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.
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.
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.
Editors Note: 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.