Aggregator Deals With Online Music Services

[Editor's Note: In Part One, the author discussed the emergence of content aggregators and began listing the issues to watch out for when contracting with one. Part Two continues that list of the major points of an aggregator agreement.]

Aggregator's Commission. Most aggregators take commissions of 9% to 30%, and assume little, if any, responsibility for marketing or promotion commitments to the independent artists whose content they license. Thus, the aggregators can only distinguish themselves from each other on a few benefits, commission rate being one of the most important. Assuming a wholesale price range of 62-67' paid by an online service to a content aggregator, an independent artist will net between 55.8' to 43.4', to 60.3' to 46.9', depending on the commission rate on a per-track basis.

The economics of content aggregation is a “tonnage” business. Assuming that an aggregator makes about 13 cents per permanent download, the aggregator will have to sell approximately 750,000 downloads for each $100,000 of operating costs in order to break even. Independent artists' share of subscription revenues will likely be negligible.

Marketing Commitment. The aggregator specializing in independent content knows that there is a small amount of marketing to promote the independent artist when compared to the major label. The aggregator knows that it may be possible that any one independent artist's recordings will be purchased a relatively few number of times. The aggregator makes money by having a very large number of recordings available on the largest number of online services, thus increasing the chance of earning revenue. While it helps an independent artist to have their content up on the online services, mere availability does not sell downloads.

It is probably a good idea to ask an aggregator what they can do for an independent artist in the way of marketing and promotional opportunities on the services with which the aggregator has distribution relationships. The aggregator will likely take the position that it has no control over what the online services promote, competition is fierce and so on. All this is true. However, while one must be realistic about expectations in competing for virtual shelf space and end caps with major label artists, there is increasing pressure on the online services to include independent content in their offerings and with that should come an expectation that they should promote independent artists along side of the major label artists.

Term. Some aggregator contracts have what may be viewed as an extraordinarily long term, some as long as 5 years. Five years is an eternity in the online music space. If the aggregator is not able to offer any particular marketing benefits, there is no reason to lock an artist in to such a long term. If the aggregator is unable to get the artist's recordings available on all the services they distribute to, for example, the agreement should terminate. Some aggregators are willing to negotiate 60-day terminations. Independent artists should be careful about the effects of termination on the accounts that already have the artist's recordings available, as terminating the aggregator contract should not result in the tracks being removed from all the services. In this case, the interests of the artist and the service are aligned, because the service will not be very interested in removing content just because the aggregator's agreement is terminated.

Distribution Partners. It is well to include a list of the aggregator's distribution partners in the aggregator agreement, and to have the aggregator commit to having the artist's content available on certain or at least a percentage of those partners within a fixed period of time.

While content aggregators are a positive development for independent artists in the online music space, it is important to avoid having the aggregator agreement simply be an arrangement by which the aggregator gets content, promises nothing in the way of distribution or marketing commitments, and has the deal locked down for a long period of time.

Accounting and Payment. There is something of a checkered history of aggregators actually paying artists the monies they receive from the aggregator's distribution partners. Some are very good, others not so good, and still others downright awful.

The independent artist should require the aggregator to render statements and payments as frequently as possible. The online services likely account to the aggregator on a monthly basis, so there is no reason why the aggregator cannot account to artists on a monthly basis as well. The aggregator should be required to provide copies of the aggregator's own statements from its distribution partners, and if there is any failure to account properly, the artist must be able to terminate his or her agreement quickly.

Publishers and Other Third-Party Royalty Recipients. Almost all, if not all, online services expect that the copyright owner of the licensed sound recordings will bear the responsibility of paying all third-party royalty recipients, including music publishers. The independent artist will need to account to these recipients on digital sales in the same way they have to account for physical CD sales.

The most common third parties to whom an independent artist owes royalties are producers and publishers. If an artist has engaged a producer for the recordings being distributed, the producer will be owed a royalty for digital sales. It is likely that the producer's royalty rate will be calculated on a royalty base price, which will be some version of a wholesale price, or could be calculated on a percentage of receipts.

If an artist writes his or her own songs and is self-published, the artist simply keeps 100% of the [publishing] monies received from the content aggregator (although some thought might be given to how this is divided up among band members who are also songwriters).

Publishers are entitled to a full mechanical royalty on digital sales, unless they agree otherwise. If an artist has a publishing deal, the artist's publisher will likely expect to be paid a full mechanical royalty for digital sales. In the United States, this currently will mean 8.5' for each song in most cases (although one should consult the Copyright Office on the applicable statutory royalty rate). This will also be true if the artist has made a “cover” recording of a song that the artist didn't write, or if the artist has used a sample of a song. Clearly, if the artist has recorded or sampled a song not controlled by the artist, the artist will need to obtain necessary mechanical licenses (from the Harry Fox Agency, for example).

Because the artist will continue to have these third-party obligations, it is essential that the artist receive accounting statements from the content aggregator that allow the artist to properly account to third parties.

The online services typically will obtain public performance licenses from performing rights organizations and the Harry Fox Agency for on-demand streaming and tethered downloads, but it is well to place this burden expressly on the services in the content aggregator's agreement to avoid unpleasant surprises in the future.

Record Deals. If an independent artist enters into a long-term content aggregator agreement and subsequently gets a record deal, especially a major label record deal, the label will very likely want to control the digital rights. In fact, the record label may refuse to enter into the artist agreement if the digital rights are not available. Every passing day makes it more likely that an artist who has granted exclusive (or even nonexclusive) digital rights to a content aggregator may find himself or herself in an awkward position when trying to negotiate a recording artist agreement, or even a distribution agreement with one of the major distributors (eg, ADA or RED). It is critical that the independent artist have the ability to terminate the aggregator agreement without penalty if this should happen.

A partial list of U.S. based content aggregators:

• CD Baby: www.cdbaby.com
• Digital Rights Agency: www.digitalrightsagency.com
• IODA: www.iodalliance.com
• Psychobaby: www.psychobaby.com
• The Orchard: www.theorchard.com

[Editor's Note: In Part One, the author discussed the emergence of content aggregators and began listing the issues to watch out for when contracting with one. Part Two continues that list of the major points of an aggregator agreement.]

Aggregator's Commission. Most aggregators take commissions of 9% to 30%, and assume little, if any, responsibility for marketing or promotion commitments to the independent artists whose content they license. Thus, the aggregators can only distinguish themselves from each other on a few benefits, commission rate being one of the most important. Assuming a wholesale price range of 62-67' paid by an online service to a content aggregator, an independent artist will net between 55.8' to 43.4', to 60.3' to 46.9', depending on the commission rate on a per-track basis.

The economics of content aggregation is a “tonnage” business. Assuming that an aggregator makes about 13 cents per permanent download, the aggregator will have to sell approximately 750,000 downloads for each $100,000 of operating costs in order to break even. Independent artists' share of subscription revenues will likely be negligible.

Marketing Commitment. The aggregator specializing in independent content knows that there is a small amount of marketing to promote the independent artist when compared to the major label. The aggregator knows that it may be possible that any one independent artist's recordings will be purchased a relatively few number of times. The aggregator makes money by having a very large number of recordings available on the largest number of online services, thus increasing the chance of earning revenue. While it helps an independent artist to have their content up on the online services, mere availability does not sell downloads.

It is probably a good idea to ask an aggregator what they can do for an independent artist in the way of marketing and promotional opportunities on the services with which the aggregator has distribution relationships. The aggregator will likely take the position that it has no control over what the online services promote, competition is fierce and so on. All this is true. However, while one must be realistic about expectations in competing for virtual shelf space and end caps with major label artists, there is increasing pressure on the online services to include independent content in their offerings and with that should come an expectation that they should promote independent artists along side of the major label artists.

Term. Some aggregator contracts have what may be viewed as an extraordinarily long term, some as long as 5 years. Five years is an eternity in the online music space. If the aggregator is not able to offer any particular marketing benefits, there is no reason to lock an artist in to such a long term. If the aggregator is unable to get the artist's recordings available on all the services they distribute to, for example, the agreement should terminate. Some aggregators are willing to negotiate 60-day terminations. Independent artists should be careful about the effects of termination on the accounts that already have the artist's recordings available, as terminating the aggregator contract should not result in the tracks being removed from all the services. In this case, the interests of the artist and the service are aligned, because the service will not be very interested in removing content just because the aggregator's agreement is terminated.

Distribution Partners. It is well to include a list of the aggregator's distribution partners in the aggregator agreement, and to have the aggregator commit to having the artist's content available on certain or at least a percentage of those partners within a fixed period of time.

While content aggregators are a positive development for independent artists in the online music space, it is important to avoid having the aggregator agreement simply be an arrangement by which the aggregator gets content, promises nothing in the way of distribution or marketing commitments, and has the deal locked down for a long period of time.

Accounting and Payment. There is something of a checkered history of aggregators actually paying artists the monies they receive from the aggregator's distribution partners. Some are very good, others not so good, and still others downright awful.

The independent artist should require the aggregator to render statements and payments as frequently as possible. The online services likely account to the aggregator on a monthly basis, so there is no reason why the aggregator cannot account to artists on a monthly basis as well. The aggregator should be required to provide copies of the aggregator's own statements from its distribution partners, and if there is any failure to account properly, the artist must be able to terminate his or her agreement quickly.

Publishers and Other Third-Party Royalty Recipients. Almost all, if not all, online services expect that the copyright owner of the licensed sound recordings will bear the responsibility of paying all third-party royalty recipients, including music publishers. The independent artist will need to account to these recipients on digital sales in the same way they have to account for physical CD sales.

The most common third parties to whom an independent artist owes royalties are producers and publishers. If an artist has engaged a producer for the recordings being distributed, the producer will be owed a royalty for digital sales. It is likely that the producer's royalty rate will be calculated on a royalty base price, which will be some version of a wholesale price, or could be calculated on a percentage of receipts.

If an artist writes his or her own songs and is self-published, the artist simply keeps 100% of the [publishing] monies received from the content aggregator (although some thought might be given to how this is divided up among band members who are also songwriters).

Publishers are entitled to a full mechanical royalty on digital sales, unless they agree otherwise. If an artist has a publishing deal, the artist's publisher will likely expect to be paid a full mechanical royalty for digital sales. In the United States, this currently will mean 8.5' for each song in most cases (although one should consult the Copyright Office on the applicable statutory royalty rate). This will also be true if the artist has made a “cover” recording of a song that the artist didn't write, or if the artist has used a sample of a song. Clearly, if the artist has recorded or sampled a song not controlled by the artist, the artist will need to obtain necessary mechanical licenses (from the Harry Fox Agency, for example).

Because the artist will continue to have these third-party obligations, it is essential that the artist receive accounting statements from the content aggregator that allow the artist to properly account to third parties.

The online services typically will obtain public performance licenses from performing rights organizations and the Harry Fox Agency for on-demand streaming and tethered downloads, but it is well to place this burden expressly on the services in the content aggregator's agreement to avoid unpleasant surprises in the future.

Record Deals. If an independent artist enters into a long-term content aggregator agreement and subsequently gets a record deal, especially a major label record deal, the label will very likely want to control the digital rights. In fact, the record label may refuse to enter into the artist agreement if the digital rights are not available. Every passing day makes it more likely that an artist who has granted exclusive (or even nonexclusive) digital rights to a content aggregator may find himself or herself in an awkward position when trying to negotiate a recording artist agreement, or even a distribution agreement with one of the major distributors (eg, ADA or RED). It is critical that the independent artist have the ability to terminate the aggregator agreement without penalty if this should happen.

A partial list of U.S. based content aggregators:

• CD Baby: www.cdbaby.com
• Digital Rights Agency: www.digitalrightsagency.com
• IODA: www.iodalliance.com
• Psychobaby: www.psychobaby.com
• The Orchard: www.theorchard.com