Recording agreement or licensing agreement?Sep 06, 2021
Record labels require a lot of capital. The label needs money to do the heavy lifting it takes to develop and break an artist. This includes funding to produce and record music, marketing and promotion, videos, touring and more.
In return the artist gives the label control and ownership of the sound recording copyright called the “master recording”. This allows the label the ability to exploit the music and artist’s brand thru sales, distribution, promotion, and more. The rights granted under a record agreement are typically worldwide.
However, there is another path that artists and labels can take with less risk; master license agreements instead of recording agreements. This allows both parties to leverage resources other than their own.
How licensing deals work
The artist or indie label (“Rights Holder”) will create and record the music and when the final product is completed, the larger record company (“Company”) will then license the music. The Company pays an advance fee for the license. This gives the Company permission to exploit the recordings in different mediums and formats (TV, Film, CD, Digital, etc.) in order to generate revenue. This is different from a traditional record deal because the Artists have creative freedom and control of their music.
After obtaining the license the Company takes responsibility for promoting the music and getting it distributed. If the company loses money then that loss is theirs; the Rights Holder still keeps the advance licensing fee regardless of the music’s performance and sales.
- Licensing is good for cash flow; and
- Licensing deals allow the Parties to the deal to share the risks.
Remember this is not a standard record deal but a partnership with another company. The Rights Holders (the indie label or artist) are responsible for funding the recordings, while someone else will be responsible for marketing and distributing the music on your behalf.
The Devil is in the Details
The licensing agreement will lay out the terms and conditions under which an entity may use the Right Holder’s materials and the fees that must be paid for its use.
Basic Terms in Licensing Agreements: The following terms can be elements of master licenses, both exclusive and non-exclusive:
Proof of copyright ownership: The Company licensing the master relies upon the Rights Holders, having valid rights to the sound recording, they provide. If the Rights Holder makes a mistake and enters into an agreement that exceeds their authority, this will invalidate the rights of the Company licensing the music. Remember, a warranty clause gives nothing more than a right to sue, it does not cure the defect in the copyright chain.
Territory: Licensing deals can be for a specific territory. Right Holders can negotiate different deals in different markets. The benefit is that each label can use their expertise in their own market to be more effective. This also allows the Rights Holder to pick up more advances on royalties from each deal.
Master Rights: Sound recording owners must give the record company the right to make copies of the master in order to sell the music to the public. The rights granted and the scope of the license for each agreement depends on the bargaining strength of the parties. In most cases, the Company will only have the right distribute and sell copies of the “master recording. Thus, the Company may not alter the master in any way, nor attempt to exercise any other rights not specified in the agreement such as the right to remix or alter the track.
Master Recordings: Is usually defined as “technically and commercially satisfactory for the manufacture and sale of phonograph/digital records”. Most license agreements also specify the format in which the master must be delivered to the Company. Where the masters already exist, it is easy to identify them in the agreement by artist and track. Company’s will also require the metadata information (i.e., song title, artist, featured artist, producer, studio, lyrics and more). The Company would also request the International Standard Recording Code (ISRC), as well as proof of copyright ownership for each track. The agreement should also address the Company’s task of complying with mechanical copyright requirements.
Synchronization: Synch licensing with TV, film and computer games is a key source of income from masters. The agreement needs to address whether the Company can grant, worldwide synchronization licenses; if the Company has a limited licensed territory. Some Rights Holders reserve the right to be able to approve requests prior to synchronize their recordings. Others will let the Company’s negotiate such licensing provided they consult with the Rights Holders. The agreement should also specify how and to who the advance will be paid.
Term: Most licenses are for three to five years, although there’s no magic number. Companies want the ability to invest and make a profit and the Rights Holder may even assign the copyright to the Company. The terms and conditions are based on what the parties want and need in order to have a meeting of the minds.
Grant of Rights: Most licenses give the Company the exclusive right for a particular territory during the term, to do the following:
- reproduce the master recordings
- communicate the recordings to the public
- reproduce other marketing materials in order to promote the music
In general, Rights Holders tend to restrict the rights granted, such as the copyright ownership, so that they retain maximum control.
Sub-licensing: Generally, Rights Holders will also forbid a Company (other than a Major) from granting sub-licenses, unless the Rights Holder’s first gives consent for each sub-license.
Promotion: Rights Holders will usually want guarantees from the Company that they will make reasonable efforts to promote the records. Common sense suggests that a Company would do that anyway but just to make sure, some Rights Holders insist on a minimum amount being spent by the Company on promotional activities.
Mechanical Fees: These fees are statutory and must be paid by the Company to whichever publisher or person controls the copyright for any physical copies or downloads that are sold of the master recording.
Controlled Composition: A clause that provides if the recording artist or producer has written or co-written a song, has ownership or control of a song, or has any interest in any composition on the album or single, the mechanical royalty rate payable by the Company for that composition is reduced (usually to 75% of the statutory rate of 9.1 cents).
Royalties - The percentage of royalties between the parties takes into account several factors but is not limited to:
- the nature of the rights you are getting;
- the territory of the license;
- the term;
- the advance;
- do your rights allow you to exploit the music properly; and
- allow the Company to make money?
Record Advances - The money the Company gives the Rights Holder as a pre-payment against royalties.
Recoupment: Will expenses for marketing and promotion be deducted from the gross before distributing royalties?
Accounting: The agreement should outline when the Company will give an accounting to the Rights Holder, either quarterly or semi-annually. Companies need to provide royalty statements on time in order to avoid an aggressive Rights Holder, the opportunity, to terminate the license for breach of the contract.
Audit: Most agreements include detailed clauses that give the Rights Holders the right to conduct detailed financial examinations of the Company’s accounting.
Warranties: A clause that allows the Company to sue if statements made by the Rights Holders, where false before or at the time of making the contract, that the Company relied on to make the agreement (i.e., such as the Rights Holder was in fact the copyright owner).
Notice: The ways and means by which the parties communicate that constitutes legally-binding notice (i.e., by mail).
Confidentiality: a clause in the agreement that barrs the receiving party from disclosing information which is in the agreement.
Governing Law: The law and the State which controls where the contract would be litigated, if there was a disagreement among the parties.
Termination: A well-drafted agreement has provisions, setting out, what events will amount to a breach of the contract and what happens if a breach occurs. Most licenses give the Company some ‘days to cure’ should they make a mistake, but some events, such as the Company’s insolvency, bankruptcy or any failure to deliver accounting statements on time, will usually give the Rights Holder the right to terminate the license immediately.
Where is the Money?
Types of Revenue from Licensing:
Royalties from Record Sales (physical and downloads)
Sales can be generated from traditional brick-and-mortar stores, Amazon digital downloads, physical sales at live shows, and digital sales through websites.
Money is owed for recordings streamed on interactive services. An interactive service allows a user to determine the exact song they wish to hear at that moment (i.e., Spotify, Apple, Deezer and more). The Company typically receives these fees from their distributor and will apply deduct expenses prior to paying out royalties.
Note: The Company is responsible to provide royalty statements and pay every other master Rights Holder for sales and streams based on the terms of their agreement. In addition, the Company must pay the composers the mechanical royalties for physical sales.
Performance Royalties (aka Neighboring Rights)
Money is paid for music streamed on non-interactive services. Non-interactive services do not allow the listener to choose the songs that plays next. This includes satellite radio stations (e.g., SiriusXM Radio), internet radio stations (e.g., iHeartRadio.com), non-interactive digital music streaming services (e.g., Pandora) and music played in nightclubs, restaurants, and stores.
Across the globe each non-interactive company pays a statutory license fee based on a number of factors (i.e., size, market share and revenue) to collection agencies. Sound Exchange is the only collection agency, authorized copyright law for the U.S., to collect these royalties on behalf of the owners of the “master recording”. Sound Exchange then receives reports from these non-interactive companies listing the exact music performed each month. This information is used to pay the appropriate parties on a pay-per-play basis. Sound Exchange pays 50% percent of the monies to the owner of the song’s sound recording (typically, a record label), 45% goes to the featured performer on the track and the remaining 5% of these funds are distributed to the non-featured performers on the track. Sound Exchange’s charges 4.6% of the revenue received to perform these services. Sound Exchange is the only collection agency, authorized by copyright law for the U.S., to collect these royalties on behalf of the owners of the “master recording”.
Note: These royalties are distributed directly to the recording artist without the artist’s respective share being first distributed to the artist’s record label. Therefore, the artist can receive Sound Exchange payments without the label being fully recouped.
Note: It is essential that record labels and recording artists properly register with Sound Exchange to ensure proper collection and distribution of all the royalties owed to them. Some distributors interface with Sound Exchange, on behalf of the Company, and so the money flows thru the distributor to the Company.
Master Use Licenses
When a song is used in film, television, commercials or for gaming the owner of the master recording is paid a “Master Use License”. The amount of the master fee depends on the bargaining power of the parties involved. The Rights Holder of a master recording, can charge whatever they want for its use. Even if a small portion is wanted, as in the case with sampling, you have the right to request any price or deny permission.
Note: Use of a sound recording requires two licenses, a Master Use License from the master owner and a Sync License from the publisher or songwriter.
User Generated Content
A recent white paper published by MIDiA Research, entitled “The Rising Power of UGC”, described User Generated Content (“UGC”) as “fan-created content which features or augments professional content. This includes self-made videos (lip syncing, dance routines or tutorials, reactions) augmented audio such as covers, music tuition and tips, mash ups and remixes, and quotes of lyrics or parodies”. https://midiaresearch.com/reports/the-rising-power-of-ugc
The creation and consumption of UGC continues to rise and in some instances is the path to breaking music, as in the case of Little Nas with “Old Town Road” on TikTok. In order for this to benefit both the music Rights Holders and technology companies a new, simpler licensing framework is needed which would allow for licensing across multiple social media platforms and business models. According to MIDiA’s projections this could lead to a windfall of $6 billion for both content owners and the social media platforms.
Currently, in the U.S., content owners must issue a takedown notice to the platform if they do not approve of the way the UGC is being used. This is labor intensive for content owners. Platforms, on the other hand, rely on "Safe Harbor," provisions which state that the platforms are not legally responsible for the uploading of unlicensed content by their users. The platform, under Safe Harbor must either compensate the Rights Holders or remove content when it is found to be infringing or face the possibility of being sued. In other words they are not liable for what is on their platform if they don’t know it is there.
Help is on the way for the European Union (EU) which has started to tackle this issue by enacting Article 17 legislation. Article 17 states that online service providers who promote content sharing are themselves making the content available, and therefore need authorization from the copyright owners to do so.
The legislation will begin enforcing reforms that require platforms to make efforts to avoid copyright violations in June 2021. Companies such as Pex, “offer licensing infrastructure and content identification technology that digital platforms can integrate free of charge. The software, in the form of an SDK, sends fingerprint hashes of user-generated content to the Attribution Engine where it is matched against a database of registered assets in 5 seconds or less. If there is a match, platforms will receive all the information they need to attribute correct ownership and license the content before it is published”. https://pex.com/
Rights Holders will now have more say about how their content is used and will be compensated for the use of the content. While these laws do not apply to content posted in the U.S., it stands to reason that International companies who must change their platforms in order to comply in the EU, may cause changes that will positively impact the U.S. market.
Finally remember licensing is not a standard record deal but a partnership with another company. There are no one-size-fits-all licensing deals and very often contracts, and terms differ based on the negotiating power of the parties. Consult with counsel to determine what is best for you.