What They'll Never Tell You About the Music Business

by Peter M Thall

  Thus, the vast majority of music is not available to the public in traditional ways. In fact, the vast majority of music never sees the light of day in the music publishers’ offices either. Talk about intangible rights! The title of the song “For Your Eyes Only” is apt: No matter how hard you try, you will not be able to find, in a store, a printed sheet music copy of it to perform or record yourself. Go ahead. Try! But you can find more than a dozen versions on the Internet in the form of digital “sheet” music—everything from piano to solo alto saxophone.

  And yet, music publishers uninitiated in the ways of the digital world carelessly “bundle” digital print rights along with traditional print rights. Whether you label it a fifth right or merely a distinct part of the fourth right (the print right), the digital right should be regarded as a different asset from the traditional print right, neither replacing nor supplanting it. Ironically, digital print may save the sheet music business because the efficiencies of print companies over the past fifty years have so steadily declined that there is a danger that the lack of profitability of this area of the music publishing business may kill off what remains of this business—from manufacturers (print companies) to dealers.

  As everyone knows, finding the particular edition of sheet music that one may seek is nearly impossible. Either the work is not in print, or it is not in stock. Or it may be part of an expensive music “folio” and not be available on its own. With digital versions, there are no warehouse, inventory, selection (read: “labor”), or shipping costs. A digital version is always in stock. And it is instantly available.

  Time was that sheet music of a hit song would sell in the 1 million copy range. From “Bicycle Built for Two” around 1900 to “Over the Rainbow” in 1939, million-sellers were frequent. The heyday of sheet music sales ended around the time that phonograph records took the place of piano rolls and player pianos. Singing in the living room or in the ice cream parlor had lost its flavor, and vinyl records took over from real live people who followed sheet music to create sound on a piano. Sure, the song from Titanic, “My Heart Will Go On,” sold a million copies in the late ’90’s, but this was an anomaly.

  In the wake of the exploding digital market, traditional print companies have fallen on hard times. Their $25 folios, which one had to buy to acquire a preferred song like “Memory” or “Over the Rainbow,” have been ambushed by the broad availability, worldwide, at any hour of the day, via the Internet or one’s own home, of digital sheet music. On top of this, recording artists and record companies have begun to “monetize” the licensing of artist photos placed in music folios or on individual sheets of music. One record company authorized the use of a photo, but only after demanding and receiving, a fee for every two thousand copies of music sold—an astronomical royalty when all was said and done.

  Therefore, it is incumbent on the music publisher to insert a provision in its contract with artists (and for artists to do the same with their record companies) to allow the publisher to use artist photos on sheet music. The print company of one major rock band had to beg (and pay) for permission to use a film logo on its special sheet music edition of a song which the music publisher licensed to the film company for a substantial synch fee. Unfortunately, the interests of their own print licensee had been ignored in the process and was reduced to having to use a postage-stamp-size version of the film logo (“as heard in….film”)—ultimately to the detriment of the music publisher and songwriters. Better communication with all of the elements on the side of the song owner/writer would have avoided this debacle.

  Today those involved with the digital distribution of sheet music are finding that the desire to possess the actual musical notation of a sought-after piece of music has not only not disappeared, it has probably increased! Given the huge population of music makers in the world, the desire may have been there all along, but the potential consumers were stymied by their inability to obtain the product they wanted. Those days appear to be over.

  Finally—a perfect application for the Internet!

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  Enough about the bundle of rights—except to wonder, What next? It was only a few years ago that we were talking about sound carriers embodying the intangible rights of a song; now we are trying to comprehend intangible delivery systems sending the intangible rights into your computers, television sets, MP3 players, cell phones, and, yes, even your watches—unless they are otherwise engaged doubling as digital cameras! Let’s go back to the real world, where songs are the motivation behind some heinous behavior displayed by record companies toward copyright holders and to which publishers often respond with deplorable judgment.

  FINANCIAL SECRETS AND REALITIES

  The fact that the majority of musical compositions are controlled by music publishers that are themselves owned and controlled by the biggest users of music—record companies, film companies, television production companies, and (for example, for a while after the AOL acquisition of Time Warner) Internet companies—makes for some interesting negotiations, and not a few potential conflicts of interest. Three important areas in which songwriters’ and publishers’ interests are not always the same are controlled compositions, buy-outs, and audits.

  Controlled Compositions

  “Controlled composition.” Perhaps the most feared words in the songwriter’s galaxy. Under the Copyright Act of 1976, the copyright owner has the exclusive right to authorize the first recording of a work; after that original authorization, anyone else can record it pursuant to certain specific rules. The most relevant rule here is that the new user must pay to the author or publisher a minimum statutory rate—aka the compulsory rate. Since 1978, the rate has risen periodically. Since 2008, the Copyright Royalty Board left unchanged the per-song rate for physical product (the so-called mechanical royalty rate), and established an identical $0.091 (and .0175/minute-long song) rate for permanent downloads. Still, $0.091 seems low given the fact that for downloads, the record label nets about $0.69 from a $0.99 download after paying the $0.091 to the publisher, the online service gets about 23% of the selling price, and the songwriter and publisher 9%. But I suppose it depends on what hat you’re wearing. The physical record industry does not see the rationale for keeping the $0.091 rate given their reduced profit margins. (But see chapter 4: “360 Deals,” as the record companies try to make up for that loss of market) The songwriter/publisher community had asked for an increase to $0.15 from $0.091. Nevertheless, the prevailing industry view is that the current rates will continue indefinitely. The Copyright Royalty Board (CRB) also established a $0.24 rate for a master tone (for example, a ringtone on a cell phone). The rate for interactive streaming and limited downloads (downloads that expire after a period of time) have also been set for the time being. Their 2008 decision establishes the current rate for five years and was the first rate set since the onset of legal online music delivery services. It has recently been renewed for another five years, adding an array of new compulsory rates affecting lockers in the cloud and other more recently developed technologies that require copying musical compositions. It will be interesting to observe how the CRB will handle these rate issues in the future when the music industry has righted itself after years of sinking out of control. If Kelly Clarkson wishes to record your four-minute song, her record company must either obtain the copyright owner’s permission for the first-ever recording of it or, if the song has already been the subject of an authorized recording, the record company can automatically record the song upon payment of the requisite fee. As discussed in chapter 4, on royalties, the record companies have found a way to contractually circumvent this rule so they don’t pay the full fee. Recording agreements between artists and record companies invariably include a provision that results in you—the artist—promising to license to them, customarily at three-fourths of the statutory rate, all songs you write, all songs you cowrite, including the cowriter’s portion, all songs your producer writes or cowrites, and in fact all songs you record—and this
holds whether or not you “control” (have ownership of) these songs. Effectively that means that if you record a song that you neither wrote nor cowrote, and that your producer had nothing to do with, if the owner of that song (who is a complete stranger to you) does not agree to license it at three-fourths of the statutory rate, the excess over three-fourths of the statutory rate will be taken out of your artist royalties! This is the controlled composition rate.

  The amounts involved can be staggering. Three-fourths of the $0.091 rate is $0.06825, and the difference, $0.02275, is retained by the record company. If you record ten songs on an album, the difference is $0.23 per album. Sell 1 million albums and you begin to get the idea of what you (and your publisher) are losing ($230,000 in this example). Over a ten-album career, if each album sells 1 million copies, the total is $2.3 million. If one sells more (Celine Dion had an album, Falling into You, which sold 10 million copies in the United States alone), as they say in the vernacular, forget about it. In addition, record companies inevitably try to limit to ten the number of titles on any given album on which they will pay even the reduced rate. Thus, even if your record contains twelve songs, the maximum mechanical royalty, continuing with the number used above, the company will pay $0.6825 rather than $0.819, which is what they would have to pay if they paid three-fourths of the mechanical rate on all twelve songs, or $1.09, which is what they would have to pay were there no “rate” given at all. Why do the record companies do this? Why not?

  Of course, the major music publishers are controlled by giant media conglomerates, and while the music publishers are biased in favor of maximum exploitation of copyrights, their bosses are biased in favor of big bottom-line profits of the entertainment unit, which counts the music publisher as a poor cousin to the record or motion picture company affiliate. For if the record company had to pay to the music publisher (its own affiliate) the $2.3 million referred to above, one-half, or $1,150,000, would have to be paid to the writers of the songs.

  A nightmare scenario occurs when the artist has agreed to a “rate,” but his or her cowriters have not—and, on request, will not. The excess paid to the cowriters will be extracted from the artist’s publishing and record royalties. See chapter 4, this page.

  Recently, a one-third writer of one song refused to grant a three-fourths rate which caused the entire remainder of the cowriters and their publishers to reverse themselves in light of the most favored nations clause in their original three-fourths rate authorization. The cost to the artist was enormous. If there were twelve songs on the album, and all were co-written with one writer only, then the total relief sought by the record company would be one-fourth of the mechanical rate for all twelve songs. That’s $0.02275 per song × 12 or $0.273. This would be divided by one-half since the artist would have already agreed to the one-fourth rate reduction; the cowriters’ rate reduction would total $0.1365. That’s $13,650 for each 100,000 records sold. If the record is a hit and sells a million records, the total that the artist would have to bear out of mechanical statements and artist statements because of the intransigence of one writer would be $136,500. Even more damaging would be the fact that the artist’s publisher’s advance to him, as a writer, would often be tied to the amount of mechanical royalties that would be paid by the record company. If the publisher is receiving 12 × one-half of $0.091, it would expect to receive $0.546 for each record sold. This sum represents the artist/writer’s share in a perfect world. If the record company is paying only three-fourths rate, then this would be reduced to $0.4095. However, if the cowriters do not license their songs at a three-fourths rate, then the differential ($0.1365 per the above calculation) would be taken out of the mechanical royalties otherwise payable to the artist/writer’s publisher. Thus, the publisher would receive only $0.273 rather than $0.4095. The impact of this would be that the publisher would reduce the advance payable on delivery of this album by a percentage representing the reduction it was going to have to suffer as a result of the cowriters’ unwillingness to grant the three-fourths rate. So, if the advance for the album is $500,000, one-half paid on signing the agreement and one-half paid on release of the album, the artist will have received $250,000 already; when the album is released, he or she will be expecting to receive the remaining $250,000. However, the artist will have failed to deliver a record generating $0.4095 for the publisher. Therefore, the publisher would reduce not just the remaining portion of the advance not yet paid, but the entire $500,000. The differential between what they thought they were going to receive ($0.4095) and what they will receive ($0.273) is 33⅓%. Therefore, they will reduce the $500,000 by 33⅓% to $333,333. Having already advanced $250,000 to the artist/writer on signing the publishing agreement, all they would owe him now would be $83,333 rather than the $250,000 that he was expecting.

  Thus, the impact of one, often irrelevant writer (the one-third writer of one song) can have a devastating effect on the artist/writer both in terms of the reduced advance he or she will receive and the ultimate amount of mechanical royalties that he or she will net after the publisher takes its share out of what it receives from the record company.

  All of this could have been avoided if the cowriters had merely entered into a standard cowriter agreement in the first place covering this contingency.

  What can be done to correct this situation? Presumably, there would have to be legislation outlawing this practice in its present form, but the record companies insist that they would merely have to reduce artist royalties accordingly if this profit cow were to be reduced or eliminated. But at least in that case, the artists would be responsible for negotiating their own royalties and the writers and publishers would not be forced to choose between being straw men or victims. The way it works now, either the song side of the creative team is blamed for the reducing the artist’s royalty, or it has to bear the brunt of the royalty reduction. (In most countries of the world, the mechanical rate payable to copyright holders is calculated as a percentage of the selling price of records. Therefore, whether the record contains ten songs or twenty songs, the mechanical royalty is the same for all. Medleys are actually financially feasible outside of the United States and Canada.) Antitrust litigation is a possible solution to this state of affairs. However, small, independent music publishers have generally elected not to sue their best customers—the record companies—for fear of destroying what little cordiality there remains in their relationship. In the event that one of their songs is used on a record and it is not written by the artist or producer, and therefore “controlled,” the record company might still threaten to remove it unless the publisher agrees to license it at the controlled composition “rate.” These small independents would have no negotiating room in this situation were they in the process of suing the hand that was feeding them.

  Buyouts

  To reproduce a song as part of a motion picture, television show, or television or radio commercial, it is necessary to obtain a synchronization license from the copyright owner. The purpose of this license is to give the user the right to synchronize the song in a timed relationship to what is going on “around” the song—usually visual images. Upon the invention of the home videocassette player (Sony’s Betamax and later the Matsushita version, the VHS videocassette recorder) in the 1970s, the music publishers (who controlled the majority of musical compositions that would comprise the soundtracks to films and other video presentations) considered the per-copy reproduction of the film in the same way as a per-copy reproduction of a phonograph record, but were unsure as to how much to charge for the per-copy use. There might, for example, be as much as two hours of music in a videocassette. There were long uses, short uses, and background orchestral score uses. There could be as many as fifty or more “cues” containing music, all of which would have to be reckoned with. Some films were heavy on the music. Some were not. A videocassette was indeed a copy, like a record, and presumably the songs used on a videocassette for sale to the consumer would be subject to per-copy mechanic
al reproduction fees, but many music publishers assumed that the formula used to calculate the per-copy fee for a record would not work given these disparate lengths. Nevertheless, some publishers wanted to charge fees on this basis, and others established a fictional “fund” for song royalties of about 5% of the wholesale-selling price of the cassette, whereby the fund was to be split among the song owners as their interest appeared.

  This concept of dividing a specific percentage of the videocassette among the various song owners would be modeled on the European approach, which is based on time. However, before the family of copyright holders, as a group, could figure out how to charge for the use of songs in such devices that would now be finding their way into homes via videocassettes, and later videodiscs and DVDs, Paramount Pictures (which coincidentally owned one of the premier music publishing companies in the world, Famous Music) came up with the concept of the buyout: If the copyright owner allowed its song to be included in the film—in return for which it would be paid many thousands of dollars as a synchronization fee plus additional performance royalties generated upon the presentation of the film in motion picture theaters outside of the United States and on television in the United States—it would have to agree to forgo a per-copy royalty upon the sale of the device.