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 an
d 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.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
Devon,
Thanks for writing a great post on an interesting topic! I never thought about music distribution from a legal standpoint. After reading your blog, it seems to me like online digital sales will outgrow all other forms of distribution. From the consumer’s perspective, digital purchases are usually the least expensive, as well as the most convenient. You don’t have to worry about getting your hands on a hard copy, you can buy just one track at a time, and once you buy it it’s available in your library across ally your devices. From the seller’s perspective, all the other channels seem to be flawed. Using distributors would handcuff the seller, which is undesirable. Physical record stores are going the way of the dinosaur, and online record stores are facing obstacles created by the Wayfair case. I look forward to checking out your blog again in the future to keep tabs on what’s going on in the music industry.
Tom
As someone who collects vinyl records, I appreciate that you took the time to fully consider the pros and cons of each method of distribution. Going to actual physical records store is something that I love to do. Although buying music online is more convenient, there is just something better about having a copy in hand. Perhaps I am just nostalgic! I would be interested to know the differences in preferences by generation — for artists and consumers!
Hi Devon,
This was a wonderful ad enlightening post on a topic that I would have never thought that there were so many legal concerns relating to choosing a way to distribute music!
I particularly appreciate how you broke the analysis down into important aspects that were easy to digest, which allows entrepreneurs to effectively choose which method fits their needs the best!