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Online Music Distribution Contracts
by David Moser
When an artist makes recordings available over an online music
distributor ("OMD") such as mp3.com, the artist enters into a contractual
relationship with the company. This is true whether the artist realizes
it or not and whether the artist understands the terms of the contract or
not. The vast majority of OMDs do not actually require the artist to "sign" a
contract. Instead, the artist agrees to be bound by a contract which the
artist can view online. In order to make recordings available, the artist
must agree to the contract's terms by clicking on an icon containing a
statement such as "I agree." It is likely that many artists click on
these icons without a second thought and without reading, let alone trying to
understand, the contract's terms.
One major disadvantage of OMD contracts is that they tend to be
non-negotiable. In other words, you either agree to them or you don't (in
which case you can't make your music available). Unlike traditional
record contracts between artists and record companies which are often heavily
negotiated in order to improve the deal for the artist, OMD contracts are
generally offered on a take it or leave it basis. This is not likely to
change since OMDs are operating on a quantity over quality basis and it
would not be worth their while to negotiate with the many artists who want to
make their music available. However, even though you probably can't negotiate
any of the terms, it is still important that you understand what they are so
you know what you're getting into.
Before addressing specific issues related to OMD contracts, it might
be useful to examine the relationship between an artist and an OMD. Many
artists compare these relationships to traditional record deals. However,
this is not an accurate comparison. Under a traditional record deal, a
record company signs an artist to provide its recording services. In
return, the record company pays all recording expenses, distributes the album and
markets and promotes the album. The record company also pays the artist a
royalty for each record sold which, for new artists, usually amounts to
about $1.25 per CD (although some of the expenses incurred by the record company
are recouped from the artist's royalty). OMDs do not really operate as
record companies - they do not pay for the artist's recordings and they
don't do anything to market and promote the artist's recordings other than
providing a page on their web site for the artist. In a sense, they
operate more like record distributors. However, comparing them to record
distributors is also a bit inaccurate since most OMDs do not make much
income from distributing records. Instead, OMDs such as mp3.com make the vast
majority of their income from advertising. In this sense, they are more
like radio stations than record companies or record distributors since, like
radio stations, they use music as content (which they generally don't pay for)
in order to sell advertising.
It is also very important for artists to have realistic expectations
when entering into a relationship with an OMD. Quite frankly, artists should
not expect to sell many records this way. To date, it does not appear that
any artist has achieved substantial record sales through OMDs. For example,
according to music news service Webnoize, the average artist on mp3.com
sells about half a CD a month. Instead of expecting to get rich selling your
music online, you should view OMDs primarily as a promotional tool which will
hopefully get you some publicity, expand your fan base and provide a
slight source of income.
The following is a summary of some of the common issues to be aware of
when considering whether to distribute recordings through OMDs.
1. Grant of Rights:
Normally, the artist gives the OMD the right to offer downloads and to
sell recordings (usually by mail order). One thing that artists should
avoid is any transfer of ownership of their recordings (or any songs contained
in the recordings). Instead, the artist should merely grant the OMD a
license to use the recordings in specified ways. Since OMDs do not pay for the
recordings or have anything to do with creating them, there is no
legitimate justification for an OMD to receive ownership.
Another important consideration is whether the contract is exclusive
or non-exclusive. An exclusive contract with one OMD would prevent the
artist from making its recordings available over other OMDs and possibly through
traditional distribution through retailers as well. Therefore, it is
rarely advisable for an artist to sign exclusively to one OMD.
Ideally, an artist should limit the OMD's rights to transmission or
distribution by means of current technology (digital downloading and
physical distribution by mail order). Since technology changes rapidly, there may
be new forms of distributing music in the future and artists are better off
keeping any rights to future technology.
Some contracts also give the OMD the right to use the artist's
recordings in compilations with other artist's recordings. Artists should have a
right to approve the use of their recordings in such compilations since OMDs
usually do not pay royalties on compilations and an artist may not want to
be associated with other artists contained on a compilation.
2. Term:
The term of an OMD contract refers to the duration of the contract.
Generally, it is in the artist's best interest to keep the term short
(month to month if possible; one year maximum). A short term gives the artist
the flexibility to end the relationship if it is not working out to the
artist's liking.
It is also beneficial for the contract to contain provisions allowing
the artist to terminate the contract before the term expires in certain
circumstances. Some of these circumstances would include the OMD's
bankruptcy and the failure to account or pay royalties to the artist.
3. Compensation:
Most OMDs pay the artist a percentage of the sales price of any CDs
sold through the OMD, commonly 50%. Consequently, if an artist's CD sells for
$10, the artist will receive $5. However, it is important to note that
most contracts provide that the artist is responsible for any royalties payable
to producers and publishers or songwriters out of the artist's share of
income.
If an artist's album is self-produced and the artist writes all the songs
recorded, this is not really an issue. However, if an outside producer is
involved, the producer will normally be entitled to a royalty on each CD
sold - commonly about 35 cents under most traditional deals although producers
may want a higher royalty for online distributions since the artist receives a
greater royalty. Additionally, if an artist records songs written or owned
by someone else, the artist would be responsible for paying mechanical
royalties of 7.55 cents per song.
It is also very important to understand that most OMDs do not pay any
royalties on free downloads of the artist's recordings. The rationale for
this is that downloads are promotional in nature. Of course another point
of view is that the OMD is receiving free content, without which it could
probably not sell advertising. The OMD is therefore making money from the
"free" downloads and artists should in fairness receive some compensation.
Some OMDs have recently started experimenting with schemes for allocating
a small portion of their advertising revenues among artists whose recordings
have been downloaded which is a step in the right direction towards
compensating artists.
4. Accountings:
Most OMDs account for and pay artists royalties owed on sales of their
recordings on a quarterly basis (4 times a year). Many contracts also
provide that the distributor can hold royalties under a specified amount.
This is not unreasonable as long as the amount is not too high (e.g., $25)
since the OMD does not want to make royalty payments for negligible
amounts.
An OMD contract should give the artist a right to object to royalty
statements and to examine or audit the OMD's books and records concerning
sales of the artist's recordings. The OMD will normally impose
limitations on the time period for objections and audits. Time limits for objections
are often one year from the date an accounting statement is sent to the
artist.
A longer period (2-3 years) is preferable since, in some situations, an
artist would not have reason to suspect underpayment until it has received
several statements for different accounting periods. An artist-friendly
provision that OMDs are unlikely to agree to would specify that the OMD
pay a penalty for any substantiated underpayments. Imposing a limitation that
requires the artist to hire a certified public accountant to conduct an
audit of the OMD's records effectively makes the audit rights useless since the
vast majority of artists would be unable to afford to do so.
5. OMD's Obligations:
Generally, there are very few obligations imposed on the OMD other
than the obligation to provide the artist with a web page where people can
listen to sample recordings for free and the obligation to mail a copy of the
artist's CD to customers who request and pay for one.
Since the benefits of OMDs are mostly promotional in nature rather
than financial, it would be advantageous if the OMD was obligated to share
information about visitors that download the artist's recordings. This
information could be used by the artist to expand its fan base through
mailing lists, etc. However, most OMDs refuse to make this information
available to artists. This seems hypocritical since the OMD obviously
intends to use the information for its own benefit, but is unwilling to
let artists do so as well. An artist might also want the OMD to be obligated
to report sales figures to Soundscan (a company that tracks records sales).
If you end up selling a substantial number of CDs, it is possible that you
may be contacted by record labels since they tend to pay attention to
Soundscan.
One thing to be very wary of is an OMD that requires the artist to pay
for a web page. This is totally unjustified since the cost of providing
the web page is usually the only investment the OMD makes on behalf of the
artist and it is a very minor one.
6. Warranties & Indemnity:
OMD contracts contain a provision under which the artist makes certain
warranties or promises. For example, the artist will warrant that it owns
all of the material that is supplies to the OMD. This would include the
recordings, the songs contained on the recordings and any artwork and
other information. If an artist has recorded someone else's songs without a
license to do so or if someone other than the artist prepared the album
cover artwork and the artist had not acquired ownership of the artwork from that
person, the artist would be breaching this warranty. An indemnity
provision says that if the OMD is sued and found liable for anything related to any
of the artist's warranties, the artist must reimburse the OMD for its losses.
For example, suppose an artist warranted that it owned all the songs
contained on its recordings, but there was actually one song owned by
someone else. If the actual owner of that song sued the OMD for copyright
infringement and won an award of $50,000, the OMD would have the right to
be reimbursed the $50,000 from the artist as well as the OMD's legal fees
incurred in defending the lawsuit. This is certainly reasonable since it
was the artist that lied about having the right to make the song available.
However, it is important for artists to consider whether they do in fact
have all the rights they are claiming to have. Another problem could arise if
an artist lets an OMD use recordings paid for by someone other than the
artist (such as a record company or production company) since the party who paid
for them may very well be the copyright owner of those sound recordings.
Similarly, recordings which contain unauthorized samples of other
recordings would constitute a breach of the artist's warranty.
7. Assignment Rights:
Many contracts give the OMD the right to assign its rights under the
contract to third parties. This is an important right from the OMD's
perspective since there is a trend toward OMDs being bought out by larger
companies. Unlimited assignment rights, however, do not benefit the
artist and, if possible, the artist should have the right to terminate the
contract if the OMD is bought out.
8. Jurisdiction & Venue:
Since contracts are governed by state law, they will normally provide
that any disputes under the contract are governed by a specific state's
laws.
For example, if an OMD is located in California, its contract will
probably specify that any disputes will be decided according to California law and
that any claims must be brought in the California courts. Obviously, if
an artist lives in New York, this would be quite inconvenient. In reality,
this provision will often make it practically impossible for many artists to
pursue claims they may have due to the costs involved.
Some contracts may contain arbitration clauses. Arbitration is an
alternative to going to court to resolve disputes. Instead, the parties
agree to be bound by the decision of an arbitrator (a neutral third
party).
Arbitration is often described as a cheaper and quicker way of resolving
disputes, but this is not always true. In fact, arbitration can be much
more expensive and time consuming than bringing a lawsuit in some
circumstances.
It is also much easier to abuse the arbitration process since arbitrators
have no ability to enforce their decisions. Consequently, you could win
an arbitration award and still have to file a suit in court to have your
arbitration award enforced.
Copyright © 2000 by David Moser
Notes:
David Moser is a Nashville-based entertainment attorney who represents
music industry clients such as record companies, music publishers, songwriters, recording artists, producers and managers. Some of the clients he has represented include Curb Records, Bret Michaels (of the band
Poison), Buddy Kiilen Music Group, KMG Records, Damascus Road Records and Praise
Hymn Soundtracks. He is also a professor in the Recording Industry program at
Middle Tennessee State University where he teaches courses such as
Copyright Law, Music Publishing and Legal Problems in the Recording Industry. He
has had articles published in Billboard Magazine, Entertainment Law & Finance,
Entertainment & Sport Lawyer, The Entertainment, Publishing & the Arts
Handbook and is currently writing a book on copyright law entitled "Music
Copyright for the Millennium." He can be reached at DMose1@aol.com.
Disclaimer: The information provided in this article is for educational
and informational purposes only and is not intended to provide specific legal
advice. Transmission of this information is not intended to create a lawyer-client relationship between the author and any readers. The applicability of the information contained in this article to a particular
situation will depend upon analysis of the specific facts and it is
therefore recommended that any readers obtain qualified legal counsel to advise them
with respect to any specific issues.
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