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Why Labels Are Sitting on a Time-Bomb of YouTube Lawsuits…

The following guest post comes from Jeff Price, founder of Audiam, a company that is navigating tricky issues related to YouTube placement and monetization.  

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A warning to labels: Based on the way your artist contracts likely read, you may be setting yourselves up to be sued by your artists over YouTube money.

The issue: distributors issuing YouTube synchronization licenses and collecting YouTube synchronization money on behalf of labels are mixing two distinct and separate types of income streams together; distribution money and synchronization money. The distributor is then applying the label/distributor contractual distribution terms, deductions and payments as opposed to the label/artist synchronization contractual terms, deductions and payments.

As labels cannot use the distributor-provided royalty calculation for synchronization money, it creates two big problems.

1) The label must pull apart and redo the entire distributor statement to accurately calculate the synchronization royalty for the artist.

2) If synchronization money is owed to the artist (i.e. the artist has recouped their advance) the label needs to come up with the money as the distributor is withholding the label’s money.

These two problems are occurring as the right of “distribution” and the right of “synchronization” fall under different contractual legal provisions and copyright uses:

• The right of Distribution for the sound recording

• The right of Distribution and Reproduction for a license to synchronize a sound recording with a moving image

 

Understanding the Issue: The Royalty Rate From The Sale of Pre-Recorded Music Vs. The Royalty Rate from Synchronization Licensing

In most traditional label recording contracts there are two royalty rates for the artist:

1) A royalty from the money made from the sale of pre-recorded music; for example, the sale of a CD or a download.

2) A royalty from the money made from the synchronization license of the music to a third party; for example, the license of a master recording allowing it to be “synchronized” with a moving image like a movie, TV show, commercial, YouTube video etc.

The percentages that are paid out to the artist by the label for these two different royalties are dramatically different.

For the sale of the music on a CD or a download, artists typically receive 12% to 18% of the list price.

For the license of a master recording allowing it to be “synchronized” with a moving image like a movie, TV show, commercial, YouTube video etc., the artist typically receives 50% of the payment.

In both cases, the money gets paid to the artist only if the artist has recouped any advances paid to the artist by the label.

 

The Royalty Rate From The Sale of Pre-Recorded Music

Money calculated and paid to the artist by the label from the sale of pre-recorded music works as follows, and applies only to the sale of pre-recorded music — not to synchronization income.

The artist signs a deal with a label stating the label will pay (on average) between 12% to 18% of the list price of the pre-recorded music.

The label signs a contract with a distributor to have the distributor place the label’s music onto the shelves of the digital and physical music stores.

In the physical world (yes, it still exists), the stores order CDs from the distributor at a wholesale price, mark the CDs up and pay the distributor the wholesale price for the CDs they sell.

In the digital world, a song is downloaded and the distributor collects the money from the download.

In return for this service the distributor takes a percentage of the money it collects. This percentage is called a “Distribution Fee” and is usually somewhere between 17% to 30% of what is paid to the distributor.

In addition, every CD shipped out by the distributor to a store can be returned by the store to the distributor for a credit against future purchases (Returns are a moot point in the digital world). Because of the returns, there is a provision in the label/distributor agreement called a “Return Reserve”.

The “Return Reserve” allows the distributor to take its “Distribution Fee” and then pay the record label 70% to 80% of the money it collects. The other 20% to 30% of the money is paid to the label in equal parts every 90 days over the next 12 months. This “reserve” protects the distributor from overpaying the label for CDs that are returned to the distributor for a credit. (This obviously does not happen with digital download sales).

 

The Royalty Rate from Synchronization Licensing

Money paid to the artist by the label from the license of pre-recorded music to be synchronized with a moving image usually works as follows.

Traditionally, the entity that wants to license the music to “synchronize” with a moving image (like a TV show, film etc) pays a flat up front fee directly to the label. This fee is usually split 50% for the artist and 50% for the label. The artist only gets paid their 50% if the they have recouped any label advances.

That’s it. No return reserves etc.

 

YouTube Money is Synchronization Licensing Money, NOT Pre-Recorded Physical, Digital or Stream Money

In order for music to be legally used in a YouTube video, there must be a synchronization license granted from the label to YouTube as the music is being “synchronized” with a moving image, in this case a YouTube video. This even applies if it’s just a static image of an album cover.

The problem is that some distributors are issuing synchronization licenses on behalf of labels and collecting the synchronization money from YouTube. The distributors treat the synchronization income as distribution income and apply the distribution expenses and deductions to the synchronization income described above. This is not the right approach. For instance, if the TV show Mad Men wants to license a song, it calls, negotiates and pays the record label (and music publisher). The distributor is not involved nor does it receive or touch any of this money.

In the same way a label does not let a distributor take any revenue or make deductions from a Mad Men synchronization license, the label cannot let the distributor do so with revenue from a YouTube income either. Thus the problem.

 

The Legal Liability Distributors May Be Creating for Labels

Because labels are not contractually allowed to deduct distribution fees, returns and other expenses from the artist’s synchronization money, the label must go through the extremely difficult task of reformatting and recalculating the entire monthly statement received from the distributor in regards to YouTube revenue. (For those of you who have not see a YouTube statement, they literally can go on for millions of lines each month at a song level. Now add this on top of all the other itemized sales information from the distributor for downloads, streams and physical sales as well as the itemized expenses across all releases by a label)

To redo the statements each month, the label must:

1) Manually identify and separate the YouTube synchronization money from all the other money and expenses

2) Add back in the “Distribution Fee”

3) Calculate and add back in the “Return Reserve” (with no distribution fee)

4) Isolate and remove all the other non-related expenses the distributor fronted and deducted (manufacturing, advertising, returns, return processing, shipping, etc.)

Once the royalty is accurately calculated it, if the artist is owed money, the label has to come up with the cash as the distributor did not pay all the synchronization money to the label.

This creates the legal liability as the artist can sue the label if the label does not:

• Accurately calculate royalties

• Credit and/or pay the artist (if they are recouped) what they are owed.

This is exactly what caused Eminem to sue Universal and a recent artist class action lawsuit against Warner Music, which Warner has just offered to settle. Although these cases were not exactly the same scenario as the topic of this article, they are absolutely about the label not calculating the appropriate royalty rate on digital licensing income, and are thus worth noting.

 

The Solution:

First, labels should check their existing distribution agreements to learn if they granted the explicit and specific right to synchronization to the distributor for YouTube. If not, the label is within its right to demand 100% of any YouTube money the distributor may have collected along with the YouTube provided accounting.

Next, the easiest and most obvious solution is to isolate the two income streams so that distribution expenses and delays in payment are not applied to synchronization money. Labels can do this by entering into their own direct licensing agreement with YouTube or using a company like Audiam.

In both cases, the label will get clear and accurate accounting for their YouTube synchronization money, and thereby allow it to calculate the right royalties for its artists. In addition, no portion of the money will be subject to distribution fees, return reserves or expenses from other artist releases. This means a label does not need to find a way to fill the financial gap to pay its artists (Full disclosure: Audiam, like SoundExchange (an entity that also works for labels) takes an “administration” fee for its service. Contractually, an administration fee is different than a “distribution fee.”)

If a distributor would like to expand its services into synchronization licensing, it should make certain the label understands the rights grant it is granting to them. In addition, the distributor should provide separate accounting for the synchronization money that is not mixed with inappropriate distribution deductions and expenses.

If not, the distributor could be setting up the label to get sued by the artists that feed them both.

 

Image: echiner1@flickr, licensed and adapted under Creative Commons Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).

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Comments (21)
  1. Chris H

    The Solution? using a company like Audiam…….Natch.

    I wouldn’t have a problem with these things, if you didn’t attach the word “article” to them. Ad, sure….


    Reply
    1. Mike Corcoran

      Sorry, Chris. I found this post to be pretty informative, actually.

      Except for one part. Enimem was suing Univeral because he wanted download sales to be treated as licensing, where the royalty is paid at the higher rate, the 50/50 split. So you would disagree with Eminem and agree with Universal, that downloads are sales, not licenses, and therefore subject to the normal royalty of 12%-18% of retail.

      Either way I think it’s clear, if you’re an indie artist and own your own recordings, you need to check with your digital distributor to make sure you’re getting paid the correct royalty rate (50/50) for YouTube streams. If you’re getting the digital download rate from your distributor, you’ve left a lot of money on the table, and you’ve got a strong claim to make against your distributor.


      Reply
      1. Chris H

        Not saying it wasn’t infomative, timely, all that….just think it should be written by an source not involved in the “solution”. Just a personal preference I suppose.


        Reply
      2. JTVDigital

        With the exception that nowadays, most digital distributors pay between 75 and 100% royalties…so in that case it is better to get a “sale” that a “sync fee”…!


        Reply
    2. Matt B.

      Agreed. Anyone that pushes an agenda this hard and uses scare tactics is immediately suspect.


      Reply
  2. JTVDigital

    Thanks Jeff, this is interesting, clear and informative.
    This is the theory / how things should work in an ideal world.
    Now please give numbers, examples, concrete stuff to help people understand what the consequence is of distributors treating YouTube revenues as standard sales royalties.
    Thanks!

    Jeremie Varengo – CEO
    JTV Digital


    Reply
  3. Joe Blow

    from what i’ve seen, nearly all artist with major label deals receive 50% of streaming revenue (read: any type of digital distribution where a song is not outright purchased). therefore, revenue from youtube is treated the same as sync revenue. the only gray area in my opinion is whether an artist is due 50% of the “at source” revenue or 50% of their record label’s share.


    Reply
    1. JTVDigital

      This is the consequence of the Eminem case.


      Reply
    2. jeff price

      this is not correct. In some cases it works as you describe in most cases it does not. Nevertheless, Synch money is not interactive streaming money. They fall under different categories

      Again, best to check all agreements to assure you are being accurately accounted to

      Jeff


      Reply
  4. Anonymous

    yay death to the major labels and death to YouTube. Yay!


    Reply
    1. TuneHunter

      Dot on for labels!
      “The owners” with no respect to own property – collecting breadcrumbs from advertising smoke.
      I would not x YouTube
      We just need to show Google that monetizing media is 10x bigger than income from advertising stink around it.


      Reply
  5. Rick Rosenberg

    Very interesting…..I think most forward thinking independent labels not only need to look at how they are being paid by their distributors for youtube revenue, but what their overall relationship is with their distributor as to how it relates to youtube and really all streaming entities. Not saying that a traditional distributor (digital) doesn’t have its purpose between the label/youtube…..but understanding that purpose and it’s value is key.


    Reply
    1. Jack R

      While perhaps bias “news,” this is a very informative piece and in my opinion something that any artist needs to do their due diligence on. If your particular label/distribution agreement is worded with the old standard royalty language that Jeff referenced, you have a very, very strong claim. Next, you should read your contract’s audit provision to understand how to start the process to recoup your contractual $$$.


      Reply
  6. Brownman

    This may be informative to some but it’s kinda incorrect. For starters, distros only hold reserves on physical sales, not digital. If they are doing so on digital (never seen) – you’ve got a terrible deal. Secondly, most royalty recording contracts, haven’t defined streaming in the past – since US royalty rates go off of the list price (suggested price to the retailer) which you don’t have for streaming, almost everyone splits the revenue received with the artist. And anyway, as for many indie contracts – they’re generally 50-50 – so this whole point is moot.
    As for the distro fee element of this, not sure if you’re aware but there are millions of placement agencies that typically charge 15%-20% off of the gross amount (incl publishing) for the license – in effect, being similar to a distribution fee, so there isn’t an issue here. Plus most contracts say that “we will pay 50% for the master license income that we receive”. Hope this clears this up.


    Reply
    1. jeff price

      what you state is not correct. Please be careful of posting wrong information. It hurts artists.

      Many distribution contracts do include these provisions and cross-mixing of physical and digital money. If you are fortunate enough to have a label where the distributor does not mix the two together, pays 100% w/o a distribution fee and does not return reserve than you are not in a problematic situation.

      As per the article CHECK your agreements, LEARN the info. To just state what is described is wrong is not only incorrect but can hurt things.

      Jeff


      Reply
      1. Brownman

        Not correct?? Read what I wrote again. You have a) a distributor and b) a record label. two separate entities. The artist has a contract with a record label. And a record label has a contract with a distributor. If the distributor is in essence placing & administering the record label’s music on YouTube, which they have been allowed to, then they can / will charge a fee. Similar to a placement / music supervision will charge a record label for placing their catalog in an ad / movie.

        Every distribution agreement with a record label, and I’ve seen plenty, have different distro fees, payment terms & reserve clauses for digital & physical sales. They only cross-collaterize them, but then that’s always been the label’s problem.

        The contract that the record label has with the artist is where you specify your terms on streaming, licensing, downloads & physical sales. That’s where the 50-50 on net monies comes in as I mentioned in my earlier point.
        It’s unfortunate that you didn’t understand what I posted above as you’re going to continue to be as delusional as you were when you wrote this piece. No one (atleast me) is doubting how helpful your service is for direct deals for artists (like your tunecore) but it doesn’t behoove you to make incorrect assumptions such as these.


        Reply
        1. jeff price

          I now its exciting for you challenge others, but what is most important is the right info get out

          What you wrote is not correct.

          For example, you wrote this: “For starters, distros only hold reserves on physical sales, not digital.”

          This is not correct. I too have seen many distribution contracts and had one myself for my label that I ran for 17 years. I recently met with a number of large indie labels and others and reviewed their distribution agreements where there was a distribution fee and return reserve being withheld on digital income.

          The you state this: “Secondly, most royalty recording contracts, haven’t defined streaming in the past ”

          This may be the case, but YouTube is not “streaming” income. YouTube is Synchronization income. As an example, you are NOT paid mechanical royalties from a YouTube stream but you are from a Spotify stream. The two are different. That, again, is the point of the article.

          Then you state this:” And anyway, as for many indie contracts – they’re generally 50-50 – so this whole point is moot.”

          You are wrong. In some cases it may be a 50/50 split. That said you do realize Beggars, SubPop, Merge etc are “indie labels”, Look at how many Indie labels are members of A2IM. Not all deals are 50/50 Net profit split.

          Then you state this: “As for the distro fee element of this, not sure if you’re aware but there are millions of placement agencies that typically charge 15%-20% off of the gross amount (incl publishing) for the license – in effect, being similar to a distribution fee, so there isn’t an issue here.”

          You are incorrect again. Although the end result is the same (i.e. a 3rd party taking a piece of the money, the fact that its a “distribution fee” is the problem. There is a legal issue with a distribution fee being taken. There is a legal definition to that word. It opens the label to liability.

          Then you say this:”Plus most contracts say that “we will pay 50% for the master license income that we receive”. Hope this clears this up.”

          YES! We agree on that. And thats the point of the article as its that provision that is not being followed

          Now back to smoking my hookah…

          Jeff


          Reply
  7. Clara J

    Oh great. Another sponsored post from Jeff Price on audiammusicnews.com.

    Realistically, the true solution for these labels (which they’re doing more and more, frankly), is to enter into a direct agreement with YouTube, and get their own CMS access. The same CMS access which you (Audiam) use to administer the rights on behalf of your client (for a fee, of course!).

    Next, they should get their employees certified in DRM by YouTube. Then they’ll have the knowledge base necessary to ensure that when they upload their artists’ assets into their CMS for Content ID-related purposes, they’re attributing any corresponding publishing rights to the proper collection agencies, and divvying any territorial splits appropriately.

    And hey! Look! No 25% “administration fee” to Audiam! A win-win!


    Reply
    1. jeff price

      Labels, artists, publishers should all have access. There should be no gatekeepers. This forces all entities, Audiam included, to truly bring something of value to their customer. Its like your taxes, you can do them yourself but you hire and pays someone else to do it for you.

      That said, there is much more to YouTube then access to content ID. Thus the reason for Audiam’s existence. I find the best customers we have are those that did it themselves first. Only after that experience do they hire us to work for them.

      Jeff


      Reply
  8. hippydog

    OMG, I just had to make a post to bring up a little something i noticed Jeff slipped in..
    This people is what i call “spin doctoring”..

    Quote “In most traditional label recording contracts there are two royalty rates for the artist:
    1) A royalty from the money made from the sale of pre-recorded music; for example, the sale of a CD or a download.
    2) A royalty from the money made from the synchronization license of the music to a third party; for example, the license of a master recording allowing it to be “synchronized” with a moving image like a movie, TV show, commercial, YouTube video etc.”

    YouTube video etc.
    A youtube video is NOT on the same level as a movie, or tv show or commercial..
    in many cases the music is incidental.. or the whole song isnt used (which changes the rate)
    which leads to

    Quote “YouTube Money is Synchronization Licensing Money, NOT Pre-Recorded Physical, Digital or Stream Money”

    not streaming? thats interesting, because I think thats exactly what its designated as..
    or can you provide a citation saying otherwise?
    its also VERY dangerous ground, as far as I know the “syncro VS Streaming” has not been heavily tested in court (besides the Prince incident) and I dont think ANY label wants it to be tested.. (for obvious reasons, as the whole VCR thing could easily happen again)


    Reply
    1. jeff price

      Yes, a YouTube video is a audio visual piece of media. It “synchronizes” a moving image to a composition and to a sound recording

      The license grant that YouTube gets states “SYNCHRONIZATION”

      Its part of the six copyrights you get when you make a song tangible

      The rights of

      Distribution
      Reproduction
      Public Display
      Digital Transmission
      Derivatives
      Public Performance

      The location as to where the video shows is irrelevant. For example a video showing on TV versus it showing on the Internet

      Take Netflix as an example. It streams on the Net just a YouTube video does. The difference being that the movies in Netflix DID get the licenses necessary synchronization licenses whereas a person uploading a video to YouTube most likely did not

      The framing you have is dangerous as its not correct and is the exact point of the article.

      YouTube is not an “interactive” streaming digital music service like Spotify, it contains a visual element as well. This visual element has it fall under a different legal category

      Further proof is found that YoUTube does NOT pay mechanical royalties for the streams, it pays synchornization money whereas Spotify pays mechanical royalties but NOT synchronization royalties

      Jeff


      Reply

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