Background

Label Contracts

Why do Artists Sign With Labels?

Traditionally, recording artists have signed with record labels. One of the most basic principles of US copyright law is the idea that someone who creates an original work should own the copyright to that work—unless he created that work as an employee. For sound recordings, anyone involved in the process of creation—the songwriter, the vocalists, the band members, the sound engineer, the producer—is a potential joint copyright owner. Complex issues surrounding ownership are usually settled through contracts. If an artist is signed to a major label, that artist usually transfers his copyrights to the label, in exchange for royalty payments from the sale of his music. The label produces, distributes and often promotes the artist's recording. However, if the artist in question is also a songwriter, he will usually retain his rights to the underlying songs, which allows him to earn publishing royalties from these songs.

Problems with Label Contracts

What makes label contracts, especially major label contracts, so unfavorable for artists is their one-sided terms. While a full analysis of major label contract structure is outside of the scope of this website, we will describe a few of these terms.

• Unfair Deductions
  First, labels can make unfair deductions from the royalty rates that are promised to artists. These deductions include charges that recoup the costs incurred for packaging expenses as well as exceptions for new media. Such deductions often end up reducing the total amount of the royalty to half of what was promised.

• Reduce Other Royalties
  Second, if an artist writes his own songs, he is entitled to a mechanical royalty—a set fee for every copy of the song distributed. Most major label contracts include clauses that require artists to accept a reduced mechanical royalty rate.

• One Sided Renewals
  Third, labels retain the option of renewing contracts as many times as they like, but artists do not retain this same right. This often results in artists being tied to a label for a prolonged period of time, during which they continue to lose their royalties to the label.

• Loss of Control
  While all of the contract terms mentioned above are unfair to artists, the most significant problem with major label contracts is the fact that an artist signing a major label contract loses control over his own work. When an artist transfers his copyrights over to a label, he loses his right to license that work to any other party— even if the label refuses to promote or distribute the artist’s work. Unfortunately, labels that choose not to press and distribute records for various reasons are not rare (the problem of out-of-print sound recordings is addressed in a separate section).

In contrast to the majors, independent label contracts are generally more artist-friendly, although this is not always the case. Additionally, artists are paid smaller advances by indies than they are by majors. As a result, indie artists tend to repay their advance and recover their royalties faster than artists on major labels. Finally, many independent labels offer different types of contracts, not all of which require that an artist give up his copyrights. This ultimately allows artists to exercise more control over their work.

Radio Play and Payola

Aside from album sales, radio play was the most prominent traditional means of getting music heard. However, radio suffers from its own set of problems, among them payola. Adam Marcus, in his paper explaining payola, notes that the term is a contraction of the words “pay” and “Victrola,” an early RCA record player (most of the information in this section is drawn from Marcus’ paper). The term payola is used to describe the process of labels or artists paying money to DJs or other radio station employees in exchange for radio airplay. Payola unfairly promotes music regardless of its quality or merit and has the potential to shut out independent and upcoming artists from the radio.

The phenomenon of payola first came to public attention in the 1950s. In the 1960s, federal laws were passed prohibiting direct payment in exchange for radio play unless the fact of the payment was announced over the air. In the mid 1990s, the nature of payola changed, with a middleman called an “independent promoter” or “indie promoter” being paid instead of a station employee.

In 2003, an investigation by then New York State Attorney General Elliot Spitzer revealed that the major labels and four large radio networks were practicing payola on a massive scale. In the settlement that followed, the major labels paid a total of $30.1 million in fines to the New York Attorney General. In addition, the labels entered into a series of consent decrees that sought to eliminate the practice by defining the kinds of compensation that could flow from labels to radio stations.

The Attorney General forwarded the evidence he collected to the FCC so that the agency could investigate the radio stations’ involvement. In 2007, four radio networks—Clear Channel, Entercom, Citadel and CBS—entered into consent decrees with the FCC and paid $12.5 million in fines. Along with the settlement, these radio groups made agreements with the independent music community as well, outlining certain best practices. These included an understanding that radio stations would not restrict access to program directors only to those who paid for that access and that radio stations would not have exclusive relationships with single outside promotion companies.

Finally, the radio groups also agreed to dedicate 4,200 hours of programming to independent music and to feature “the recordings of local, regional and unsigned artists and artists affiliated with independent labels.” While this agreement may seem like a good first step, Marcus lays out several concerns. These include the lack of a time limit within which the 4,200 hour condition should be fulfilled. Does this mean 4,200 hours in a week, in a month or in a year? Also, the radio groups get to decide what stations will play this music and thus, could choose to meet this condition on smaller stations in smaller markets. Last but not the least, in the terms of the agreement, the terms “independent label,” “local” and “regional” are not defined. Thus, a “local artist” could also be a major label recording artist.

Alternative Methods of Distribution

So how can artists get away from these traditional models of distribution? A number of alternatives allow artists to be their own publishers. Others are more promotional in nature and may not result in direct remuneration. These new methods are still evolving and will present exciting possibilities for professional musicians in the future.

Self-Promotion and Distribution

Promotional Tools

Websites such as MySpace, YouTube and Last.fm are good examples of communities where artists can easily self-promote. In addition, P2P technology can be very useful for promoting your work. For instance, releasing a few tracks "into the wild" on P2P networks might act as a promotion for those who might later buy an album, or additional tracks.

Online stores

Retail outlets such as iTunes, eMusic, CD Baby and Audio Lunchbox allow unsigned artists and independent labels to sell their music online—in some cases, alongside music from major label artists. For artists and labels that find it difficult to self-distribute, services such as Orchard, MediaNet, TuneCore and the Independent Online Distribution Alliance (IODA) act as intermediaries connecting artists with retail outlets.

Customers Set the Price

In between the promotional services and the retail services are services such as Magnatune and Jamendo, both of which offer music for free and allow consumers to pay whatever they want (a la the "Radiohead model"). Both services offer music under Creative Commons licenses. Magnatune allows a customer to stream music for free, while charging between $5 and $18 for album downloads. This sum is split 50/50 with the artist. Jamendo, meanwhile, offers free streaming over BitTorrent networks like eDonkey. Payment is collected via a “tip jar” on each artist’s page and is divided between Jamendo and the artist. Jamendo also receives money from advertising, which it also shares with the artists.

P2P Distribution - How Can Artists be Compensated?

The RIAA’s lawsuits against Napster, Grokster and other file-sharing services and individual users have made P2P networks notorious as a means copyright infringement. However, P2P can be a useful promotional tool. In the long term, the challenge lies in developing a means for compensating artists whose music is distributed online without permission using P2P software. The Berkman Center at Harvard University and the Electronic Frontier Foundation (EFF) have developed proposals that seek to address this issue.

Both proposals posit that a collective licensing scheme could be developed that would legitimize P2P distribution. Such a system would provide a blanket license, allowing consumers to download and share as much music as they want for a flat fee. This fee could be paid either directly or through an intermediary—for example, an ISP. The money collected as a result of this license would be distributed to copyright owners based on the popularity of their music. The EFF suggests that participation in this program should provide users protection from lawsuits.

While the EFF suggests that the music industry should create the collective that oversees this license, the Berkman Center proposes to create its own collective licensing body. This body would take the form of a cooperative of both copyright owners and users. This way, the fees paid by consumers would be kept reasonable.

Creative Commons Licenses

If you're interested in making tracks available for people to share while protecting your copyrights, Creative Commons provides a convenient set of licensing tools. Creative Commons, an organization founded by a number of legal scholars, has developed a series of licenses that allow copyright holders to retain control over their work, while simultaneously making it available under terms more favorable than current copyright law allows. With a Creative Commons license, the copyright holder can choose to make his work available under either a single license or a combination of licenses. For example, a copyright holder can permit use of the work only if it is used for noncommercial purposes and if the work is attributed to him, while allowing users to make derivative works, like mashups and remixes. Or, he could make it available for use in derivative works but require that these derivative works be made available under the same terms as the original.

Examples of creative commons licenses:

• Attribution – Others may copy, distribute, display, and perform your work, and create derivative works based on your original but must give you credit.

• Noncommercial – Others may copy, distribute, display and perform your work, and create derivative works of your original, but only for noncommercial purposes.

• No Derivative works – Only exact copies of your work may be made, distributed, displayed, or performed.

• Share Alike – Others may distribute derivatives of your work, but only under a license identical to that which governs your work.

• Public Domain – The copyright owner dedicates all copyrights to the public domain, for the benefit of the public.

Creative Commons hosts a music community site, called ccMixter, featuring remixes licensed under creative commons. The site allows you to listen to, sample, mash up, or interact with music in whatever way you want.

The Importance of Net Neutrality

During the last decade, the Internet has had a far-reaching democratizing effect on the music industry, allowing thousands of musicians to break away from major label contracts and reach their fans directly. In large part, this leveling of the playing field is a direct result of the Internet's openness: the Web allows anyone to send and receive any content using any application. However, this openness, which we currently take for granted, is in danger of being compromised. The principle that stands to ensure this openness is called "network neutrality"—or "net neutrality," for short.

What is Net Neutrality?

The guiding principle of net neutrality is the idea that any company that operates a telecommunications network—for example, telephone and cable companies that sell Internet service—should not play favorites with the content that travels over the network. To borrow an example from the Future of Music Coalition, Sony Music should not be able to cut a deal with Comcast to have myplay.com load faster than cdbaby.com or the iTunes Store. Why? Because if Internet Service Providers (ISPs) were allowed to do this, they, not consumers, would decide what services get delivered at what speeds. It would be all too easy for an ISP to allow a service in which they have a financial/business interest to run faster than one in which they have no vested interest.

The concept of net neutrality originated with the Communications Act, which forbade telephone companies from playing favorites. While this provision originally extended to Internet services, in 2005, the Supreme Court upheld rules changes made by the Federal Communications Commission (FCC), which said that Internet services were no longer covered under these consumer protections.

Why Should Musicians Care?

The importance of net neutrality for professional musicians cannot be overstated. The ability to connect directly with fans has freed many artists from a dependence on record labels. As Future of Music Coalition co-founders Jenny Toomey and Michael Bracy note, a non-neutral network would allow large content providers, such as the RIAA labels, to cut deals with large ISPs that would effectively shut out independent artists. In that sense, a closed Internet would have a lot in common with the current payola-tainted radio market.

Examples of Discrimination

Naysayers argue that there is no imminent danger to the Internet and that net neutrality is a “solution in search of a problem.” However a few examples of discrimination, of which there are several, might help counter this perception.

In 2005, a North Carolina telephone company, Madison River Communications, admitted to blocking its Internet customers from using Internet telephone services that would compete with its traditional phone service. Madison River was fined $15,000 by the FCC, and had to agree not to block Internet telephony, but the agreement doesn't prevent the company from other sorts of blocking.

On September 14, 2005, Verso Technologies Inc. introduced a new product that would allow network operators to “selectively disable undesirable traffic,” such as VoIP (Skype, Vonage, etc.), P2P applications, streaming media and instant messaging. Verso’s CEO, noted that his company's services should be attractive to Internet Service Providers.

On August 4, 2007, AT&T cut out portions of a Pearl Jam concert from a webcast. The segments in question contained speech that was critical of President George W. Bush. AT&T’s explanation was that a junior content manager had mistakenly edited the concert incorrectly. Despite this, the fact of the matter is that AT&T was blocking content it deemed inappropriate even when the law did not require it to do so. If AT&T can choose to block "inappropriate" content at will, then the company can easily do the same to content that competes with other AT&T offerings. If we look at AT&T services like Uverse (an IPTV service), we can easily see how AT&T products compete with existing web content providers (for example, streaming video services like YouTube, Vimeo, Hulu).