Content Agreggator Agreements With Online Music Services

Part One of a Two-Part Article

Legitimate online music services have struggled to provide content from the fragmented independent music world. Until recently, independent artists were not very present on the legitimate online music services. There were exceptions, but MusicNet, pressplay, MusicMatch and even iTunes were initially more interested in licensing big catalogs from the major labels than in individual licenses from independent artists. This is partly because the major labels control the best-known recordings, partly because the major labels usually support online distribution with significant marketing budgets and partly because it is not very efficient for an online service to negotiate agreements with thousands of independent artists.

In addition, given the highly litigious state of the online music business and the potential exposure to statutory damages for copyright infringement in the United States, it is unlikely that the legitimate services would take the risk of allowing click-through agreements for artists to post their recordings on these services.

But after securing licenses from the major labels, the major online services sought to differentiate their offerings by adding independent artists. This created opportunities for a few companies to enter into “middleman” distribution agreements with many independent artists, and then enter into a licensing agreement with an online service for the artists' content. (Aggregators may also represent smaller independent labels, but this article will focus on independent artists who are also copyright owners.)

These middleman companies are commonly called “content aggregators,” meaning that they aggregate content for licensing to online services. The aggregator takes care of obtaining the rights, encoding the content and delivering it to the online service. The aggregator is paid and accounted to by the online service and in turn takes a commission from the revenue paid by the service for the content. The online service sends one statement and one check to the aggregator, which then breaks the statement into individual statements and payments for the artists that the aggregator represents.

There is also efficiency for independent artists when dealing with a content aggregator. The alternative would be to contact each online service, get their attention long enough to negotiate a license agreement, ship content to each of them, and monitor each service for a payment and statement. And unlike anonymous file bartering on illegitimate peer-to-peer networks, legitimate services such as iTunes Music Store allows a much greater opportunity for artists to develop a direct relationship with fans through marketing collateral. The major chains and big-box retailers are also offering a variety of online and offline promotions, which hopefully results in selling CDs.

There are a few things to watch out for in choosing an aggregator, though. Following are the major points of an aggregator agreement.

Services. An agreement with an online music service, particularly for permanent downloads, is effectively an agreement with a sales agent to resell copies of a copyright owner's recordings. The copyright owner permits the online service to copy a digital version of the artist's master, and sell it to end users. Because the artist is not entering into an agreement directly with an online service, the artist is in a less favorable position than a label would be to get the online service to run promotions or even to banner the artist as a new release. Therefore, when choosing an aggregator, it is well from an artist's perspective to discuss in some detail with an aggregator how the aggregator plans on helping the artist to market himself or herself. It is also a good idea to ask the aggregator for examples of recent promotions that the aggregator has run with the online services.

Wholesale Price for Permanent Downloads. The aggregator will have an agreement with the online services that will likely be on the same terms as the online services accords to “indie” content. The wholesale price paid on a per-download basis will likely be in the 62' to 67' range per download, depending on the service.

Subscription Revenue. Almost all of the music services except iTunes offer a “subscription” to end users, which means that the user has access to unlimited “streaming” audio ' often on-demand streams ' as well as unlimited “tethered” downloads, usually a download that either times out after a period of time or that cannot be removed from the subscriber's computer. The idea behind these subscription services is to allow subscribers to sample the recordings available on the service and hopefully encourage the subscribers to buy permanent downloads that they can copy off of their desktop to a portable device. (See the companion article, “New hardware Could Affect Online Subscription Pricing” for a discussion of the impact of new hardware on tethered-download pricing.)

Subscription revenues are typically lumped together in a hotchpot that is reduced by certain operating expenses and the like, and is then generally split 50/50 between the online service and the sound recording copyright owners. The copyright owner's share is then usually allocated on a prorata basis among all copyright owners whose recordings were streamed or downloaded in tethered downloads during an accounting period. This raises some negotiation issues, such as how are prepaid annual subscription fees to be treated and what are the maximums that can be allowed for overhead and other costs to be deducted from subscription revenue by the online music service. Each copyright owner will negotiate their own deal on subscription revenues.

The content aggregator will typically have a standard deal on subscription revenues that all of the content aggregator's artists will accept, so when the content aggregator receives subscription revenue, it will be divided prorata among the aggregator's artists on that basis.

Also worth noting is that the services report performances for streaming to the performing rights organizations (PROs), so it is well for independent artists to be members of a PRO and be sure that their songs are registered so that the artists can capture this revenue stream as well.

Part One of a Two-Part Article

Legitimate online music services have struggled to provide content from the fragmented independent music world. Until recently, independent artists were not very present on the legitimate online music services. There were exceptions, but MusicNet, pressplay, MusicMatch and even iTunes were initially more interested in licensing big catalogs from the major labels than in individual licenses from independent artists. This is partly because the major labels control the best-known recordings, partly because the major labels usually support online distribution with significant marketing budgets and partly because it is not very efficient for an online service to negotiate agreements with thousands of independent artists.

In addition, given the highly litigious state of the online music business and the potential exposure to statutory damages for copyright infringement in the United States, it is unlikely that the legitimate services would take the risk of allowing click-through agreements for artists to post their recordings on these services.

But after securing licenses from the major labels, the major online services sought to differentiate their offerings by adding independent artists. This created opportunities for a few companies to enter into “middleman” distribution agreements with many independent artists, and then enter into a licensing agreement with an online service for the artists' content. (Aggregators may also represent smaller independent labels, but this article will focus on independent artists who are also copyright owners.)

These middleman companies are commonly called “content aggregators,” meaning that they aggregate content for licensing to online services. The aggregator takes care of obtaining the rights, encoding the content and delivering it to the online service. The aggregator is paid and accounted to by the online service and in turn takes a commission from the revenue paid by the service for the content. The online service sends one statement and one check to the aggregator, which then breaks the statement into individual statements and payments for the artists that the aggregator represents.

There is also efficiency for independent artists when dealing with a content aggregator. The alternative would be to contact each online service, get their attention long enough to negotiate a license agreement, ship content to each of them, and monitor each service for a payment and statement. And unlike anonymous file bartering on illegitimate peer-to-peer networks, legitimate services such as iTunes Music Store allows a much greater opportunity for artists to develop a direct relationship with fans through marketing collateral. The major chains and big-box retailers are also offering a variety of online and offline promotions, which hopefully results in selling CDs.

There are a few things to watch out for in choosing an aggregator, though. Following are the major points of an aggregator agreement.

Services. An agreement with an online music service, particularly for permanent downloads, is effectively an agreement with a sales agent to resell copies of a copyright owner's recordings. The copyright owner permits the online service to copy a digital version of the artist's master, and sell it to end users. Because the artist is not entering into an agreement directly with an online service, the artist is in a less favorable position than a label would be to get the online service to run promotions or even to banner the artist as a new release. Therefore, when choosing an aggregator, it is well from an artist's perspective to discuss in some detail with an aggregator how the aggregator plans on helping the artist to market himself or herself. It is also a good idea to ask the aggregator for examples of recent promotions that the aggregator has run with the online services.

Wholesale Price for Permanent Downloads. The aggregator will have an agreement with the online services that will likely be on the same terms as the online services accords to “indie” content. The wholesale price paid on a per-download basis will likely be in the 62' to 67' range per download, depending on the service.

Subscription Revenue. Almost all of the music services except iTunes offer a “subscription” to end users, which means that the user has access to unlimited “streaming” audio ' often on-demand streams ' as well as unlimited “tethered” downloads, usually a download that either times out after a period of time or that cannot be removed from the subscriber's computer. The idea behind these subscription services is to allow subscribers to sample the recordings available on the service and hopefully encourage the subscribers to buy permanent downloads that they can copy off of their desktop to a portable device. (See the companion article, “New hardware Could Affect Online Subscription Pricing” for a discussion of the impact of new hardware on tethered-download pricing.)

Subscription revenues are typically lumped together in a hotchpot that is reduced by certain operating expenses and the like, and is then generally split 50/50 between the online service and the sound recording copyright owners. The copyright owner's share is then usually allocated on a prorata basis among all copyright owners whose recordings were streamed or downloaded in tethered downloads during an accounting period. This raises some negotiation issues, such as how are prepaid annual subscription fees to be treated and what are the maximums that can be allowed for overhead and other costs to be deducted from subscription revenue by the online music service. Each copyright owner will negotiate their own deal on subscription revenues.

The content aggregator will typically have a standard deal on subscription revenues that all of the content aggregator's artists will accept, so when the content aggregator receives subscription revenue, it will be divided prorata among the aggregator's artists on that basis.

Also worth noting is that the services report performances for streaming to the performing rights organizations (PROs), so it is well for independent artists to be members of a PRO and be sure that their songs are registered so that the artists can capture this revenue stream as well.