This is a guest blog post by Caz McChrystal, artist attorney and Assistant Professor of Business Law at University of Wisconsin, Stevens Point.
The musicians that I represent aren’t being offered multi-million dollar record deals that land them on the cover of Rolling Stone or in a mansion atop the Hollywood hills. Quite frankly, I’m not sure those deals exist other than in an idealized memory of what the record industry looked like in its days of excessive hedonism. So where does that leave work-a-day musicians – the ones that actually make music for a living?
On the composition and sound recording side, licensing and distribution deals are getting smaller, each netting less pay than in years past. That is the bad news. The good news is that there are infinitely more opportunities out there. However, as deals get smaller, a musician must both look farther afield to earn her money and make the most of every deal that comes her way by avoiding costly mistakes.
Rather than relying on a record label or large publishing house to distribute and license their music abroad, musicians are increasingly setting up their own distribution networks in foreign territories and handling film, television, and other forms of licensing on their own. That’s where attorneys like me step in.
New revenue streams generated by uses in foreign markets that would have been beyond most musicians’ reach a decade ago have proven a boon for the folks I represent. However, international transactions present concerns that are both nonobvious and brutal for the unwary. One in particular blind-sided me when it first came up: foreign currencies and exchange rates.
Here is a brief primer. There are a finite number of “hard currencies” in the world — those which are readily convertible on the foreign exchange market. In other words, hard currencies can be easily traded for other forms of currency without cost-prohibitive fees and at the prevailing exchange rate. Using the volume of trading as a yardstick (the amount of each currency held in reserve by foreign currency exchanges), the hard currencies are (in descending order of desirability): U.S. Dollars, Euros, Pounds Sterling, Japanese Yen, and Swiss Francs.
On the other hand, “soft currencies” are less desirable forms of currency that may be difficult to exchange for hard currencies. Banks may be either unwilling to exchange, say, Brazilian Reals for U.S. Dollars, or may do so only at an unfavorable exchange rate or with a prohibitive fee attached. Such currencies are termed “nonconvertible.”
“Okay, Caz,” you’re saying, “Thanks for the lesson on foreign currencies. What does this have to do with musicians?”
One musician I represent recently licensed his entire catalogue of music to a film studio based in mainland China. The original offer was structured to include a small up-front payment to my musician client, followed by points on the back-end for films that used his music. Here was the rub: the studio wanted to pay my client in Yuan, the official currency of the People’s Republic of China.
The Yuan is commonly considered to be a nonconvertible currency; it is not widely traded on foreign exchange markets due to China’s reluctance to allow the market to set the value of the currency. Long story short, the government of China has artificially tied the value of the Yuan to the dollar and prevents its currency from competing against foreign currencies in the international market. It does so in an effort to keep the value of the Yuan artificially low, which boosts China’s exports and trade surplus.
If we had agreed to cash payments in Yuan, my client would certainly have been able to take his earnings from that deal and spend the money in China, but going to a bank in Madrid (where he lives) and converting it to Euros would have had led to significant financial consequences. While he likely could have found a bank to convert his Yuan into Euros, he would have received an unfavorable exchange rate and had to pay fees that together would have cost him thirty or forty cents on the dollar. In other words, even though the deal was generally fair and the amount of money (in Yuan) was adequate, the form of currency made the transaction unfavorable to my client. By the time my client would have been able to actually spend his earnings in Spain on food or rent, his take on the deal would have fallen by roughly a third.
One solution would have been to demand all payments in a hard currency, such as the Euro (I tried this tactic, but failed). The only other possibility was to structure the deal such that something other than money was changing hands. What we finally arrived at was a kind of deal known as a “countertrade” which is becoming increasingly common in international transactions. A countertrade occurs when a seller exchanges goods or services not for money, but for goods or services from the buyer.
As it turned out, the Chinese film studio already had distribution channels set up for its films in Europe, so we agreed to a countertrade whereby my client did not receive up-front money or points from the studio, but got a chunk of the studio’s distribution rights for the E.U. territory. In other words, when the films were sold, leased, or rented in Europe, the European users would pay the European distributor in Euros, and my client could then claim a portion of those Euros from the distributor.
The deal was certainly more complicated than a traditional exchange of a license for cash, but it nonetheless worked. He now earns a steady, albeit small, stream of income from the distribution of Chinese films in Europe and earns the money in a currency that he can readily use – Euros. In addition, a couple of his songs have been used in films by the Chinese studio and, apparently, have gotten popular enough that two Chinese promoters have contacted him in the hopes of booking mainland China tour dates.
As musicians begin to engage in more international music transactions, currency convertibility will increasingly become a concept that musicians must understand. Believe me; I was not terribly excited about the prospect of educating myself on the finer points of global macroeconomics. After all, I majored in music as an undergrad then became a lawyer, a profession that many enter to avoid math. However, as the music industry changes, we must adapt to those changes. A basic understanding of currency convertibility will ensure that musicians actually get paid in usable currency when they license out their works; openness to countertrade deals will sidestep the issue of currency nonconvertibility altogether.
Another issue raised by international transactions is that of currency exchange rate fluctuations. As currencies are traded on the foreign exchange market, the value of a particular currency will change over time. While hard currencies are generally perceived to be fairly stable, they are by no means immobile. Exchange rate fluctuations typically are an issue for musicians who enter into foreign licensing or distribution deals that last for a period of months or years. During that time, changes in currency rates could mean that a licensing agreement that once seemed like a good deal for the artist could become a poor deal that generates far less income than anticipated.
For example, a U.S.-based musician who licensed his music for use on a continental European news network in May 2008 in return for €100/month may regret that deal today. When the deal was struck, the musician would have been earning about $155.81/month after converting that €100 check into U.S. dollars. Flash forward to now; those same €100 Euro checks would only be worth $130.87. That may not seem like the end of the world, but it constitutes a 16% drop in income over the past four years. Furthermore, if the Euro were to continue its decline against the dollar, as many predict, the losses could be even greater.
But currency exchange rate fluctuations cut both ways. If a musician agrees to be paid in a currency that is gaining strength against that musician’s local currency then the value of the deal could increase dramatically. Let us now consider that the musician from the last example is based in London and licenses his music in May 2008 to an American cable news company at $100/month. At the time the deal was struck, that musician would have been earning about UK£50.65/month after converting that $100 check into Pounds Sterling. Today, those same $100 checks would be worth UK£61.93, an increase of 23% in earnings over four years on a music licensing contract that was structured to pay a “fixed” amount.
Taking advantage of currency rate fluctuations, or at least preventing the loss of huge amounts of income as a result of unfavorable dips in the paid currency against the local currency is difficult. Musicians, like macroeconomists and finance geeks, are not soothsayers. Nor should musicians trade the woodshed for the Wall Street Journal.
However, as the market for international music transactions continues to grow, a savvy musician should at least be aware of the risks. Even if a musician or her attorney cannot predict currency rate fluctuations and thus translate an ounce of prevention into a pound of cure, understanding the risks of exchange rate fluctuation may help a musician better understand how the earnings generated by an international licensing or distribution contract, even one with a “fixed” rate of return, could change over time.