The Companies That Make Up The Music Biz

So one afternoon you sat down and wrote a simple four-chord song and made a rough recording on your home hard-disk multi-track. You sent it to a friend who liked it, and the next thing you know, a top artist heard it and fell in love. They want it for their next album. A few months later, the song is on the radio and it’s a hit. You’ve won the jackpot.

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Suddenly, as if from nowhere, your mailbox is being stuffed with large, thick envelopes from various companies. Who are they? What do they want? There seem to be hundreds of them and they all have thick forms and legal documents for you to fill out. You’re hearing from record companies, performance rights organizations, publishing companies, promotion companies … It is staggering how many companies are associated with a marketable song.

All right, so the above example is a bit oversimplified, although I have seen songwriters with successes almost that dramatic. The point I’m making is that most artists and songwriters are at first unaware of the amount of paperwork and legal documentation that goes into the simple four-chord song they wrote and produced in their living room. Here is a basic list of some of the main companies and what they do. They are the entities we speak of when we speak of “the music industry.”

Record Companies
Record companies are in the business of making bets. Every band they sign requires an outlay of cash. If it’s a major label or a major-owned indie, it could be anywhere from $200,000 to $2,000,000 per act. If it’s an independent, the tab is usually no more than $50,000. In essence, record companies are really banks that specialize in lending money to musicians. The idea that a record company gives an artist money is the most common misconception among new artists. In reality, record companies loan the artist money.

When you read about an artist getting a one-million-dollar recording contract, it means that the record company offered to loan that artist up to a million dollars over the course of the contract. The artist is expected to pay it back out of the royalties that their record earns.

Aside from loaning money, record companies offer promotional and distribution services to a recording artist. These services can range from merely supporting distribution for an already finished record, usually for about 25% of the artist’s profit, all the way to the other end of the spectrum of financing the recording of the record and then promoting and supporting its distribution. For this, the take is generally up around 90% of the proceeds from record sales.

Production Companies
These operate in one similar way as record companies – they invest in talent – and one vital way that they do not, in that they do not have a specific distribution contract with a distributor to get their recordings into a retail environment. This is no small exception – if you can’t get the records in front of customers, you usually can’t sell very many of them.
Production companies, which I sometimes call “vanity labels” or “three-deep labels,” are usually owned by producers or recording studios. They sign artists and produce demos and shop them in hopes of getting the artist a record deal.
Many production companies dream of being record companies and often seek an affiliation with a major label or distributor to handle their product. But don’t be fooled. Unless the production company has secured a distribution contract with a legitimate distributor or has found a way to independently release their recordings, they are no more capable of selling records en masse than you or I.

Publishing Companies
The role of the publishing company is easy to comprehend, even if publishing deals themselves are not. Simply put, publishing companies control and safeguard the copyright by dealing with the complex renewal regulations, and they collect the money that is due to the songwriters whose copyrights they acquire. They also litigate on behalf of their authors in case of infringement, and they shop your songs to various other companies to use in movies, commercials, TV shows, and so on.
In exchange for these services writers agree to hand over the copyright of their songs and receive a percentage of whatever the songs earn – usually about 50%.

If you’ve written a song that is going to be released on a major record label, you are going to make money. Because the Copyright Act of 1976 requires record companies to pay for the use of a song on a record. The rate labels have agreed to pay is called the “compulsory rate” (sometimes called the “statutory rate”). It is paid to each author who writes a song that’s on any record they distribute. As of January 2006 the rate is 9.1¢ per song for each record distributed.

So, to continue our mock example, you wrote a song that will now be on a big record. The record company agrees to pay the owner of the copyright a compulsory licensing fee of about 9¢ for each song on a record, and for each record sold. A million-seller has huge potential.

The publishing company sees an opportunity to collect some easy coin, so they will try to make a deal to collect writers’ royalties, since writers seldom want to go to the trouble of pounding the phones and hiring accountants to do this nasty work themselves. The publishing company will also negotiate and collect the synchronization license fees for a song. A synchronization license is the fee that a movie or television company pays for the right to use the song as part of the soundtrack in a film or TV show. These fees can be quite high.

For the use of Sonny and Cher’s “I Got You Babe” in the movie Groundhog Day, the film’s producers paid the song’s publishers $80,000. Not bad. In recent years publishing companies have found new sources of revenue in “clearing samples.” Samples are the small sound bits used mostly in rap and R&B to make up pieces of the groove of a song. The publishing company owns the rights to the songs embodied in the samples, so they can negotiate a fee for use of the sample in a new song. Then there are ringtones, a revenue stream worth about $1 billion a year to publishers.

As an artist or writer, you may be asking yourself, “Why do I need this?” Well, you may not. Starting in the ’60s, many artists who wrote their own material realized that they were giving up 50% of their money to a service that they didn’t require, because they were the artist recording the material. Why hire a company to sell the material to others? They began to make publishing arrangements directly with the record companies. In order to compete with this new trend, publishing companies started handing out big advances to new artists, as high as $1,000,000 for a new act; superstar writers can get five times that amount. In fact, this still is a common practice. But still, why would an artist accept any amount of money to give away 50% of their music when they don’t have to?

Over the past few years, in an attempt to compete directly with publishing companies, several entities have sprung up that will gladly collect a songwriter’s (or publisher’s) money and enforce his rights for a mere 10%. They call themselves copyright administration companies. They don’t generally shop songs (but most publishing companies don’t do that either these days) nor do they give you large advances. But if you haven’t tied up your administration rights with a standard publishing deal when luck strikes and one of your songs is placed in a major project, signing with one of these has huge advantages. You retain most of your rights, and these companies perform most of the same services that you would expect from a publisher. Some of these companies also administrate the copyrights of sound recordings, something traditional publishing companies do not do as yet.
The one type of revenue that publishing companies and copyright administration companies let others collect for them are performance royalties – that is, the royalty that the writer/publisher of a song gets each time that song is performed publicly on media like radio or network TV.

In the music business, “perform” has a unique definition that goes beyond the normal use. When you see a musician play a song live on TV, you’re obviously watching a performance. But did you know that when a DJ spins a record in a club, what you’re hearing is a “performance” as well, even though it’s originating from a machine? This also goes for cover bands playing at weddings, as well as jukeboxes in bars, DVDs, turntables in nightclubs, and any other type of music that is experienced in a “for profit” public place.
So, yes, the common interpretation of law says that each time a radio station plays a song for its hundreds of thousands of listeners or a DJ spins a mix in your favorite dance club, the writer should get paid a few pennies for the “performance.” If the song is a hit, this can add up to quite a few pennies. But how can you ever know how many times each station or club plays a song, or how many wedding bands are turning your cool hit into “the bride cuts the cake”?

Performing Rights Organizations
Enter the PROs, that is, the performing rights organizations: ASCAP, BMI, and SESAC. (Also called “Societies.”) In the United States, they represent the writers, the little guy out there trying to make a buck in the super-duper Big Brother environment of the broadcast industry.

These three companies monitor clubs, venues, theaters, and the airwaves and keep track of who plays what and how many times. They collect performance fees (which vary according to the approximate listenership of each station or size of each venue) and distribute this money to the writers who are registered with them. Because the costs of negotiating millions of transactions would be prohibitive, a system has evolved using these societies in similar ways that unions represent laborers with collective bargaining. Each society negotiates a “blanket license” (kind of like a set annual payment) that permits broadcasters and venues to play music by its members.

Since you cannot belong to more than one PRO at a time, and since hit songs earn a ton of cash, these organizations compete fiercely for membership. The rivalry between ASCAP and BMI has filled the pages of several other books, all worth reading before you venture into joining either. To attract members, each sometimes offers cash advances to a new artist/writer who just signed a big deal (although they “officially” deny this practice), and each also boasts about its unique monitoring system. BMI’s pitch is that they have the largest membership in the world.

But there is currently much debate over how fair the systems for ASCAP and BMI are because to some it seems as though the payouts favor certain writers or types of music. SESAC has managed to dodge this bullet for the moment, since they use an “objective” computerized monitoring system – but it is likely that they, too, will be under scrutiny soon as their membership grows.
There are other PROs in other countries. In fact, each European, Asian, and South American country has its own versions of ASCAP, BMI, and SESAC, but you need not concern yourself with them. For those with international hits originating in the U.S., the three main PROs mentioned above will attempt to collect from each of the smaller ones in the individual countries.

SoundExchange
Due to the internet, a new type of PRO designed strictly for collecting the performance royalties for digitally streamed sound recordings has been created. These days “digital streaming” means through the internet and over satellite radio. Why is this new? Well, in the U.S., sound recordings were never paid a royalty when publicly “performed.” That means, in simple terms, when a song played on the radio, the songwriter made a royalty, but the people who own the sound recording of that song made zilch. This includes the record company and the artist who performs the song. Hard to believe, but true. (In Europe and Australia both the song and the sound recording of the song are subject to performance royalties).

However, a new statute that allows for the collection of royalties from “digital sources” has opened up a fresh revenue stream for artists and their labels. This royalty is supposed to be split between the artist, the label, and the collective other musicians who played on the record in a 50%/45%/5% split, respectively. (The musician’s share actually gets paid to the musician’s union, the AFM, which supposedly distributes it to members using its own formulas.

While it’s true that so far the only sources for earning “digital sound recording performance royalties” are things like internet steaming/downloads and Internet and satellite radio, it’s a given that in the not-too-distant future many forms of transmissions (and distribution) will be digital, and thus we will see artists making additional money from these “performances” of their records. Examples might be the digitally “beaming in” of music to restaurants and stadiums, as well as cell phone ringtones and many other mediums.

Unlike PROs, who collect royalties for non-digital performances, wherein you have a choice of ASCAP, BMI, or SESAC, there is only one PRO to collect this new money: SoundExchange. SoundExchange collects and distributes millions of dollars a year to artists and labels. They have approximately 31,000 artist accounts and approximately 3,500 independent labels as well as the majors. In 2007 they took in $141,546,442 and for 2008 gross revenue is projected to be $154,260,000. Since they claim that their overhead is only about 7%, that means that over 93% of all this new money is getting split between artists and their labels.

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