Foreign
Licensing of Records:
Licensing
Your Music Overseas
by Bart Day - Entertainment Attorney, September 2002
Back to The
Academy
Legal Ease
If you are an artist or indie label, one way to significantly expand your
universe is to license your master recordings to record companies outside the
United States.
There are various advantages of doing so. Aside from the
obvious advantage of generating additional record sales, there is also the
advantage of creating a relationship with a record company outside the United
States who will have various music business relationships in that foreign
country and who can connect you up with booking agencies, venues, festival
organizers, music publishers, etc. in that territory. This may enable you to do
touring and to build an audience in those countries that otherwise might not be
practical to try to do.
THE BASICS OF LICENSING
When you enter into a music licensing agreement with a
foreign record company, you are in essence authorizing them to duplicate and
sell copies of existing masters, in exchange for paying you a royalty for each
record sold. The label is responsible for paying all costs, such as the costs of
manufacturing, promotion, and advertising, and it is up to the foreign label to
manufacture CDs and to get those CDs distributed in their territory. One alternative to a foreign licensing arrangement is to
manufacture your CDs in the United States yourself, then export them to
distributors in other counties. However, one big disadvantage in going the
“export” route, at least if you do it legally, is that for most foreign
countries, you will usually be paying a government-imposed tariff in those
countries of 20% to 40%. Also, a distributor gets a much smaller piece of the
pie, and generally is not going to do the level of proactive marketing and
promotion that will need to be done to break you successfully into foreign
markets.
As a result of these various factors and others, the best
alternative for the vast majority of U.S. indie artists and labels trying to
break into foreign countries is going to be a licensing arrangement with labels
based in those countries, rather than a distribution agreement in those
countries.
APPROVAL RIGHTS
A
U.S. label that wants to enter into licensing arrangements with one or more
foreign labels must first make sure that it has the rights to do so under the
terms of its recording contracts with its artists. If the label doesn’t already
have such rights, then the label needs to get its artists’ approval before
entering into any such licensing arrangements with foreign
labels.
NEGOTIATING
CLOUT
As a general rule, it is going to be much easier for a U.S.
label or artist to get a foreign licensing deal, and especially a deal on terms
that are quite favorable to the U.S. label or artist, if its records are already
selling well in the U.S. and the artists already have a significant reputation
in the U.S.
BASIC DEAL
POINTS
The basic deal points of the typical music licensing
agreement are as follows:
1. Scope of License. The license may
cover only one or a few specified recordings, or may cover your entire catalog.
It is sometimes a good idea to start out with less than your entire catalog, so
that you can “test drive” the relationship first, before committing your entire
catalog.
2. Territory. if you are licensing
masters to indie foreign labels, you will normally be licensing only for a
particular county or for a particular group of countries. Often the agreement
will be for so-called “bundled countries,” such as Benelux (standing for
Belgium, the Netherlands and Luxembourg) and GAS (Germany, Austria, and
Switzerland). On the other hand, if you were entering into a foreign licensing
agreement with one of the major worldwide labels, such as WEA or BMG, you might
be licensing your masters to one company for all countries outside the
United States in one fell swoop. As a practical matter, though, a deal with one
of the “majors” is normally not available to a U.S. artist or label unless you
already have major sales in the U.S.
Incidentally, if the territory is defined in the licensing
agreement as the “European Union” or similar terminology, the territory will in
effect change over time as more countries join the European Union.
3. Term. Typically the term of the
agreement will be for five years, though sometimes such agreements are for three
years and sometimes for seven years. Generally, the smaller the advance, the
less of a justification there is for entering into a longer term.
Normally, there is also a “sell off” period added to the end
of the term of the agreement, which allows the label to sell off any existing
inventory for an additional six months to a year after the end of the
term. If there is a “sell off” period included in the agreement, it is wise to
add a clause prohibiting the label from manufacturing more copies of a CD during
the original three, five or seven year term than they can reasonably expect to
sell during that three, five or seven year term.
A practical tip: As soon as the licensing agreement expires,
it is a very good idea to send the label a “Notice of Termination” even if the
contract doesn’t require it. (It usually doesn’t.) Otherwise, there is a
significant risk that the foreign label will, innocently or not so innocently,
continue selling your records. The risk of that happening can be significantly
reduced by sending them a “Notice of Termination.” Be sure to send any such
notice in such a way that you have proof that it was actually
received.
4. Exclusivity. Normally the agreement
is “exclusive,” in which case you cannot later authorize any other company in
that territory to sell your records during the term of the licensing agreement.
5. Royalty Rate. Unlike the United
States, where royalty rates are usually based on the retail price of
records, the royalty rates in most other countries are based on some price that
is somewhere between the wholesale price and the retail price. For example, in
some countries the price is based on the “PPD” (“Published Price to Dealer”)
price. In other countries, like France, they often use the so-called “BIEM-IFPI”
rate.
Typically, the royalty rate is in the 15% to 20% range (and
sometimes more) – which is higher than the typical rate in the U.S. – because
the foreign royalty rate is not based on the retail price as in the U.S.,
but instead (as mentioned above) on a price that is significantly lower. Hence,
in order for you to come out roughly the same in terms of dollars and cents, the
foreign royalty rate has to be higher.
In any event, here are a few random tips about evaluating the
royalty rate being offered:
A. The best way to evaluate the royalty rate is to run the
royalty calculations and figure out what you will be earning for each record in
dollars and cents, rather than getting fixated on percentage rates etc.
In order to do any useful number crunching, you will need to find out the exact
price that the label is currently using, then convert that amount to U.S.
dollars, and then do your royalty calculations based on the royalty terms
contained in the proposed licensing agreement.
B.
There is often a difference
from one county to the next in regards to what are considered acceptable royalty
provisions. What is customary in one country is often not customary in another
country. So, if you are negotiating royalty provisions for particular foreign
countries, you need to know what is customary in that country. For example, in
the U.S., royalties are typically not paid on promotional free goods that the
record company gives away, but in some other countries that is not the
case.
C. If you’re comparing offers from two or more companies, you
need to investigate and compare the reputation and financial stability of each
company. You can sometimes end up doing much better financially with an average
deal from a relatively honest company than you will do with a great royalty rate
from a crooked or financially borderline company.
D. If the licensing agreement contains any definitions of,
for example, the “PPD” price, read the fine print very carefully.
6. Advances. The amount of the advance
that is paid, if any, will depend on the foreign label’s forecast of how many
records can be sold in their territory. Advances vary wildly and can be anywhere
between $500 and $50,000 (but sometimes higher and sometimes lower).
In some cases, it will make sense for you to enter into the
licensing agreement even if the advance is minimal, if there is a good chance
that your relationship with the foreign record company will significantly help
you to get established in their territory. By the same token, because of the
difficulty of auditing foreign countries and trying to collect money from
foreign companies, often times you have to assume that the advance is the only
money that you will ever see from the deal.
By the way, the advance should be described in the contract
as being non-refundable (i.e., you won’t have to ever pay it back). Also, the
advance is normally deemed “recoupable” (i.e., the label can reimburse itself
for the advance from your future royalties), so if your advance is $5,000, and
if the total royalties end up being $15,000, the label later will pay you only
$10,000 (i.e., the $15,000 in royalties minus the $5,000 advance).
7. Release Commitment. You should have a clause in the
licensing agreement requiring the label to release the record by a certain date,
and that if they don’t do so, you have a right to terminate the agreement.
For masters that already exist at the time of the licensing
agreement, you will normally want to have a fixed calendar date by which time
the record has to be released. For records not yet recorded, but that will be
recorded and released during the term of the licensing agreement, the release
commitment is usually 90–120 days within the date of your delivery of the master
to the label.
You want to be careful that the contract language is very
specific and precise, and you will also want to be sure to ship the masters in
such a way that you will later be able to prove the exact date of delivery if
necessary.
8. Sharing in Other Types of Income.
Sometimes there is potential income from sources other than record sales.
For example, a U.K. ad agency might want to use a track in a film, and so the
licensing agreement needs to deal with this scenario. If at all possible, have
the contract provide that the rights to enter into those kinds of deals stays
with you and are outside the scope of the licensing agreement. By the same token
it usually makes sense to give the label the piece of any such deal that they
find for you, so that they have a motivation to make such deals happen.
Sometimes the contract will say that the foreign label has
the rights to enter into such deals for your masters, but only for
territory/countries covered by the agreement, and that in return, you will
receive a share of the income from such deals.
The bottom line here: The main thing you absolutely want to
avoid here is a contract that gives a foreign label the right to enter into such
deals, but doesn’t spell out your rights to receive a certain specified share of
the income from such deals.
9. Payment. Payments are usually made
semi-annually. The agreement should provide for the royalties to be wired
to your account at the label’s expense (as opposed to the label mailing you
a check, which can cause very long delays in your actual receipt of the money
and the clearing of the check).
10. Foreign Taxes. You will also
normally want a clause requiring the foreign label to help you file the
necessary paperwork with the foreign government(s) involved, so that the foreign
label will not have to withhold foreign taxes from the royalties that are
otherwise payable to you. If that is not possible, you will at the very least
want some arrangements whereby the foreign label gives you a formal statement at
the end of each year as to the amount of foreign taxes that were withheld that
year, so that you can claim the appropriate tax credits on your United States
tax returns.
11. Audits. There should be a clause
allowing you to audit the foreign label’s business records, and providing that
if there is a discrepancy of more than 10%, they must pay your audit costs.
However, as mentioned above, it very likely will not be practical for you to
audit the foreign label’s business records, but you want to have that option if
at all possible.
MECHANICAL ROYALTIES FOR FOREIGN
SALES
Mechanical royalties –- i.e., the royalties that record
companies pay to music publishers/songwriters based on how many records are sold
–- are handled differently almost everywhere outside the U.S. than they are
handled in the U.S.
The details are really too complex to cover well here, but
the main thing to remember is this: If you are an artist who is also a
songwriter, or if you are a label that also operates as a music publisher, and
if your material is on records being sold outside the U.S. and Canada, and if
you are not represented by a worldwide music publisher and have not entered into
sub-publishing agreements with foreign publishers, then you need to take the
necessary steps to make sure that you receive the foreign mechanical royalties
that you are due.
HOW TO FIND MUSIC
LICENSING OPPORTUNITIES
There are a various ways to find music licensing
opportunities, for example:
1. Researching Foreign Labels. You can
obtain the necessary contact information from such directories as the
Billboard International Buyer's Guide. (Check with the “Reference
Librarian” at your local library to see if they might have a copy on hand that
you can use, and if not, ask if they can borrow a copy for you through an
inter-library loan from another library.)
Also, some Internet searching can be very helpful in locating
foreign labels that are appropriate for you.
Before submitting material
to a foreign label, it’s usually a good idea to send them a professional and
non-hypey e-mail first, just to find out whether they are even interested in
considering your material.
2. Tip Sheets. Tips sheets such as “New
On The Charts” allow subscribers (and sometimes non-subscribers) to post a
listing of masters that they have available for licensing.
3. Referrals. Check with any
established artists and American labels that you know of, in case you think they
might be able to turn you on to appropriate foreign labels.
4. MIDEM. There is a large
international music business conference in Cannes, France every year (in late
January), called “MIDEM,” where people negotiate music licensing deals. The
practical side of it is that unless you are a well financed artist or label, it
won’t be affordable to attend that conference. One alternative is to buy the
MIDEM conference directory, which you can use as another resource directory to
locate appropriate labels.
Incidentally, there are occasionally people who will
advertise that, for a cash fee, they will shop your material at the MIDEM
conference. Be very careful with any such arrangements and check those people
and their track records out thoroughly. You obviously don’t want to find out
after the fact that you have just financed someone’s vacation in the south of
France and have nothing to show for it.
-----
Bart Day is an entertainment attorney
in private practice and outside music counsel for Vivendi Universal Games, the
computer games unit of Universal Studios. He is also VP of Business Affairs for
Media Creature Music, a Los Angeles music publisher and catalog administration
company.
Bart is the co-author of a chapter
(entitled “Contracts and Relationships between Major Labels and Independent
Labels”) in The Musician’s Business and Legal Guide, a book compiled by the
Beverly Hills Bar Association and published by Prentice Hall Publishing (New
York). From 1998 to 2002, he was an elected member of the Board of Governors of
the Pacific NW Chapter of the Recording Academy (presenter of the Grammy
Awards).
The reader is cautioned to seek the advice
of the reader's own attorney concerning the applicability of the general
principles discussed above to the reader's own activities.
Contact information for Bart Day:
1435 NW 19th Avenue
Portland, Oregon 972049
E-mail: bart@dayandkoch.com
Telephone: 503-224-4900
NOTICE TO MUSIC ACADEMY WEBSITE VISITORS: The above information is offered
for general informational purposes only, and not for the purpose of providing legal advice. You are cautioned to
seek the advice of your own attorney concerning the applicability of the general principles discussed above to
your own particular activities.
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