What They'll Never Tell You About the Music Business

by Peter M Thall

MECHANICAL ROYALTY RATES OUTSIDE OF THE UNITED STATES

  Foreign record companies, as a rule, pay just as high, and very often higher, royalties to the music publishers and do not seek to reduce artists’ royalties to keep their costs down. Outside of the United States and about a dozen other countries where the mechanical rate is set by statute or collective bargaining, an association of mechanical rights societies (Bureau International des Sociétés Gérants les Droits d’Enregistrement et de Reproduction Mécanique, or BIEM) and record industry lobbying organizations, such as the British Phonograph Industry (BPI) in the United Kingdom and the International Federation of the Phonographic Industry (IFPI), periodically negotiates mechanical royalty rates to apply in their territories. While these rates vary somewhat from country to country, they are currently in the range of between 8.5% and 9% of the published price to dealers (PPD) of a record, excluding value-added tax (VAT), which is, essentially, a built-in sales tax.

  The PPD represents the cost of a record to a record retailer. In the United Kingdom, the rate is currently 8.5% of PPD. With a 10 pound sterling PPD for most top-line CDs, this amounts to 85 pence or just over $1.25 per CD. The US equivalent for ten songs—even absent the special “rate”—is $0.91, far below the UK rate. This mechanical royalty is shared collectively among all of the writers and publishers—usually based on percentages of total music contained on the CD, calculated by time.

  TOP GUN—A TOP BUYOUT FOR PARAMOUNT

  Top Gun: Paramount Pictures’ once-maligned investment in a feature film starring a relatively unknown Tom Cruise—a film that had been reworked, reshot, rewritten, and refinanced so many times that its future was not only uncertain, it was most likely nonexistent!

  Paramount’s music licensing supervisors had put together a marvelous score featuring some of the hottest recording artists of the day and presaging the phenomenal musical soundtracks to come over the next two decades that would result in the sale of tens of millions of albums. But they did not want to pay a per-copy mechanical royalty rate upon the sale of videocassettes—if indeed anyone would ever be interested in buying copies of this risky film. (This is an example of the brilliant anticipation of the future that the motion picture industry is known for. Here’s another. Decades before television was invented, there were provisions in film contracts with screenwriters that prohibited the screenwriters from authorizing a version of the film to be shot and broadcast on “television.” It’s true!)

  Paramount offered a one-time, $2,500 payment to each music publisher who controlled a song in the soundtrack without regard to the ultimate number of videocassettes, videodiscs, etc., that might be sold. The music publishers broke ranks, and most of them agreed to the deal, thinking that at $0.05 a copy—the audio-only copyright rate at the time the film was made—a 50,000-unit sale would not amount to all that much in the long run and $2,500 in hand was better in the short run than a gamble that the film (especially this film) would break all previous sales levels, including Jane Fonda’s workout video. Had you seen the trailer for the film, you would have jumped on the same bandwagon. Oh, you’re wondering how many copies the Top Gun videocassette/disc combination sold? 1.2 million copies.

  Music publishers and writers in the United States customarily grant to their affiliates or subpublishers outside of the United States the exclusive rights in their respective territories to exercise most rights under copyright. Included among these are mechanical reproduction rights. But each subpublisher, as well as the US publisher, is also usually authorized to issue worldwide synchronization licenses only on a nonexclusive basis, for music embodied in motion picture soundtracks. In this way, the film company, wherever it is, can rest easy in the knowledge that it can distribute its film worldwide, without regard to where the film has been shot, without having to seek licenses in each other territory of the world in which the film might be presented.

  However, when it came to determining whether a worldwide synchronization license for a film also covered the videocassette or videodisc embodying the film, problems arose. Was the reproduction of music on a videocassette a mechanical reproduction or just an extension of the synchronization right? If the right to mechanically reproduce musical compositions was exclusively granted to the various publishing affiliates or subpublishers around the world for their territories only, the value of the synchronization license would be defeated for uses outside of the traditional film medium. What’s more, in many countries the manufacture and sale of individual videocassettes and discs would generate a per-copy obligation to pay royalties to the copyright holders, much like a mechanical royalty on the sale of records.

  With respect to films made in the United States, since the worldwide synchronization license was entered into in the United States, the powerful film companies decided that the provisions of the synchronization contract—with its worldwide effect—prevailed, superseding foreign countries’ laws and society rules. Basically, the companies were saying to the publishers who had granted exclusive mechanical reproduction rights around the world to their affiliates or subpublishers: “Work out your contractual breaches with your subpublishers. We don’t care to hear about your view that you have already given away the rights we are demanding. We insist on a worldwide buyout of all videogram reproduction rights even if you have previously given away the rights to grant us these and you no longer own them. Either work it out, or we will not include your song in our film.” (“Videogram” covers all physical audio and video devices, including videocassettes, videodiscs, and DVDs.)

  The buyout concept prevailed and continues to this day. Do you think that Sony/ATV Music Publishing Company (Columbia/Sony Pictures), Warner/Chappell Music (Warner Bros. and New Line Cinema) or Universal Music Publishing Company (Universal Pictures) will fight this take-it-or-leave-it approach? No way. Sorry, writers. (BMG, which had no affiliated motion picture company, can no longer come to the rescue and litigate the issue; BMG has merged with Sony.)

  Audits

  While I have dealt with the audit process in some detail in chapter 12, it is appropriate to expand on the discussion here because some aspects of the music publishing business require a more in-depth review of this subject.

  As noted earlier, when a songwriter licenses the right to mechanically reproduce his or her song on a record, a mechanical royalty is payable pursuant to a license agreement with the record company. This license agreement ordinarily contains an audit right, allowing the songwriter to examine the books and records of the record company to the extent reasonably necessary to verify that he or she is being paid properly.

  Songwriters who utilize the services of the Harry Fox Agency, Inc., or other mechanical rights licensing agencies, have the benefit of their agents’ auditing the record companies on their behalf. Indeed, the Harry Fox Agency audits the major record companies regularly not only on behalf of those independent songwriters and publishers who are their principals, but also on behalf of some of the major publishers who are owned by the major record companies. While this appears to avoid any potential conflict of interest between the major music publishers and their affiliated record companies, it also is a mechanism through which the major music publishers can pass off their responsibilities to a third party. However, when it comes to their sister record companies, the major music publishers choose to license them directly, thereby—not coincidentally—bypassing the Harry Fox audit juggernaut.

  Independent songwriters who control their own publishing rights and license record companies directly also have the opportunity to audit the record companies, threaten lawsuits, and participate in settlement discussions. This may be an advantage for them because, if they utilize the massive audit capabilities of the Harry Fox Agency—where an enormous number of songs are the subject of an annual or other periodic audit of a record company—while the audit costs are certainly reduced pro rata, the opportunity for the record companies to make broad settlements increases at the same time that the probability of obtaining a satisfactory settl
ement for individual works, or groups of works, decreases. And, while the major music publishers have an incentive, as do all copyright holders, to maximize their receipts and profits, it is unlikely that they will go to the wall against their own record company affiliates.

  Foreign Audits As might be expected, the major music publishers’ record company affiliates in other countries are not used to being audited or being the initiator of an audit. For example, since Warner/Chappell (US) does not audit the Warner Records Group in the United States, Warner/Chappell (France) is not likely to audit Warner, Atlantic, or East/West Records in France. On the contrary, it will leave this responsibility to the mechanical rights society in France, the Société pour l’Administration du Droit de Reproduction Mécanique (SDRM), and let the settlements be made in the customary manner in that territory. This is not the right scenario for inquiring aggressively to ensure that (1) the songs that should have been registered at the foreign mechanical (and performing) rights societies were indeed registered, (2) the money that should have been collected has in fact been collected, and (3) the division of this money is in accordance with the songwriter’s agreement with the publisher. Nevertheless, SDRM is independent of the US parent publishing companies and at least some audit is conducted.

  THE ADMINISTRATING FUNCTION

  The previous section discussed audits—the process by which financial records are verified. But it is important to note that unless the administrative responsibilities toward a song are properly discharged, there may be no financial records to verify! The importance of the administrating role of the music publisher cannot be overstated. And, without the proper information from the songwriter, the administrator’s performance capabilities are extremely limited.

  What happens when a writer’s or recording artist’s music publishing rights are controlled by a music publisher that is so overloaded with administrative responsibilities that it fails to do some of the things it needs to do to fulfill its administrative responsibilities? Simple. Everyone loses. The writer loses his or her share of the income that has not been collected. The publisher, of course, also loses its share of the income, but if it has given cash advances to the writer and has the right to keep the writer’s share of income until those cash advances are paid back, its losses are doubled. So it is in both the writer’s and the publisher’s self-interest to accomplish the first two administrative tasks effectively: registration and collection. For at least in these two areas, their interests coincide exactly. A song properly registered results in a dollar collected, which in one way or another works to the benefit of both the songwriter and the publisher.

  FAMILY TIES (TOO CLOSE TO SUE)

  A hot recording artist was signed to a major record company, and, of course, the major record company’s publishing affiliate was the first to hear about it. So the music publishing affiliate offered to enter into a long-term copublishing agreement with the artist (read: “they would control the administration rights in the compositions forever”). They offered the artist lots of money, calling it an advance. (This advance would later be recouped against the artist’s song earnings, and therefore, except for the short-term risk on the part of the music publisher of losing the investment, the artist would have paid his or her own advance!) Well, when the recording was done, lo and behold the CD contained twenty songs, not ten, and so had to be released as a double CD, though the recording agreement provided for only a ten times three-fourths statutory rate rather than twenty times three-fourths.

  What’s more, there were outside songs on the album, and the publishers of those songs were unwilling to reduce their royalty to less than three-fourths the statutory rate, which is exactly what happens when the ten times formula is applied to twenty songs! So who ate the difference? The artist. What did the artist’s publishing company do? It punted.

  Although the publishing company had a financial interest in fighting this deal, it had no stomach for it, especially because the record company affiliate’s CEO was, ultimately, the boss of the publishing company president. So a double CD that contained twenty songs was licensed to the record company for three-fourths of the statutory rate for a CD containing ten songs.

  There are arguments on both sides here. The fact that the double CD cost twice as much to manufacture, and the retail selling price was less than twice that of a single-album CD was certainly an argument in the record company’s favor. Then again, the packaging cost was not twice that of a single CD. Yes, the union pension and welfare percentage that is applied against the retail selling price of the CD was now increased, since the double CD would be sold at a higher price than a single CD, but the cost of promoting the double CD would, of course, be the same as it would have been for a single CD. In the end, the record company prevailed.

  Could an independent publisher have gotten a better result? Probably not, since if the record company had to pay more for the mechanical royalties than it had contracted for, it would simply take the excess out of the artist’s royalties. But at least an independent publisher would raise hell over it and maybe get something in return.

  In early 2002, Warner/Chappell’s foreign affiliates were directed to report not to the head of Warner/Chappell in Los Angeles, but to the record company heads in their own territories. The result is more potential conflict of interest insofar as musical composition rights are concerned.

  I used the word fails above, rather than “neglects,” because too often the errors of administrators are due solely to the fact that they are so big and have so many copyrights to administer that they are bound to slip up sometimes. And sometimes an administrative “failure” is actually caused by the songwriter and the songwriter’s representatives, not the publisher at all. Here’s an example that illuminates this point.

  One of my clients, the principal songwriter of a popular rock band, assigned responsibility for administering his worldwide publishing rights to a major music publisher, which at the time was administering several hundred thousand copyrights. The administrating publisher paid the songwriter lots of money in return for a percentage of whatever it collected over a period of years as a result of the worldwide exploitation of the songwriter’s musical compositions. What the songwriter failed to do was to advise the administrating publisher adequately as to what he was writing and what he was recording. It was as if once the deal was in place, such details would magically find their way into the administrating publisher’s computer.

  Subsequently, the band had a hugely successful worldwide hit that sold more than a million singles and millions of albums. Everyone was happy. Except one thing went wrong. The B side of the single was an instrumental that, although it did not appear on the album, received a lot of radio play because it was the theme of a major world sporting event—the Olympics. The publishing administrator had never heard of the song. In the course of a full-scale examination of the status of the songwriter’s songs around the world, lo and behold, this song’s title appeared. All concerned were surprised to find that no one had communicated the necessary information to the administrating publisher and therefore the song had never been licensed, registered in Washington, or registered with any performing or mechanical rights society anywhere in the world. The lesson? Songwriters must treat their copyrights as any other precious offspring. Like children, they must be nurtured, cared for, and paid attention to. And just as no one but the parents can be expected to be responsible for developing a child to his or her full potential, no one other than the person who created a song should be responsible for developing a copyright to its full potential.

  WHEN YOUR PUBLISHER FORGETS YOU

  What happens when songwriters and their heirs find that their music publishers have totally forgotten them, and their songs? In many cases, the music publishers have no clue as to what the songs in their catalogue even sound like. Often the only evidence that a song exists is the title on an ASCAP, BMI, or SESAC schedule or a Copyright Office printout. There are three reasons for this:

  1
. Recordings, and more likely lead sheets or sheet music, have long gone missing. Whether a song was “published” or “unpublished” under the 1909 law, registrations of copyright could be made, and would be accompanied by so-called “deposit” copies of the music—most often in musical notation on paper format. These deposit copies presumably still exist, but probably in a pile of music that has not been disturbed in fifty or more years. Thus, how could a music publisher exploit a musical composition whose very essence (the music and words) is a mystery to them.

  2. Music publishers have undergone significant changes of ownership over the past fifty years—such that current owners, who focused on the “top 25” earners when they valued the catalogues prior to purchase, either have no idea what else is in the catalogue or have no interest in these songs as they are not particularly reflective of the stream of income generated by the catalogue’s biggest earners.

  3. You may have guessed by now the third reason. Yes, the venture capitalists and investment bankers who are often behind the purchases of music catalogues have no idea whatsoever as to the inherent vitality of a musical composition. The composition is represented to them merely by a numerical column of earnings or a title in a Copyright Office search report. Why would they—no, how could they possibly be even aware of musical compositions outside of the financial heart of the catalogue? They do not even need to be aware; after all, the key to the acquisition is the growth of the numbers, not the activity (or lack of it) of any particular song. The opportunities granted to authors and their heirs by Section 304(c) of the Copyright Act (see chapter 20) serve to overcome some of these problems by removing the publishers from the position of “caregiver” over these copyrights, but unfortunately, in many cases, the songwriters or their heirs are unaware of their termination rights. Furthermore, music publishers who were charged with the responsibility of keeping the copyrights alive and available are the only ones with the files and records that can uncover the identity of a song years after it first made its way into their catalogues.