A Brief Overview of Music Business Contracting Structure - DJ Greaves, Lockup Music Publishing, Jan 2018

Initial draft - comments welcome.

Introduction

In the old days of music publishing, there were no records but there was sheet music that people could buy at a shop and play on their piano at home. And then there were player pianos that took a paper tape and played that at home, and then there was the gramophone and so on ...

The history of the music business still affects the structure of many recording deals in current times, but recently many alternative contractual arrangements have also been widely used. Nonetheless, it is worthwhile for anybody in the music business to have a good knowledge of the typical structure in use at the end of the 20th century as a baseline. Such setups are still widely used as the basis of contracts.

The Composer

Music starts with the composer. The composer creates intellectual property and initially holds the copyright in his/her creation. The composer should garner a financial benefit, typically in the form of composition royalties, whenever the music is used.

The composer may transfer copyright to a music publishing company. Generally exclusively. The company will handle the licensing of the music for various purposes and should collect the composers royalties and pass them back to him/her, after deduction of some agreed margin (up to 50 percent). Alternatively the composer may license the composition to various users themselves.

A license to use the music can take many forms. The original two forms were the right to print sheet music and to make piano player rolls. The latter was called a 'mechanical license' since the music was performed by the player piano that was a machine. When the gramophone (record player) came along, the same term was reused, and the right to use a composition on a record or CD is still called a mechanical license.

Next, movies and TV came along, and the right to use a composition as part of the soundtrack to a movie, advert, TV programme or DVD is called a 'synchronisation license'. The term arises since the composition is synchronised with moving pictures.

Finally, 'new media' arrived, a term which covers downloads and Internet streaming. A license agreement may include different limits and royalty rates for each distribution form.

Another form of distribution is live performance. In the UK the royalty rates for this are controlled by the MCPS/PRS society.

Licenses can be for a finite time (e.g. 3 years) or for a certain number of copes (e.g. 10,000 CDs). These are called limited licenses. Typically a limited license also includes a clause where the licensee should be granted the automatic right to negotiate a renewal or extension under 'fair and reasonable terms' should the license expire. For instance, after the 10,000 CDs are sold, the record label might want to cut some more discs and will expect the composer (or their publisher) to grant a new or extended license.

A license may be exclusive or non-exclusive. When exclusive, a territory is identified, such as Europe and North America, and the publisher cannot sell another license of the composition into that territory (e.g. to another performer) while the exclusive licence holds.

Note that so far we have not mentioned musicians or performances. That's the next section. Often the publisher may be a division of a record company and the composer may also be the performer for a piece, and so on. In the traditional set-up, this does not make any difference to the structure of contracts and payments. A person or company who plays more than one role is entitled to receive the sum of the payments for their various roles. This can lead to situations where the lead singer of a band can be earning a lot more than the rest of the band members: not because they are more important to the performance, but because they also personally wrote many of the songs. So for a live performance of those songs, the lead singer will be receiving both a performance fee and a composition royalty.

Traditionally, for sheet music of popular songs, there were only two parts of the composition that were licensable. These were the melody and the lyric. Today other parts are considered to contain intellectual property, such as the bass line, harmony or rhythm. (The lead solo on the organ in 'A Whiter Shade Of Pale' made music history when a judge retrospectively awarded royalties to the composer of that lead solo.)

Performers

Once some music is written it needs to be performed. It also normally needs to be recorded or videoed. Let us first consider performance.

The performers are the people who turn a compostion from its sheet music (or their memory) into sound. They should be paid a performance fee for this work. Drum and sequence programmers are sometimes counted as performers or sometimes counted as composers according to the nature of their contribution. Someone who freshly programs up a drum part or sequencer track for an existing song would normally be considered a performer. These days, the performers are often just two people: one who sets up a DAW on a laptop and presses play and one who sings into a microphone while playing one instrument.

There are two basic forms of performance: recording and live. Sometimes a live performance is also recorded (then remixed offline) and then released mechanically, so it embodies both forms.

Performers are normally paid on a royalty basis, but they may also get an advance against future royalties. When a performer (or composer) is given an advance they will receive no further payment until the royalties owing start to exceed the advanced amount. Alternatively, a performer may be paid a one-and-for-all flat fee. This is common if they are a 'session musician'. The performer should agree their contract in advance of making the performance. Getting payments staged to straddle tax years may help reduce income tax burden.

Production Company

The recording of a performance is normally made by a production company, also known as a record company. Or the actual recording (tracking), mixing and mastering stages may be sub-contracted by the production company to independent third parties (people or companies) that will typically receive a flat fee for their work.

The production company (or record company) takes (or commissions) a performance and sells it. The production company receives money from the sales. Out of the gross sales there will be 'costs of sales' to be deducted, to give the net sales amount. The costs typically include cost of goods (like physically pressing disks and hosting web sites) and overheads, such as shipping, breakages, cost of staff and studio time. The production company must pay the composer and performers royalties and make some profit for itself.

Typical Break Down of Costs for a CD Album Sale

Suppose an album is sold on CD containing a number of tracks for a retail price of £12.00. This is what the end consumer pays for that 'unit'. The first two pounds of this is VAT which must be payed to the HM Revenue. This leaves £10. The royalties to the composers and the performers are normally based on this pre-VAT amount of £10.00. If they generously get 25 percent each, then there is £5.00 left to cover all the production and distribution costs and retail margin. Note that the composers and performers have to pay income tax on their fees. The per unit retail markup might be £2.50 and the distribution cost might be £0.30. The cost of pressing the CD, including artwork printing might be £0.50. This leaves the production company £1.70 from each sale. Hopefully they sell sufficient units to overcome the non-recurring costs (facilities and staff costs) to make ultimately make some profit! If the album cost £250K to record then they need to sell at least 200,000 units. This means they would lose money if the album does not make it to at least gold sales status.

In the past, quite a large number of units may be given away by the production company during promotion. Contracts should be clear where the cost of promotional copies lies. Today, promotions can be done electronically with no cost of goods.

Remixes and Covers

Performing a version of a song without a license from the publisher in a public place is an offence in law unless that place has a performing rights license from MCPS/PRS. Many pubs and bars do have such a license.

Commercially selling a cover or remix of a song or performance without a license is also an offence and the rights holder could sue the seller. The same goes for using a commercial track in the soundtrack of a video. But certain web sites are beginning to offer automatic licensing for a large part of the 'published catalogue' when a cover or remix is uploaded to them. Web sites such as You Tube use AI techniques to work out what song is being covered and then work out whether an automatic license can be granted. Otherwise they flag the upload as a copyright breach.

A remix that completely changes the nature of a composition or performance may be considered a partial composition or performance in its own right. Clearance for the original rights holder is still required to commercially exploit the remix, but the royalty rate charge may be reduced according to how little the original work contributes to the artistic value of the new work.


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