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Advocating
for the Recording Artist
In the New Digital Marketplace
By
Kenneth D. Freundlich, Esq.
Schleimer & Freundlich, LLP
Beverly Hills, California
The emergence of compression technology,
digital downloads and expanding bandwidth has triggered a heated battle for
control of entertainment content on the Internet. Following the pattern
established in the historic legal battles over player piano rolls, radio,
television, and recordable audio and video cassettes, this struggle involves
three arenas: the Courts, Congress, and the negotiating table. While the giant
media companies with their lobbyists and legions of attorneys have
traditionally dominated the field, this time artists should have more leverage
than ever before.
The purpose of this article is to
provide artists and their representatives with a basic understanding of the
legal protection available for their “digital rights” under existing
record contracts--and to offer some tips on the licensing of digital rights
under both existing and future recording contracts.
Effect of Anticoupling Clause
The major record companies claim that they
already have the right to digitally download and stream existing music
catalogs, despite several potential roadblocks in their artist agreements.
The digital download market is shaping up as a mix-and-match, per-track
medium, with online customers eager to create personal compilations of songs
by different artists. To provide that service to consumers, record companies
must re-negotiate the coupling restrictions in existing artist deals— giving
the artist tremendous leverage. In years past, record companies considered
such provisions to be of minor concern, involving a tertiary record market,
and therefore rarely resisted an artist’s request for such restriction.
Those record companies never dreamt that coupling would become the cornerstone
to the distribution of their catalogues in the digital age.
Because such clauses are firmly entrenched
in older artist contracts, record companies will have to negotiate if they
want to participate in the “interactive” digital download market. Artists
are responding to overtures from the record companies on coupling by demanding
a waiver of unrecouped balances and as much as a 50% royalty on digital
sales.
In addition, record companies claim that they already have the right to
digitally download and stream existing music catalogs, based on strained
theories of work-for-hire and/or the self-serving interpretation of vague
contract language. In the case of older contracts, neither theory is very
strong. The parties to
pre-Internet record contracts had no inkling that the new digital markets
would ever exist, much less have a “meeting of the minds” as to how
digital rights would be allocated. As a result, typical contract
language under old contracts granted rights based on a definition of “record”
or “phonorecord” which does not expressly include digital rights.
Artist representatives should carefully
analyze the grant of rights clause in the record contract to ascertain if
digital transmission and download rights were granted. In the case of the
oldest such contracts there may not be language to cover media not then in
place. In these situations, artists could successfully claim that digital
rights were not granted. Furthermore, many contracts since then might not have
included language to cover digital media, because such rights were beyond even
the comprehension of the best attorneys. Indeed, there is no better evidence
of this fact than the recent specific inclusion in record contracts, of
digital rights provisions in the penumbra of granted rights.
If the “granting clause” of the artist’s
original contract does not fairly include digital download rights, the major
record companies can be forced into a bidding war with start-up Internet
distribution companies—many of whom are willing to give the artist a 50%
royalty on digital sales.
Artists can also exercise leverage in negotiating for the digital marketplace because of arcane royalty provisions in existing record contracts.
Negotiating for the Subscription Model
Napster
demonstrates that consumers want digital music conveniently—at no charge.
Although the RIAA and others are fighting to terminate Napster as a copyright
killer, new peer-to-peer systems such as Gnutella are emerging which will be
extremely difficult to fight in court and have thus far proved impervious to
encryption or any other form of electronic protection.
Legal
remedies and electronic countermeasures may fail to stem the infringing
masses, so many in the industry are investigating a subscription model under
which consumers will pay a flat monthly fee to obtain access to a web site
where vast catalogs of music can be accessed at will. This über website, to
compete with the free access to music content that Napster and its progeny
provide, will have to include interactive downloads, streaming “radio”
stations, CD sales, auction sites, links to artist web sites, chat rooms,
message boards and music video channels. Different tiers of subscription
service may be offered, with the cheaper sites containing advertising and
sponsorships. The potential
exists for artists to share in advertising and sponsorship income, as well as
the prodigious market that will develop for the consumer data such Internet
activity will generate.
Protagonists
of the subscription model argue that such sites will be hip and
artist-oriented, and offer enough sizzle to attract the monthly fees. They
point to the AOL model, where tens of millions of consumers pay a monthly
access fee--even though free Internet service providers exist.
Whether the
subscription model will take hold and, moreover, whether it will garner
billions of dollars in annual revenues from all sources—or fail completely—is
unknown. How, then, is an artist’s representative to negotiate a contract
covering royalties and restrictions for this speculative new market?
At this juncture, virtually nobody in the industry has figured out how to structure payments, let alone royalties for Internet downloads (with or without advertising), to make a profit. Thus, the safe bet is to negotiate an outright prohibition, wait for the market to develop, and then negotiate a royalty rate.
When
the market develops, the royalty provisions must adequately cover income from
use of music, advertising, sponsorship and data sales. The technology will
allow for exact tracking of “sales” or “uses” of an artist’s music
as a percentage of overall ”uses”. This
multiplier will be applied to the net receipts from all sources. Gross
Receipts in the subscription model would include subscription fees, general
advertising and sponsorship income, advertising, sponsorship and data revenue
which can be attributed to directly to the artist. The gross would be reduced
by agreed “marketing” costs and advances, if any, to achieve “net”
receipts. The multiplier times “net” receipts is the amount that will be
split between the artist and the “companies” – the internet service
company and the record company. An artist should take home at least 50% of
that figure having provided the content in a system where costs (and therefore
risks) all around are very low.
If consumers are permitted to mix-and-match download an artist’s music
in exchange for having an advertising banner appear on their screens, or with
audio advertising interspersed with the music, this could deter consumers from
using your artist’s files. Hence, the artist’s contract should ideally
provide a total prohibition of this kind of use. At minimum, you should set up
a stiff royalty structure for sharing such advertising revenue.
Great care should be taken in drafting the digital grant-of-rights
clause—and imposing restrictions on use. In a typical “digital rights”
clause, the Artist grants the following rights:
“To sell and otherwise reproduce the Masters and the Records …(i) by
digital transmission over all electronic networks (e.g., the exclusive right
to sell and transmit such Master Recordings and Records by allowing consumers
and other third parties to digitally download such Master Recordings and such
Records), and (ii) to publicly perform the Master Recordings over all
electronic networks by any method, whether utilizing technology existing as of
the date hereof or hereafter devised, including for purposes of advertising,
promotion and publicity.”
To narrow this broad grant, the artist’s representative should insist on
length-of-use (e.g. :30 or :45 seconds), frequency-of-use and density-of-use
restrictions in relation to advertising, promotion and publicity. In addition,
artists shouldn’t allow the artificial distinction drawn in (i) and (ii)
to justify a different royalty structure. Although streamed music
supposedly cannot be downloaded, from a technological standpoint that is a
fiction, because one can easily set up a computer for permanent recording of
streaming content either on the computer itself or on portable media.
Thus, any system that, allows a consumer to “order” particular
music over the Internet, should be contractually treated as a sale
New artists should also beware of the "web site grab” clause that
is cropping up in major-company form contracts. In such a provision, the
record company obtains the exclusive right to the artist’s name and persona
on the Web, including the right to register the “[artist name].com”
address and the right to run the back-end functions of the web site. The
record company registers the domain name as its own property, and will
probably host the artist website on its own, controlled servers.
This clause should be fought off at all costs. For one thing, the record
company may not manage, develop and innovate a web site with the enthusiasm
and artistry that the musician will. The artist should be able to appoint his
or her own developers and hire and fire them at will. In many cases, a “captive”
web site is likely to become entangled in inter-company politics, or just fall
through the cracks through bureaucratic neglect. Also, consider the web site
as a center for artist merchandising and other collateral sources of revenue.
The individual artist web sites can attract additional traffic and associated
commerce from über web site referrals permitting the artist to retain such
revenues minus a small referral fee.
If the artist concedes the domain name and web site, after the honeymoon with the record company ends, the artist will be deprived of the single most effective means of maintaining direct contact with the fans—and lose one of the most valuable assets which can be carried away from a career.
The Technology-Empowered Artist
New,
inexpensive technology has made it possible to produce a commercial-quality
music master for little or no money, burn CDs in a garage and create and print
high-quality color artwork and packaging at home. Moreover, with the cost of
hosting and bandwidth decreasing, artists can distribute music worldwide over
the web--at a minimal cost. As a
result, many artists now arrive at the shopping process with polished masters,
state of the art web
sites, fully packaged, ready-for-market CDs, and released MP3s.
What
the artist needs in this environment is a marketing partnership, and in
this evolving relationship, the major record companies may increasingly be
relegated to marketing alone, and have no other function in the artist’s
career. The label will be essential for publicity and promotion of the artist’s
work. In a true digital partnership, the artist should be able to command as
much as 50% of net profits on digital rights, which is 2 times the standard
royalty rates in the old contracts.
Copyright ownership should remain with the artist, and distribution should be under a long-term license--the functional equivalent of the independent film deal, which provides for 10-year to 20-year license term with a reversion of all rights at the end of the term. Such deals already exist--and a new breed of “digital” record companies are emerging, eager to make that kind of bargain if the major record companies will not do so.
Royalty
Accounting Under Pre-Internet Contracts
As
internet revenue begins to trickle in, the record companies are searching for
ways to “construe around” their obligation to pay royalties for such
income.
The top tier royalty in record
contracts is normally the rate for sales through “normal” retail channels
in the United States. None of the major record companies have thus far been
willing to include digital distribution in this tier. Instead, they classify
digital income under the penumbra of “new media,” which often provides for
reduction of the royalty rates for the format itself, and a
deduction for packaging and containers. In older contracts, which do not
mention “new media,” the record companies try to reduce the royalty
further by classifying digital exploitation as “direct sales.”
Many record contracts provide that income from “third party” licenses
are reported at a greatly reduced royalty, often as much as 50 percent off the
regular royalty. Accordingly, record companies are structuring digital
distribution through third party entities, so they can apply this clause to
water down royalties on all digital sales.
From the artist’s perspective, that record companies seek to apply packaging
and container deduction for sales in the digital market is a sham. The
Internet eliminates the cost of containers and packaging entirely, but
the record companies cling to this overzealous, old-economy deduction, even
though it is doubtful that any fair-minded Court would allow it. Deductions
for “foreign sales” which are in nearly every record contract are also
misplaced in the realm of digital sales where there are no extra costs
associated with sales to foreign consumers – the web site is equally
accessible to someone in New York as it is to someone in Thailand.
Schleimerlaw.com