Number and Diversity of Songs
The number of songs in a catalogue is significant in the sense that administrative costs can be a significant deterrent to profitability. Purchasers tend to look at the top twenty-five or one hundred earners and calculate the worth of the company on this basis. Even a company with 25,000 titles has twenty-five top sellers. But consider the cost of registering the assignments in the Copyright Office and upgrading an old-fashioned accounting and record-keeping system to present-day standards. Certainly many hidden gems may be in the 24,975 less-significant titles, but the cost of uncovering them is as much of a burden to a buyer as is the cost of extracting gold from an abandoned gold mine. A buyer has to be able both to identify the overall value of the catalogue as a whole and to evaluate the cost of managing it.
Another factor to take into account is diversity. On the face of it, diversity would seem to be an advantage, but it can work the other way, too. A catalogue may be so diverse that its owners are unable to take advantage of any of the parts of which it is composed. If country music is making a comeback, for example, and the catalogue is 2% country music, the trend will have little positive effect.
Administration Issues
The numbers are only as good as the administrative talent and detail behind them. Those handling the due diligence should be able to evaluate how likely it is that the income data from various sources, including various regions of the world, is (1) accurate and (2) likely to be well administered. If the foreign collecting agents are reputable, and not companies connected with the seller, the chances are the numbers are accurate. Some publishers either join foreign societies or check periodically on the registration facts at the various societies, and those records are valuable sources of confirmation as to the accuracy of the numbers.
As for the quality of the administering function, there are two concerns:
1. Once again, the reputation of the foreign collecting agents or the potential connection to the seller (which will make their numbers suspect) is important.
2. Whenever the administration of a catalogue is in the hands of a third party, the contractual terms of the administration agreements should be very carefully examined. Are the earnings calculated at source? Have the foreign subpublishers been audited? If foreign subpublishers have retention rights, how long do they last? (It used to be that a cover record obtained in certain European countries, however insignificant in terms of sales, would entitle the subpublisher to represent the song for the entire remaining term of copyright; nowadays, retention rights usually extend two years if the cover record has strong sales or is high on the charts.)
Quality of Registrations
There is not usually sufficient time for a potential purchaser to double-check the accuracy of the registrations with the various societies that handle copyrights, including US societies, leaving purchasers pretty much in the dark as to whether the numbers they are depending on reflect reality. Errors, however, tend to benefit the purchaser because the numbers on which the purchaser will base the multiple will be lower, not higher. Catalogue owners (sellers) who pay attention to such things will have society printouts of registrations, and these can be compared with catalogue master lists. These are particularly useful because no society is likely to allow a potential purchaser to obtain information on catalogues he or she does not own or control.
Limitations on Recovery of Royalties
Agreements between the seller and its licensees will often contain a contractual statute of limitations that will limit the ability of a purchaser to audit their books and records. Those doing the due diligence will have to schedule these so that a conclusion can be reached as to what limitations the purchaser will have to accept.
Timeliness of Data
Naturally, the more recent the data, the more valid it is. The purchaser should be wary of companies that cannot provide a clear picture of recent activity—through such verifiable means as statements issued from record companies or collection agents, or from other users or administrators of the music (such as subpublishers). Confirming letters from such companies or societies will help the purchaser to get a picture of more than a years’ worth of current activity. They can also confirm what earnings have yet to be paid to the catalogue owner—known as pipeline earnings.
Translations and Adaptations
Many songs that originate overseas are successful in the United States only because of their translations and/or adaptations. The publisher’s share is not often affected by the presence of translators or adaptors, but sometimes it is. More often, in the modern era, songs are cowritten, and co-owned, by multiple writers, so that the valuation of a more current song may require checking a bit more thoroughly into songwriter contracts (if indeed there are any) than cases in which a song has been written by a single songwriter whose exclusivity is established by a clear written contract.
For songs that originate in the United States and are translated and/or adapted for use overseas, royalty splits with respect to the affected songs are often controlled by foreign societies, and not by contract. To the extent that songs have originated in or are particularly successful in foreign languages, in foreign countries, it is useful to ask the seller what they actually control, and what, by virtue of society regulations, they may have been forced to relinquish to, say, a foreign adaptor and the adaptor’s publisher.
Advances
Unrecouped advances benefit the purchasers as long as they can keep song earnings coming in until those advances are recouped. They act, on a dollar-for-dollar basis, to reduce the risk of the purchaser. Sometimes, however, writers receive loans or advances from their publishers. The efficacy of a company’s bookkeeping records that should disclose these loans or advances can avoid a lot of confusion and unhappiness down the road. Otherwise, a buyer might pay royalties to writers whose accounts are in fact unrecouped. This again is an area in which the purchaser will traditionally look to his or her accountant for guidance.
Contractual Carryovers with Third Parties
Whether carryovers with third parties are positive or negative, they will have an impact on revenues. Ordinarily there will be both: unrecouped advances from third-party publishers or administrators, and unrecouped advances to writers and copublishers. These carryovers should be on the books of the company and can be verified by checking the agreements giving rise to them. These will have an impact (again positive or negative) on the true value of the catalogue and should be looked at very carefully.
WHO OWNS THE CATALOGUE?
When a company that is all about legitimate business and legitimate profit owns a catalogue, potential purchasers are likely to be dealing with honestly obtained and presented facts and figures traditionally used to evaluate any business. But when the catalogue owner is the writer or the heir of the writer, or someone who has a reputation for sharp dealings with his or her writers, there are often big-time problems, especially with regard to a purchaser’s ability to perform due diligence. And, of course, for a variety of reasons, the records simply may not be available.
I recall performing due diligence on a catalogue the owner of which was an alleged mobster, whose name was regularly inserted as “author” on copyright registration certificates and on “amendments” to copyright certificates following a loan to the real author, which was granted in return for an “acknowledgment” that a mistake had been made in the original copyright registration application. The alleged mobster decided to sell, and negotiations for the sale of the catalogue began. Two companies were interested. One pulled out, on the correct assumption that the risk was enormous that the owner had so carelessly, and/or criminally, acquired the rights that the documentation available to the lawyers performing the due diligence was practically worthless. The other company, which eventually did purchase the catalogue, faced the same problems, but it was headed by an executive who had a way with writers and who knew that the first step was to find the legitimate authors and their heirs, then announce that for the
first time, their royalties would be properly accounted for and paid and their songs exploited. This turned out to be enough to forestall almost all of the threatened lawsuits; the catalogue became stable and made the new owners (and the songwriters) a lot of money. (Coda: Two of the writers did choose to sue the new owner, claiming that they were really the writers of a song, but that they had been afraid for twenty-five years to present a claim to the dishonest owner because they feared they would be killed, and on this basis, they sought to extend the statute of limitations on their claim, which had expired almost twenty years earlier. The court rejected their argument, and threw out the case. Too bad.)
TERMINATION ISSUES
Termination issues are discussed in detail in chapter 20, this page. Suffice it to say here that copyrights to which either Section 304(c) or 203 applies are ticking bombs. When any notice of termination becomes effective, all newly licensed (although not all formerly licensed) revenue stops. Period. While one may never be able to get a precise fix on whether the author of a particular composition or group of compositions—or the author’s heirs—is even aware of, let alone willing to exercise, his or her rights under Sections 304(c) or 203, the mere possibility that the rights could be exercised should give a purchaser pause (and impact the price he or she is willing to pay for the catalogue).
Of course, the composition of some catalogues is such that it is highly unlikely that the heirs of an author will elect to disrupt a flow of income and to simultaneously be willing, or financially able, to take on the cost of hiring advisors to help them prepare notices of termination, and then, once they acquire the copyrights, help them administer them. I don’t know the percentages of copyrights whose termination windows pass without a peep from the authors or their heirs, but I would guess it is very high. Nevertheless, would-be purchasers must take this factor into account and assume that it is more likely that the termination rights for the more important songs (at least those with the highest earnings) will be very much on the radar of their authors or the heirs of their authors.
THE “TRUNK”
Robert Kimball, the theater historian, archivist of the Ira Gershwin estate, and the country’s leading expert on the American song, has written many of the exhaustive studies of Cole Porter, Irving Berlin, the Gershwins, and other American songwriters. Mr. Kimball was asked by Warner Bros. Music (the predecessor to Warner/Chappell Music) to investigate a box of miscellaneous musical material in a warehouse in Secaucus, New Jersey. He found the proverbial “trunk” of George and Ira Gershwin, as well as works of Cole Porter, Jerome Kern, and Richard Rodgers. This contained a mother lode of musical compositions, musical shows, and fragments of both. When I first started practicing law, my firm was providing legal services to Frank Loesser, composer, lyricist, and book writer of Guys and Dolls, The Most Happy Fella, How to Succeed in Business Without Really Trying, and many more. It was then that I learned of the trunk. Frank had one. Paul Simon has one. And the discovery that the Gershwins also had a trunk was so miraculous that it deserved a front-page New York Times story and a feature story in Time magazine.
WHO’S SORRY NOW? THE BLACKBIRD
In valuing a copyright catalogue, the potential purchaser must evaluate whether a composition, once terminated, still has some life left as an income provider to the catalogue. The courts have held that a mechanical license, issued by a music publisher prior to termination, remains valid and the income derived from that license remains the music publisher’s, to share with the author or the author’s heirs in accordance with the author’s original grant. (This principle was established in the “Who’s Sorry Now” case decided in 1985 by the Supreme Court.) That mechanical license, issued to a record company, remains the legal document affecting who receives the mechanical royalty from a digital download of the subject song. (Note that a digital download of a new recording requires a separate mechanical license.)
What happens once an author, or the heir of a musical composition’s author, terminates a grant—for example, a US license to use the composition on a recording? Can the original music publisher continue to license the use of the song as embodied on the recording for, say, a motion picture soundtrack?
In 1998, the Second Circuit New York Court of Appeals said “no” in a case which involved “Bye Bye Blackbird.” While it was pointed out that a terminating author’s (or his heir’s) rights are not unlimited because there exists in the Copyright Act an exception to the usual rule that all rights return to the author (or his heirs) upon termination. This is the so-called “derivative works exception,” which permits a grantee or licensee (for example, an original publisher) who creates or authorizes the creation of a derivative work (that is, a work that combines an original copyrighted composition with independently created modifications—such as a recording, or even a ballet based on a song) to continue to utilize it. (The section of the Copyright Act that covers this is Section 304[c][6][A].) In this case, both the original publisher and the successor publisher, which received its rights from the heirs of the author, wished to exercise the right to license a Joe Cocker recording (a derivative work) in the soundtrack and soundtrack album of the motion picture Sleepless in Seattle. In the end, the successor publisher was allowed to control the use of the derivative work in the film. The original publisher was prohibited from issuing posttermination licenses of pretermination derivative works. The original publisher’s claim was thrown out.
Why are we interested in these two cases? Because any purchaser of a catalogue who includes, in the course of his or her valuation of the catalogue, income receipts from a song that has been, or may well be, terminated needs to know what assets he or she will be able to exploit (in this example, not the derivative work).
Anyone purchasing a music catalogue must seek to understand the catalogue sufficiently to know, or have reason to know, whether one or more of its songwriters might actually have a trunk. Some writers will; some won’t. But it might surprise you to learn that most of the rock-and-roll writers I know do have a trunk. Hundreds of songs, in the style, and from the creative mind, of a popular songwriter—most of which are usually recorded at least in demo form—can certainly add value to a catalogue. If the writer was exclusively signed to the music publishing company for the period of time during which it acquired the disclosed songs of that writer, then most likely the publisher also owns the copyrights to the trunk songs. One challenge is simply (or not so simply) to identify who these writers might be and another is to actually talk with them prior to the date the sale takes place. However, even the mere identification of the existence of such a trunk might justify purchasing a catalogue at a slightly higher price than otherwise would be the case.
23 • COPYRIGHT ISSUES
A Sampler
To see itself through music must have an idea or magic. The best has both. Music with neither dies young, though sometimes rich.
—NED ROREM
This chapter will explore the dialogue—many would say battle—between procopyright and anticopyright forces, a dialogue that has moved beyond the hallowed halls of universities and spread across the editorial and front pages of our newspapers and magazines. But first, let’s spend a little time examining important principles of copyright law that affect songwriters, musicians, recording artists, record producers, and record companies in the digital age. There is no better place to begin than by exploring where you end up if your so-called “creative” actions wind up constituting copyright infringement. There is no less appealing place to end up than in the dock, having been hit with the full force of copyright law.
CHANGING COPYRIGHT’S IMAGE
Despite the fact that most people would agree that creators of original works should have the right to earn income through the sale of those works, or through fees paid for the use of those works, copyright interests have received a bad rap over the last few decades. For example:
• In 1967, United Artists tried to stop a Community Antenna Television Company (CATV), fortnightly
, from delivering television signals over a mountain to people who could not otherwise receive the station’s programs.
• In 1983 and 1984, Universal City Studios tried to stop sales of Betamax tapes.
• In 1999, the American Society of Composers, Authors, and Publishers (ASCAP) was perceived as trying to stop Girl Scout camps from performing copyrighted music around their campfires.
• In 2000, A&M was the lead plaintiff in the recording industry’s successful effort to stop Napster in its tracks, a move that many, especially teenagers, perceived as an undeserved victory by the establishment over our basic rights to listen to music via the Internet.
• In 2003, the Recording Industry Association of America (RIAA) began its series of litigations against individuals, including college students, for illegal downloads. By 2007, these suits numbered more than 20,000. Only 4,000 of them have been settled. Defendants of thousands more have defaulted—with consequences one can’t even imagine.
What They'll Never Tell You About the Music Business Page 64