Legitimate digital business models and legitimate digital music marketplaces are critical to musicians’ ability to promote, distribute and earn compensation for their music. This document translates the Principles for Artist Compensation in New Business Models.
Legitimate digital business models and legitimate digital music marketplaces are critical to musicians’ ability to promote, distribute and earn compensation for their music.
Since 2000, FMC has been carefully tracking — and sometimes facilitating — the ongoing conversations about potentially rewarding new business models. Recently, a number of new models have been proposed that would compensate copyright owners through indirect means: shares of ad revenue, fees on physical devices or broadband access, or equity stakes in a company, for example. We encourage such talks and experimentation. However, the needs of those who actually create the music — the performers and songwriters — cannot be overlooked in any discussions between corporate content owners and the businesses that use the music.
FMC believes that any new business models should embrace the following principles:
Licensing, Collection and Distribution of Revenues
- Revenue sharing: Revenues must be equitably shared between copyright owner and original creator(s).
The history of the music industry is littered with stories of artists who have not been paid anything for the sales of their recordings. Typical major label contracts only give musicians 10 to 15 percent of the revenue from sales, and that’s after the label has recouped all the costs of recording, manufacturing and promotion. It’s no wonder that many musicians never see a penny in sales royalties.
This principle simply says that revenue generated by new models for music access or delivery should be fairly shared between rightsholders and artists — after all, they created the music that provides the value for these new business models. This will help ensure that future models properly compensate artists, and don’t just replicate the flawed and unfair structures of the past.
- Unattributable income: Some deals generate revenue that cannot be attributed to specific musicians at the time the initial deal is executed. Unattributable income, such as advertising revenue, advances, delivery charges for online content, bulk catalogue licensing, revenues from covenants not to sue on your catalogue, and the value of non-monetary items such as free advertising or equity stakes, must be fairly apportioned between the copyright owners and the creators of the music that is being licensed in the deal.
This principle recognizes that big record companies can use their massive catalogs of recorded music as leverage in licensing deals with new music services. As a result, labels and digital music services often agree to revenue streams to license music far beyond what is attributed to individual transactions. This money must be fairly shared with musicians.
Here are three examples:
Recently, the major labels entered a joint venture with MySpace for a new advertising-based streaming music service. In exchange for agreeing to license their music to MySpace, the major labels received equity stakes in the enterprise. The value of the equity stake should be shared with the musicians whose music was licensed in the deal.
The same goes for bulk catalog licensing, in which the copyright owners receive a lump sum for the use of their recorded music library in a new service. The performers and songwriters whose songs and recordings make up that catalog must be compensated when their work is licensed en masse to any business – online, mobile or otherwise.
Finally, there are cases when the labels get a cut of any advertising dollars earned by the website or service. Currently, it’s unclear if or how the labels plan to share this equity or ad revenue with the artists whose music is being used. The principle states that artists must receive their share of this “unattributable” income.
- Complete and accurate reporting: Reporting is essential to enable a distribution of receipts. Because sample and survey reporting shortchange smaller and niche musicians, revenues must be paid based on the actual use of a work and tracked using census data/reporting to the greatest extent possible.
This principle simply says that digital music services and labels should make every effort to ensure that the data explaining what works were used, when, where and how is robust and complete. Traditionally, performance royalties have been calculated using a “sample” method — tracking was conducted in chunks at during certain weeks of the year, and royalties were calculated based on what was reported during that timeframe. Clearly, this favors the biggest and most frequently played artists, and can easily miss niche and developing acts that are played less often. Today it’s possible (and economically feasible) for digital services to employ accurate census and data-based reporting, which would help all artists get paid for the use of their music across a variety of platforms. These principles urge music services and labels to embrace accurate and complete reporting.
- Direct payment: The creators’ share of the revenue must be paid directly to the creator or its collective agent, not to the copyright owner for redistribution. Except where otherwise prohibited, musicians can assign the right to receive this income provided that the musician receives an accounting statement directly from the third party user or collective agent to ensure that the assignee appropriately accounted for this revenue. Any assignments to copyright owners, when permitted, must be limited to a period of 3 years from the date the licensed work is published.
When artists sign contracts with major labels, they typically transfer the copyright ownership of their recordings over to the record label. The label usually agrees to pay for recording, manufacturing and promoting the record, and sometimes gives the artist an “advance.” The label basically acts like a bank: it provides a loan to the performer to cover costs, as well as the advance, and then “recoups” those expenses by deducting the loaned amount from any royalty payments owed to the artist. Sadly, the overwhelming majority of recordings never recoup, which means most artists never receive any money from the sales of their recordings.
This principle says that the portion of the revenue owed to artists for any use of their work on these new digital platforms should go directly to the artist, not to the label. Without direct payment, all the revenue generated by these new models will be delivered to the labels for dissemination to the artists in the form of royalties, but history has demonstrated that labels accounting practices are not to be trusted.
For artists who have assigned their copyrights to a label as part of a record deal, this principle acknowledges that the label can be the recipient of this revenue and can use this money against recoupable costs. But here’s the important part: this principle says that an artist may only divert this income to the label for a three-year term from when a recording is released. For these three years, the label can use this income to recoup debts incurred by the artist. After three years, it shifts to direct payments to the artist. This principle is especially valuable for the thousands of artists whose recordings are more than three years old but who remain unrecouped. This means they would finally start getting paid.
Let’s be clear: many performance right revenues already include total prohibitions on an artists’ ability to assign revenue to copyright owners, and those restrictions must stay in place. What this principle calls for is the expansion of this direct payment model to additional revenue streams (e.g., distributions, advertising licenses). Since labels have historically used these revenue streams to recoup costs, these principles propose a compromise position that acknowledges that labels needs to recoup, but places a reasonable time limit of three years on it.
However, even if an artist assigns his or her copyrights to a label, s/he would still receive accounting statements directly from the user of their work (or the artist’s agent). This lets the artist see whether the assignee (again, probably the label) is properly accounting for revenues.
Ultimately, direct payment means that money owed to artists does not pass through the labels, which can lead to delays in compensation. When an artist isn’t paid directly, it makes it difficult to determine if they’re being paid properly and puts the burden on the creator to conduct costly, time-consuming and burdensome audits. Direct payment would provide artists with regular accounting for the use of their music.
- Equal access to new models: All musicians and copyright owners must have equal access to these new models. An indie or unaffiliated musician must be able to license music to new services. While services should be able to experiment with variable pricing and offer different marketing opportunities depending on the level of the artist or based on the size of catalogue, for items on the same service and with the same retail price, indie and unaffiliated musicians should receive the same per download or per stream payment as major label musicians.
This principle simply says that independent and unaffiliated artists should be able to participate in new digital services and partake in revenue streams generated by such services. If an indie artist is selling music on the same site, in the same way and at same price point as a major label act, they both should receive the same level of compensation. Also, all artists should be paid the same for the revenue generated by ads on the artist’s homepage. Obviously, bigger acts will have more promotional opportunities, but where the dynamics of the use/service are the same, indie and unaffiliated acts should be paid the same mount as a major label artist.
- Lawsuit or settlement monies: All monies received as a result of copyright infringement claims brought by copyright owners, or resulting from their covenants not to bring claims, must be shared with the musicians who created the underlying works.
The recording industry has waged a considerable number of battles in the courts over the last ten years to protect copyrights in artists’ works, in some cases winning huge settlements ($200 million from MP3.com, $50 million from Grokster, for example). This principle says that if the copyright owner receives money from any settlement — in or out of court — the musicians whose music was part of the lawsuit must be compensated. This could mean money from lawsuits involving peer-to-peer services like Grokster or out-of-court settlements involving individual infringers. Likewise, any lump sum or other financial reward coming from an agreement not to sue must be equitably shared with performers and songwriters whose music is being licensed or “shared” in a network.
- Best effort to pay creators: The agency or organization designated to collect revenue shall make every reasonable effort to locate and identify creators who are entitled to receive a portion of the revenue collected.
This means that any royalty-collecting agency must make a reasonably diligent effort to find and pay performers, songwriters and creators.
- Accurate accounting: Tracking/accounting figures and calculations must be detailed and transparent, and the license terms must be clearly defined.
Music industry history is full of stories — anecdotal and otherwise — of misleading accounting by copyright owners. This principle says that any entity that uses the work of musicians must provide clear and detailed account of how and where that music was used, as well as the details of the licensing.
- Right to audit: All revenue recipients, including creators, shall have audit rights.
Artists must be able to audit any entity that uses their music. We understand that artists wishing to audit cannot endlessly interrupt music services and businesses. To address this, the user could, for example, set a single annual date during which a joint artist audit would take place. That said, all artists would have the right to examine relevant financial and usage records at least once each year.
- Equal representation on governing board: Creators must have the same level of representation as copyright owners on any entity that collects licensing revenues for music, such as licensing and collection societies. To the extent decisions on licensing, distribution of revenues, other expenditures of collected funds, or resolution of disputes are made by committees rather than the full board of such entities, creators must have equal representation on those committees as well.
Artists must be represented on the governing board and its decision making committees tasked with licensing, collecting and distributing artist royalties. This principle says that artists must be share equal control over any agencies that license, collect and distribute their royalties.
- Collection of International Royalties: Musician shares of statutory or other royalties collected overseas by musician organizations for the use of US works must be paid directly to the musician or its collective agent. If any taxes are withheld from foreign royalties, the artist should be the beneficiary of any foreign tax credits arising from such tax withholdings.
It’s important not to overlook the revenue streams generated from the international use of artists’ work. This principle says that direct payment systems must also be applied to musician royalties received from overseas uses, and that a label can’t collect the artists’ share of foreign royalties. Additionally, if there are taxes withheld on the artist’s foreign income, then the artist should be eligible for any foreign tax credits.
Definitions: As used herein, “musicians” and “creators” include performers (both vocalists and instrumentalists) and songwriters. “Music,” as used herein, includes both the composition and recording.