Digital Issues For Distributors And Indie Labels

The advent of digital-music delivery has brought about significant changes in both the format and distribution channels by which consumers receive music. Nonetheless, the fundamental role of distribution remains the same: to put product into the hands ' and today the computers and portable media devices ' of consumers.

Now, traditional offline distributors and a number of independent record labels have decided that digital distribution is an important component of their respective business models. The Independent Online Distribution Alliance (IODA), the Orchard and the Digital Rights Agency (DRA) are among a growing number of companies that offer digital-music distribution services to traditional offline-music distributors and record labels.

This article examines some of the interplay between the provisions of digital-distribution contracts and provisions contained in pre-existing contracts between offline distributors and independent record labels, and between independent record labels and artists.

Powerful Standard Language

The following provisions, standard in most digital-distribution contracts, hold great potential to force changes in the way in which the offline distributor and its affiliated labels conduct business as a precondition to participation in digital distribution, either by amending the pre-existing offline contracts or in executing new contracts.

First, an offline distributor will need to ensure that the contract term of its proposed deal with a digital distributor matches the term contained in the respective distribution contract it has with its affiliated labels, including any option periods. Renegotiations to extend those terms in order to fit the digital distributor's marketing structure and protocols may be necessary.

Digital distribution requires encoding the titles from the labels' catalogs in order to make digital versions of those songs available to digital customers. Digital-distribution will therefore require labels to grant the exclusive right and license to “make cause or otherwise effect Digital Audio Trans-mission (DAT) and Digital Phono-record Deliveries (DPD)” of the records made by the labels' respective artists in much the same way that artists grant a label the right to mechanically reproduce their recordings in standard formats. (A DAT occurs when a customer streams music over a computer or portable-media device, while a DPD occurs when customers download music to a computer or portable-media device.)

Review Artists' Rights

A label will need to review the grant-of-rights provisions in contracts with its artists to determine whether the right to mechanically reproduce the artists' recordings is broad enough to allow the label to grant the right to “make, cause or otherwise effect” DATs or DPDs. Most major-label recording contracts employ broad wording to define the universe of uses that the label may make of the artists songs, such as “to manufacture, distribute, and exploit the Masters and records embodying the Masters, in any or all fields of use, by any method now or hereafter known, upon such terms and conditions as Company (and its Licensees) may from time to time elect.” Such a provision should allow a label to grant a license to make, cause or affect DATs or DPDs.

Many independent-label contracts are more artist-friendly, and allow an artist to retain a portion or all of the copyright in the underlying composition and/or the sound recording. If that ethic has led to the creation of a more limited grant-of-rights clause than the one noted above, the independent label may need to renegotiate with its artists to amend the recording contracts to allow it to license DATS and DPDs of an artist's recordings for digital distribution, as digital-distribution will almost certainly require a label to warrant that it “owns or has the rights to distribute over the Internet the master sound recordings.”

The grant of rights in a contract between an offline distributor and an affiliated label may state that the distributor can't “re-couple, resequence, edit or alter the Albums or its packaging without Label's written consent.” If an offline distributor executes a contract with a digital distributor, this limitation may prevent the offline distributor from rendering the recordings from the affiliated label's catalogs into DATs or DPDs. In such a case, the offline distributor will need to obtain the label's consent to modification of the recordings contained on the albums in its catalog, or to negotiate with the label to amend the respective contracts to allow such modification. An offline distributor's successful efforts at doing so represents a prime component of the “label management” role that digital distributors will rely on a potential offline-distributor partner to fulfill.

Digital-rights management technology (DRM) encrypts digital content to limit the manner in which the recipient of the content may use it. DRM technology is seen by many music-industry and digital-media players as critical to maximizing the commercial viability of digital-media services and products. A digital-distribution contract will contain a provision that allows a digital distributor to encode the recordings “in any format now known or hereafter devised for purposes of facilitating the exercise of rights and licenses granted hereunder” while specifying that the digital distributor has no right to modify the recordings. As with DAT and DPD, a label should review its recording contracts with artists to ensure that no provision or wording limits the label from allowing a digital distributor, or any other third party, such as the digital distributor's copyright-protection partner, the right to add information to the encoded digital files containing the artists' recordings.

Distribution Rights

Most distribution contracts between mid-sized independent labels and major independent offline distributors are exclusive; affiliated labels agree that they will distribute records only through the offline distributor. A typical clause states that “label hereby grants to distributor during the term, the exclusive right to advertise, distribute and sell the albums in all mechanical formats only, now known or hereafter created and through all channels of sales and distribution in the United States.” The application of such wording to the issues posed by digital distribution is difficult; the phrase, and similarly worded variants common in offline distribution contracts, contains both restrictive and non-restrictive wording.

The rights granted the offline distributor applies “only” to “mechanical formats,” but also applies to all such formats “now known or hereafter created.” The wording of the grant makes clear that the offline distributor may distribute albums “through all channels of sale and distribution,” which should include the right to convert the recordings from the label's catalog into DAT and DPD formats. An offline distributor's affiliated labels that plan on executing contracts directly with a digital distributor will need to work with the offline distributor to amend the exclusivity provision of the offline-distribution contract so that the labels may provide the digital distributor with copies of the titles in their catalogs for purposes of creating DAT and DPD files necessary for digital delivery.

Many offline-distribution contracts also grant the offline distributor the right to “use the Artist's name and likeness in connection with the advertising, sale and distribution of the Albums after obtaining approval” from the label. The offline distributor may have sought and obtained such approval for the albums that it and its would-be digital distribution partner are interested in making available to digital music consumers. Furthermore, that appro-val, applying as it does to “the advertising, sale, and distribution of the Albums,” should apply to allow the types of activities conducted by digital distributors.

Still, the offline distributor should work with its affiliated labels to coordinate grants of approval from the labels' artists to the digital distributor, or structure the deal with the digital distributor in such a way that use of artist names and likenesses on the digital-delivery Web site falls within the scope of the approvals already obtained by the offline distributor in conjunction with its activities to allow for grouping artist offerings by label, and under a banner or other symbol identifying the label, on the Web site from which the digital distributor makes music streams and downloads available. In addition, a label wanting digital distribution of its catalog should contact its artists' representatives to ensure that the artist has not granted rights for Internet use of name and likeness to any third parties whose approval would be needed for use of the artist's name and likeness on the Web site from which the digital distributor makes music streams and downloads available.

The advent of digital-music delivery has brought about significant changes in both the format and distribution channels by which consumers receive music. Nonetheless, the fundamental role of distribution remains the same: to put product into the hands ' and today the computers and portable media devices ' of consumers.

Now, traditional offline distributors and a number of independent record labels have decided that digital distribution is an important component of their respective business models. The Independent Online Distribution Alliance (IODA), the Orchard and the Digital Rights Agency (DRA) are among a growing number of companies that offer digital-music distribution services to traditional offline-music distributors and record labels.

This article examines some of the interplay between the provisions of digital-distribution contracts and provisions contained in pre-existing contracts between offline distributors and independent record labels, and between independent record labels and artists.

Powerful Standard Language

The following provisions, standard in most digital-distribution contracts, hold great potential to force changes in the way in which the offline distributor and its affiliated labels conduct business as a precondition to participation in digital distribution, either by amending the pre-existing offline contracts or in executing new contracts.

First, an offline distributor will need to ensure that the contract term of its proposed deal with a digital distributor matches the term contained in the respective distribution contract it has with its affiliated labels, including any option periods. Renegotiations to extend those terms in order to fit the digital distributor's marketing structure and protocols may be necessary.

Digital distribution requires encoding the titles from the labels' catalogs in order to make digital versions of those songs available to digital customers. Digital-distribution will therefore require labels to grant the exclusive right and license to “make cause or otherwise effect Digital Audio Trans-mission (DAT) and Digital Phono-record Deliveries (DPD)” of the records made by the labels' respective artists in much the same way that artists grant a label the right to mechanically reproduce their recordings in standard formats. (A DAT occurs when a customer streams music over a computer or portable-media device, while a DPD occurs when customers download music to a computer or portable-media device.)

Review Artists' Rights

A label will need to review the grant-of-rights provisions in contracts with its artists to determine whether the right to mechanically reproduce the artists' recordings is broad enough to allow the label to grant the right to “make, cause or otherwise effect” DATs or DPDs. Most major-label recording contracts employ broad wording to define the universe of uses that the label may make of the artists songs, such as “to manufacture, distribute, and exploit the Masters and records embodying the Masters, in any or all fields of use, by any method now or hereafter known, upon such terms and conditions as Company (and its Licensees) may from time to time elect.” Such a provision should allow a label to grant a license to make, cause or affect DATs or DPDs.

Many independent-label contracts are more artist-friendly, and allow an artist to retain a portion or all of the copyright in the underlying composition and/or the sound recording. If that ethic has led to the creation of a more limited grant-of-rights clause than the one noted above, the independent label may need to renegotiate with its artists to amend the recording contracts to allow it to license DATS and DPDs of an artist's recordings for digital distribution, as digital-distribution will almost certainly require a label to warrant that it “owns or has the rights to distribute over the Internet the master sound recordings.”

The grant of rights in a contract between an offline distributor and an affiliated label may state that the distributor can't “re-couple, resequence, edit or alter the Albums or its packaging without Label's written consent.” If an offline distributor executes a contract with a digital distributor, this limitation may prevent the offline distributor from rendering the recordings from the affiliated label's catalogs into DATs or DPDs. In such a case, the offline distributor will need to obtain the label's consent to modification of the recordings contained on the albums in its catalog, or to negotiate with the label to amend the respective contracts to allow such modification. An offline distributor's successful efforts at doing so represents a prime component of the “label management” role that digital distributors will rely on a potential offline-distributor partner to fulfill.

Digital-rights management technology (DRM) encrypts digital content to limit the manner in which the recipient of the content may use it. DRM technology is seen by many music-industry and digital-media players as critical to maximizing the commercial viability of digital-media services and products. A digital-distribution contract will contain a provision that allows a digital distributor to encode the recordings “in any format now known or hereafter devised for purposes of facilitating the exercise of rights and licenses granted hereunder” while specifying that the digital distributor has no right to modify the recordings. As with DAT and DPD, a label should review its recording contracts with artists to ensure that no provision or wording limits the label from allowing a digital distributor, or any other third party, such as the digital distributor's copyright-protection partner, the right to add information to the encoded digital files containing the artists' recordings.

Distribution Rights

Most distribution contracts between mid-sized independent labels and major independent offline distributors are exclusive; affiliated labels agree that they will distribute records only through the offline distributor. A typical clause states that “label hereby grants to distributor during the term, the exclusive right to advertise, distribute and sell the albums in all mechanical formats only, now known or hereafter created and through all channels of sales and distribution in the United States.” The application of such wording to the issues posed by digital distribution is difficult; the phrase, and similarly worded variants common in offline distribution contracts, contains both restrictive and non-restrictive wording.

The rights granted the offline distributor applies “only” to “mechanical formats,” but also applies to all such formats “now known or hereafter created.” The wording of the grant makes clear that the offline distributor may distribute albums “through all channels of sale and distribution,” which should include the right to convert the recordings from the label's catalog into DAT and DPD formats. An offline distributor's affiliated labels that plan on executing contracts directly with a digital distributor will need to work with the offline distributor to amend the exclusivity provision of the offline-distribution contract so that the labels may provide the digital distributor with copies of the titles in their catalogs for purposes of creating DAT and DPD files necessary for digital delivery.

Many offline-distribution contracts also grant the offline distributor the right to “use the Artist's name and likeness in connection with the advertising, sale and distribution of the Albums after obtaining approval” from the label. The offline distributor may have sought and obtained such approval for the albums that it and its would-be digital distribution partner are interested in making available to digital music consumers. Furthermore, that appro-val, applying as it does to “the advertising, sale, and distribution of the Albums,” should apply to allow the types of activities conducted by digital distributors.

Still, the offline distributor should work with its affiliated labels to coordinate grants of approval from the labels' artists to the digital distributor, or structure the deal with the digital distributor in such a way that use of artist names and likenesses on the digital-delivery Web site falls within the scope of the approvals already obtained by the offline distributor in conjunction with its activities to allow for grouping artist offerings by label, and under a banner or other symbol identifying the label, on the Web site from which the digital distributor makes music streams and downloads available. In addition, a label wanting digital distribution of its catalog should contact its artists' representatives to ensure that the artist has not granted rights for Internet use of name and likeness to any third parties whose approval would be needed for use of the artist's name and likeness on the Web site from which the digital distributor makes music streams and downloads available.