,” which requires the artist to sign to your label only. The label has exclusive rights to the artist’s music, name, merchandising, image, and likeness for the entirety of the contract. If an artist wants to appear on another artist’s track (who is signed to another label), then the artist should negotiate what is known as a “sideman” provision.

Other provisions of the agreement include: the territory; the length of the agreement; rights granted; advances and royalties; recording costs; warranties; and termination, to name a few.

Provisions:

Usually, recording agreements are for year-terms which allow the label to extend the contract if the artist does well after the release of an album. Artists may be contractually required to release a certain number of albums in a particular period of time. For example, the first term of the contract might be for the first album, the second term for the second album, and so on. As a new and small business, it might be a better idea to give your label this type of flexibility when creating recording agreements with new artists.

Artists also assign the copyright in their music to the label. The label will own the copyright in the sound recording once the track/album is recorded. The label owns this copyright for 50 years from the date of its release, and the same goes for any unreleased recordings. There may also be a contract provision on licensing, allowing the label to license the album or song to others, but it may owe a fee to the artist depending on the contractual language. A label may also want to include what is known as a “lock-out” clause which prevents the artist from re-recording any of the songs on the album, and unreleased tracks, for 5 to 10 years following the end of the contract.

Recording costs can also be a point of contention since it is common for a label to charge artists for a variety of costs associated with the production of an album, such as promotion costs, music video production, and touring expenses. The costs may be deducted from the artist’s royalties before they even receive them. Keep in mind that independent labels typically spend around $15,000 when making a record, depending on the associated costs.

As a small business owner, it is up to you how to craft recording agreements and how flexible you want to be with various provisions, such as royalties. Following traditional approaches taken by larger labels will yield more profit, but might scare away potential artists from signing with you. So, it is best to seek advice from outside counsel and ultimately determine what is best for your company.

 

 

 

https://www.soundonsound.com/music-business/recording-contracts-explained

https://entertainment.howstuffworks.com/recording-contract2.htm

https://entertainment.howstuffworks.com/music-royalties6.htm

https://www.taxi.com/music-business-faq/music-business/money-record-companies.html

http://www.mccormicks.com.au/blogs/record-deals-how-music-royalties-are-calculated-on-record-sales

http://smallbusiness.chron.com/divide-percentages-record-label-39258.html

https://www.thebalance.com/indie-label-contracts-2460760

Being an entrepreneur in the music industry is just like starting any other small business. However, there are a few risks that distinguish operating an independent record label from other companies. One such distinction involves Intellectual Property (IP) issues. IP issues that may come up include trademark protection of one’s business name, as well as possible copyright dilemmas involving your business and/or the musicians you produce for.

Trademarking Your Name

Naming your record label is extremely important and you will want to pick a name that helps consumers and musicians identify your label. To be clear, your customers are the music-loving public who will be purchasing the CDs, records, and other media you produce for the musicians who record with your company. A record label name is extremely important to the functioning of the business, since it will be what draws other musicians, and therefore sales, to you.

Many business owners wonder if they should trademark their business name/ “trade name.” A trademark is a symbol, word, phrase, or a combination thereof that identifies the source of goods or services. Obtaining a federal trademark offers various protections to your business, primarily keeping others from using it. Some other benefits include:

• Nationwide trademark protection;
• Your trademark becomes part of the online database of trademarks;
• You can file a suit in federal court to enforce your mark if someone else starts using it;
• You get to use the trademark symbol ®.

To obtain a trademark, the mark must meet a few requirements. Essentially, there is a spectrum of distinctiveness that helps you determine if your mark will qualify for federal registration. For example, made up names are the easiest to obtain a trademark for. If your name suggests a product type, then it can be trademarked, but if a name describes your good or service, such as “Chicago Pizza,” it will most likely not be trademarked.

To trademark your business name, you can apply online with the United States Patent and Trademark Office (USPTO). By registering your record label, your trademark will cover the display of the business name in any font or color, so long as it is registered as a “standard character mark” on your application.

If you choose to not trademark your name, however, you need to make sure that the label’s name does not infringe on another trademark. While there are many criteria used to determine if trademark infringement exists, one factor is the degree of similarity between the two marks. You can go online to the USPTO’s website and check the Electronic Search System (ESS) database to make sure your name is not already in use by another business.

Another problem to avoid is making sure your record label’s name does not create a likelihood of confusion with a preexisting business in the music industry. To avoid this potential dilemma, search for your potential label name in the ESS database and make sure it does not sound or look like other labels. You can also protect yourself against infringing by searching on Google, as well as keeping in mind that geographic location does not matter. If there is a similar record label name anywhere else in the country, you could be in trouble.

Federally registering your business name is not necessary if you plan to operate only in one state. However, operating a record label means you will be shipping your CDs, records, and other media across state lines, and maybe even internationally. Also, the music business can be cut-throat, and it is crucial to make sure your business is protected because at the end of the day, it is still a business as well as part of your livelihood.

Copyrights and Sampling

Copyright is a legal protection for creative works such as paintings, books, or songs/musical compositions, etc. To receive copyright protection, the creative work must be (1) original to the author with a minimal degree of creativity, and (2) fixed in a tangible medium of expression. Your work, if it meets these requirements, is automatically copyright protected, but federally registering your copyright affords you more rights. Briefly, these rights include: the right to reproduce the work, to distribute copies of the work, to perform the works publicly, make derivative works, to perform sound recordings/digital audio of the work, and to display the work.

As the label owner, your company will not own the copyright in the music and lyrics; that is owned by the musician themselves. However, you will own the copyright in the sound recording. Since you will have a stake in the music, it is important to know about Sampling, which is a type of copyright infringement when it is done without permission. Sampling is taking a portion of a prior recording and incorporating it into a new song or other recording. Musicians get in trouble for this quite often, so it is important to know what not to do.

Sampling is legally allowed, so long as you are given permission, which is given in the form of a license. If a piece is sampled without permission though, the copyrights of the sound recording and the song itself have been infringed and your musician and your company could be in trouble. As the creator of the sound recording, your record label would be in trouble for producing and selling someone else’s copyrighted material. This is especially troublesome for an independent record label that may not have a lot of money to spend in court fees or settlements.

If illegal sampling occurs, a court can force the musician and/or the record label, to destroy all of the records containing the sampled work and pay damages to the copyright owner in an amount ranging from $750 to $150,000 for each infringement. So, when in doubt, always get permission!

 

Sources:

https://www.entrepreneur.com/businessideas/independent-record-label

https://www.thebalance.com/how-to-start-a-record-label-2460782

https://www.nolo.com/legal-encyclopedia/how-start-record-label.html

https://law-arts.org/pdf/Legal_Issues_in_the_Music_Industry.pdf

https://www.legalzoom.com/articles/should-i-trademark-my-business-name