If you go to CD Baby’s website, the description reads "CD Baby is a little online record store that sells CDs by independent musicians." Accurate, yes, but modest to say the least. CD Baby embraces the co-op model, where artists can share common resources, and takes it to a new level. They offer independent musicians a whole range of tools to help them with their musical livings – from promoting and selling CDs online, to their customizable Host Baby website hosting service, to networking opportunities, down to helping bands get barcodes for their records. The results are inspiring. Currently over 47,000 artists sell their CDs through the store, and $4.7 MILLION has been paid out to artists since the store’s launch in 1998.

In the past few months, CD Baby has launched a new side-project – distribution of its members’ music through legal digital music stores. This is a real win/win for independent artists and for these new digital outlets. Like it or not, the digital distribution of songs and albums is becoming a reality, but to this point the material offered in these online stores — iTunes, MusicMatch, Pressplay, etc — has been limited to artists signed either to major labels or to big indies. And, at this stage especially, hardly any of these digital stores are willing or able to deal directly with individual artists – they just don’t have the infrastructure (or in some cases, the interest). With CD Baby acting as an intermediary – negotiating the contract, delivering all the songs and metadata in the right format, and disbursing the sales royalties back to the artists – the digital stores get thousands and thousands of new songs, and the independent artists have a way to get their music into these stores.

I recently caught up with CD Baby wunderkind Derek Sivers and talked to him about CD Baby’s new digital distribution option. As usual, Derek floored me with his ability to make even the most gargantuan projects into elegant little additions to the list of things that CD Baby has to offer musicians. Here’s what he said.

Hi Derek. The last time I saw you was at the Apple iTunes event in June. I was at first stunned, but then not stunned at all, when you told me that day that you’d already been planning for ways to offer digital distribution services to CD Baby members. When did you start thinking that things would be moving in this direction?

Back in 1990 when I was putting some music to a DAT tape while watching a fax come through the machine. I thought, "Hey – if digital music is just 1’s and 0’s, and that fax is just sending black dots and white dots, couldn’t we transfer all this music over a phone line?"

So when all these download services came about, and were finally getting USED (not just iTunes but Emusic, MusicMatch, Rhapsody, etc.) – I realized that CD Baby was already doing most of what was needed by these download retailers. We were already encoding every CD that came in the door. Already paying the artists every week. Already keeping a database of all the details of all of their albums.

So – delivering it to Apple then dispersing the payments is no big change for us. I think that’s why we’re able to do it so cheap (9% cut).

I think in the LONG-term, music over the internet will be the main method of delivery, so it makes sense to get in there early. But remember that only 30 percent of the country has broadband, and apparently the other 70 percent are not interested. Cable and DSL companies are having a hard time converting the other 70 percent. So I think we’ve got years and years of CDs being the main medium.

So tell me the digital distribution services that you’ve already made deals with.

So far we’ve got deals from Apple iTunes, Emusic.com, BuyMusic.com, Rhapsody aka Listen.com, AOL’s MusicNet, and MusicMatch. Also Sony’s new music service that has yet to be announced.

How have the negotiations been?

Expensive. There have been a lot of legal fees.

I’m sure. Review again what you’re offering CD Baby folks who are interested in taking advantage of the digital distribution service option.

If artists want CD Baby to help them get their music up on the digital distribution services, there’s a one time $40 sign up charge from us (note: that’s in addition to the $35 initial fee for having CD Baby sell your CDs through their store). That covers our costs of preparing the music and metadata for each of the services. After that, CD Baby keeps 9 percent of whatever income the artist makes – whether it’s for songs downloaded or songs streamed — and we pay out 91 percent to the artists.

That’s incredible – by far the highest percentage paid to musicians. (Author’s note: artists signed to a label will in some cases get 50 percent of each sale, and in many cases a lot less).

As far as payment goes, when we get a check and some forms from each digital retailer, we’ll run a script that parses the form, and we’ll just add the value of any digital sales or streams to each artist’s weekly CD Baby check. That’s the nice thing about it – since we’re already set up to cut checks to artists weekly this is just another batch of sales we’ll add on.

How many current CD Baby member decided to opt in to this new opportunity?

9000 have signed up. Altogether, there are about 46,000 CD Baby members on the site but a few thousand have dead emails, so about 25 percent of the active members have gone for it.

Wow. That probably makes you one of the biggest representatives of a batch of artists for many of these digital stores.

Possibly. Though I think IODA is going to represent a ton. In quantity of albums they might have more.

How’s the encoding and collection of data going?

Great. We now have an army of 15 computers daisychained together with nine 200 gig drives in each. That gives us 1.5 terrabytes per box and 15 boxes, all constantly churning data.

But as far as the encoding goes, we’re keeping human hands off this as much as possible. A human first puts the CD in the drive, then it automatically gets ripped to WAV files, and then converted into other formats that correspond with the platform requirements for each service — AAC for iTunes, MP3s, WMA, and so on.

How is this helpful for musicians?

We provide independent musicians with a way to distribute their music through these various legal digital music stores. If an artist approached any of these stores directly, they might not get very far. Apple and those other companies – they’re not used to talking to musicians like that, they don’t have the time to do it. We have folks here on the phones and answering email, talking to musicians all day. We’re doing that anyway. In fact, this whole venture into offering digital distribution options to CD Baby members is no big deal on our end – it’s another one of our side projects.

We try to apply this co-op approach to everything. Does an artist need a barcode for their CD? We’ve got it. A credit card swiper for shows? We’ve got that too. It’s so much easier to put an umbrella over this, so everyone doesn’t have to do it on their own.

Have you run into any snags in this process?

Well, one snag has had to do with the Harry Fox Agency. (note from the writer: Harry Fox is a monitoring service for licensing musical copyrights, and acts as a licensing agent for music publishers. HFA collects mechanical royalties – the royalties based on the number of records manufactured.)

Compulsory license law says that anyone can do a cover song of anything that’s been released. On other words, your version of a song falls under the compulsory copyright. We thought HFA was required to grant a license, but we found out that HFA is a replacement for a compulsory license so they’re not required to do anything they don’t want to do. At first I was upset because they came to us saying that HFA doesn’t have the time or resources to monitor thousands of licenses, and songs sold basically on-demand. With thousands of musicians with scattered sales they can’t audit the books of so many people. So they said to us that either CD Baby should be the licensee or they’re not going to deal with this. I was like, no way, I’m not the licensee. But we found out that musicians have the law on their side in this case. If they’ve done a cover and they want to sell their version through an online store, they can send a notice to the publisher of the song that they intend to do a cover version. As long as it’s 30 days before the making of copies you’re okay. Technically, the artist should account sales of that cover song to the publisher each month, but lots of musicians and publishers don’t want to deal with tiny micro payments and checks. So we’re going to urge CD Baby members to do this: find the song’s publisher; send an official notice; and then wait until the publisher requests money. It completely bypasses Harry Fox Agency, but it’s legitimate. CD Baby is actually filing an amicus brief that’s co-signed by a number of copyright lawyers. We want to be able to verify that this is a legitimate legal position in the musician community.

And, finally, I have a big picture question for you. Piracy is a big issue. On one side we’ve got the RIAA and their very heavy-handed legal strategy of going after "significant infringers". On the other side we’ve got a lot of people out there who justify their use of peer to peer services because they think that CDs are overpriced, that major labels are ripping off artists, that radio just plays pabulum and it’s a place to discover and share new music. And third is the economic reality that retail sales are down 15% this quarter AGAIN, and I read that 1000 retail stores have closed recently. You’ve been in the space a long time – what do you see as the best possible way to fix this?

I should start with a story to put this in perspective. A few years ago I gave a deposition in the Napster case. At that time, one out of every 20 orders that CD Baby got came from Napster, along the lines of "a friend told me I’d like the band, I went to Napster to hear it, I love it, send me three copies." At its core, Napster wasn’t hurting real CD sales.

As far as the issues of piracy goes, I really like what Steve Jobs said – "you can never really stop the pirates, but let’s keep the honest people honest." It seems like most people are willing to pay for something that they like. We just need to make the system a really easy way to buy what they want for 99 cents. It comes down to ease. There will always be people ready to screw the system, but if there are enough roadblocks to steal it, I think easy wins over hard, even if it has a price tag on it.

Thanks Derek, and good luck with your new side project.

Visit CD Baby online for more information.

Other interviews you might like:
Online Digital Distribution Alliance

Digital Rights Agency