berklee college of music music business journalthembj.org/pdfs/april10.pdf · music business...

Music Business JournalVolume 5, Issue 8 April 2010

Berklee College of Music

Songwriters’ Mechanicals Since 1976

www.thembj.org

Inside This Issue

Mission Statement

The Music Business Journal (of the Berklee College of Music) is a student pub-lication that serves as a forum for intellectu-al discussion and research into the various aspects of the music business. The goal is to inform and educate aspiring music pro-fessionals, connect them with the industry, and raise the academic level and interest in-side and outside the Berklee Community.

(Continued on Page 3)

Mechanical collections from sound recordings are one of the key income sources for musicians. In the days when recorded music ruled, and LPs or CDs represented the main cash crop of the music industry, revenues from me-chanicals were a reliable source of receipts for songwriters and their publishers. Songwriters, in particular, knew that, by law, mechanicals had to be paid dutifully by the record labels. Whereas artist royalties on recorded music sales were al-ways subject to the record label breaking even with the artist—and the label’s ‘recoupment’ had to be considered before any payment to the songwriter—mechanicals guaranteed immediate income for the songwriter.

Moreover, mechanicals have always loomed large in the consideration of music creators, for they are one of the most impor-tant rights that the law recognizes for recorded music. From the mid 1980s to the new millen-nium, in many of the most developed countries, songwriters and publishers collected money from mechanicals roughly in the same propor-tion as that they collected money from perfor-mance rights on radio and TV broadcasting, sporting venues, clubs, and restaurants. This has changed since 2001, as recorded music sales have dropped, and the comparable figure is now is $1 of mechanicals for every $2 or even $3 of performance income.

In 2008, the Harry Fox Agency, the organization that administers the bulk of the mechanical royalty collections in the US, valued the market at $397 million. This is the figure that was distributed to music publishers, and roughly half of this was passed on to songwriters. Col-lections are based almost entirely on the applica-tion of the statutory rate of 9.1 cents per song under five-minute-duration (for lengthier songs, the rate is calculated at 1.75 cents a minute; this tends to discourage record labels from recording longer material, because for them the mechani-cal rate is a cost of production). Digital down-loads at iTunes pay the same statutory rate on a 99-cent song. Other mechanical licenses today involve ringtones and interactive streams and limited downloads from subscriptions services. However, the combined revenue to Harry Fox from such activities is still very small.

A Checkered History Since 1976 A ‘new era’ of US mechanical col-lections was truly inaugurated with the Copy-right Act of 1976, at a time when the recorded music business had reached a high point in sales. The rate was then set at 2.75 cents, and it has been periodically revised upwards to take marketplace conditions into account. However, there seems to be some confusion in the existing music business literature about how inflation factors in the determination of the rate, which is key to overall collections.

Without listing any particular au-thor by name, an overall argument could be made to suggest that, depending on the year of the edition of a music business text, the rate is seen as determined by inflation only when it is declared so by the Copyright Arbitration Royalty Tribunal (CARP). The problem is that there have been many years since 1976 when the rate has been revised upwards with no reference to the rate of inflation. In that case, authors will often refer to the upward revision of the rate without reference to inflation.

The question here is whether or not the statutory mechanical rate has really kept up with inflation since 1976. If so, songwrit-ers and their publishers could be said to have obtained fair terms against the record labels (Table, pg. 3).

Inflation, in short, has not been ac-commodated properly. There has been a seri-ous devaluation of the mechanical statutory rate against the Consumer Price Index since 1976. Moreover, the downward trend is steady throughout, suggesting that the periodic up-ward revisions of the mechanical rate –much publicized in the creative music community—are at best cosmetic. The evidence suggests songwriters and their publishers are losing power in the US against the record labels. Perhaps it is the mitigating circumstances of the current reces-sion that justify the sway labels have on CARP (and Congress) today. But in the golden mid 1980s and 1990s, proper artist representation

By Peter Alhadeff and Caz McChrystal

Producing World Toursp. 4

The Business of Music Streamingp. 6

Revisiting Artist Contractsp. 8

Mobile Apps and the Lawp. 9

Recent Booksp. 12 & 14

Table of Contents

Business Articles

Music Mechanicals and Inflation................1Touring with Gerry Barad........................4The Business of Music Streams.................6SXSW....................................................10 Financial News........................................11

Law SectionArtist Contracts..........................................8Mobile Technology....................................9

Book ReviewsMusic Law in the Digital Age...................12Irrational Behavior...................................14

MBJ Editorial

Mission Statement......................................1Editor’s Note..............................................2Upcoming Topics.................................... 16

Sponsorship

Berklee Media........................................ 15

Editor’s Note

Volume 5, Issue 8 Music Business Journal

As we emerge from the depths of winter, I hope you enjoy this latest issue of the MBJ. I continue to be amazed at the amount of interest we are able to garner both from students and alumni, always submitting articles, and our readership--which continues to expand outside of the Berklee campus through our renewed internet pres-ence.

Our cover article features Caz McCrystal, a Berklee alumnus and attorney, and Peter Alhadeff, our own fac-ulty advisor. It tracks the mechanical rate since the Copyright Act of 1976 and uses economic analysis to suggest why, during much of the time, songwriters lost ground against the record companies. Revenue from rights’ collec-tions is as key to musicians today it always was. So is income from live music. In this issue, we feature a remark-able interview with Live Nation’s distinguished COO of Global Touring, Gerry Barad. Barad gives an exclusive to MBJ’s Silvina Moreno, and tells us about the massive undertaking of top tours such as U2 and Lady Gaga and some of the operational considerations that play out in the world stage.

Students Kerry Fee and Ben Hong support our Law Section. Kerry was able to speak with a talented music lawyer, Ms. Linda Edel Howard, during her trip to Nashville this Spring. The two spoke a bit about multiple rights deals, i.e. the famed “360 deals”, and the legal challenges therein. Ben writes well about developments in the market for mobile applications, and the importance of intellectual property protection. There are still plenty of op-portunities that the music industry can seize. As streaming continues to grow in popularity--Pandora just recently posted their first profitable quarter-- Lau Meng Wai has given us a timely and engaging piece on music streaming models and their pricing.

Of course, we would be doing our readers a disservice if we did not cover South-By-Southwest, arguably one of the most important music festival/conferences of the year. Shawn Wolfgang, a Berklee student and event manager and talent buyer for Cafe 939’s Red Room in Boston, attended South-By this March and writes about the experience. Fellow student Steven Gringer sheds light on the undertow of new investments in the music industry, and Caz McChrystal appears once again, this time reviewing at length Music Law in the Digital Age, a new release by Allen Bargfrede and Cecily Mak, published by Berklee Press. Kevin Block-Schwenk, another Berklee faculty member, gives us insight too into Dan Ariely’s Predictably Irrational, which delves into the emerging field of be-havioral economics.

Overall I feel inspired by the quality and quantity of work we continue to receive, and I hope you will feel the same way. Be sure to check out or new website at thembj.org if you haven’t yet, where you can always download the latest issue or use our database for all your music business researching needs. You can also find us on Facebook so if you like what you see, become a fan! As always, thanks for reading.

Salutations,Michael L. Benson

Erratum: In last month’s cover article, “ A Marketplace Like No Other”, we quoted Allen Bargfrede as saying that Spotify was paying 10% of their revenue to the labels. This was a misstatement. Bagfrede was giving a hypotheti-cal figure. We should have said that Spotify pays only “a percentage” of their revenue to the label.

Contributors Editor’s Note.......... ..................................................................................................................................................... Michael Benson Business Articles ..................................................................... Dr. Peter Alhadeff, Caz McChrystal, Silvina Moreno, Lau Meng Wai Business Articles...............................................................................................................................Shawn Wolfgang, Steven Gringer Law Section.......................................................................................................................................................Kerry Fee, Beom Hong Book Reviews........ .................................................................................................................Caz McChrystal, Kevin Block-Schwenk

2 www.thembj.org April 2010

Management Editor-in-Chief ........................................................................................................................................................... .Michael Benson Webmaster........ .........................................................................................................................................................Itay Shahar Rahat Finance ..................................................................................................................................................................... Dr. Peter Alhadeff Layout Editor .................................................................................................................................................................. Ryan Driscoll Faculty Advisor ........................................................................................................................................................ Dr. Peter Alhadeff

April 2010 www.thembj.org 3

Music Business Journal Volume 5, Issue 8

Business Articles

lic under the first objective. In addition, the in-vestments made by record labels in recording and distributing sound recordings are almost always greater than those made by the compos-er in writing the song, leading the third objec-tive to also weigh in favor of keeping the rate low. Finally, the fourth objective also plays against a periodic increase, as any rise would cause at least some disruption in the record industry. Overall, the four objectives may be considered somewhat of a sweetheart deal for the labels.

Under a provision of section 801, furthermore, when Copyright Royalty Judges set rates for compulsory music licensing in the secondary transmission of music by cable sys-tems, only two factors may be considered and the first is “national monetary inflation or defla-tion.” Therefore, it is not as if monetary factors were entirely absent in the mind of Congress when the 1976 Copyright Act was drafted. The absence of inflation as a consideration in the setting of a mechanical rate is indeed conspicu-ous.

Mechanicals Today

The mechanical rate has remained at 9.1 cents since 2006, and will remain so un-til 2012. Because it has not been adjusted up-wards to reflect inflation, it suggests more loss of power by songwriters and their publishers. Conversely, record labels continue to save on the cost of production of intellectual property.

However, a number of points need to be made. An album is now $9.99 at Apple iTunes, one of the main retail fronts of the busi-ness. Ignoring for a moment that most record

label contracts now include controlled com-position clauses that reduce payments of the mechanicals to a third of their value and pay mechanicals up to a maximum of ten songs per album, it is clear that the current mechani-cal rate is now a much greater percentage out of the selling price of an album than it was in the 1990s—when wholesale prices, without a discount, were around $12-$15.

Many artists, moreover, wish to promote sales of their music on a variety of non-recorded platforms, including live music

and merchandise sales. Jazz artists, in particular, may be happy that mechanicals have not risen much be-cause their livelihood is not as dependent on recordings (besides, it makes covering other standards and newer outside compositions more affordable). But they may not be alone. Higher me-chanicals might mean more expensive records for the consumer—a factor that is not lost on many artists in other genres and on Apple, who has opposed the in-crease of the mechanical rate.

There is little evidence, moreover, that the Songwriters Guild and the National Music Publishers Association (for whom the Harry Fox Agency collects) are truly up in arms against the record labels for maintaining the 9.1 cents rate. The recorded music busi-ness is in retrenchment, so the struggle over mechanicals is not generating the excitement it might have engendered in better times.

Finally, mechanical concessions for new-recorded media may also be traded against the fixed and standard rate of 9.1 cents. Publishers and their songwriters were not able to change the 9.1 cents rate, but during the lat-est round of negotiations for a new schedule of mechanical levies, in force until December 31, 2012, they got a new mechanical rate ap-proved for master ringtones. It was the first ever, and was set at 24 cents per download. The NMPA had done well. Although it fell short of the 30 cents it wanted, i.e. 15 % of a $1.99 download, it was well over the NMPA’s minimum position of 15 cents. Besides, a new compulsory license for recorded music had been written into law, potentially redressing the continuing inequity of a poor treatment of inflation in the long-standing distribution of mechanical collections.

could have addressed the decline in mechani-cals at a time when the record business was financially strong.

Mechanical Rates and the Law

As will be seen, there is nothing in the legislation of 1976 that explicitly says that upward revisions of the statutory mechanical rate be based on the Consumer Price Index.

In particular, section 801 of the Copyright Act, the statute that establishes the functions of Copyright Royalty Judges, i.e. the officials who have the authority to set the me-chanical royalty rate, lists four considerations to be taken into account when setting the rate. They are (sic):

(i) to maximize the availability of creative works to the public(ii) to afford the copy-right owner a fair return for his or her creative work and the copyright user a fair income under existing economic con-ditions(iii) to reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their com-munication(iv) to minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices

There is no mention here about keeping pace with the rate of inflation. In fact, among the canons of legal interpretation, it is usual to fall back on the phrase “expressio unius est exclusio alterius” --which has the im-plication that if something is not accounted for explicitly, it should not be considered. As there is nothing about the Consumer Price Index included in the statute, it can be inferred that inflation need not be an official consideration for the tribunal of judges.

Indeed, all of the objectives, but most particularly the fourth, seem to caution against raising the rates to keep in pace with the Consumer Price Index. A lower rate would maximize the availability of works to the pub-

Songwriters’ Mechanicals (cont.)


Interview

On February 26th 2010, Mr. Gerry Barad, Chief Operating Officer of Live Nation Global Touring, delivered the 17th annual Zaf-ris Distinguished Lecture in Music Business/Management at Berklee. Earlier that day, he conducted a Music Business class, in which he discussed how he started out in the business and the recent merger of Live Nation with Tick-etmaster. He answered as well many questions about the global touring business. Later, during the spring break, I had the pleasure of inter-viewing Mr. Barad at length.

Prior to joining Live Nation, Gerry Barad was a founding partner of the Next Ad-venture (TNA), the global touring company re-sponsible for Pink Floyd’s Division Bell tour. He was the vice president of Client Acquisition for Brockum, which serviced some of the biggest tours of the 1980s and 1990s. Barad has worked in the music industry for more than 35 years. He has been an integral part of the acquisition, pro-duction, merchandising, budgeting, sponsorship affiliation, and execution of many top tours, in-cluding U2, Madonna, the Rolling Stones, Paul McCartney, the Police, David Bowie, Barbra Streisand, the Who, Shakira and Joni Mitchell.

The first part of the interview focused on international tours. Barad then answered questions about the merger with Ticketmaster, 360 deals, digital vs analog and the current state of the music industry in general.

MBJ: Which artists are you currently work-ing with?

GB: Right now we’re working on tours that are about to start or have just started. We’re work-ing with Lady Gaga, U2, Sting, Rush, Peter Ga-briel and The Eagles.

MBJ: Which one has been the most challeng-ing?

GB: U2 when it started, because of the nature and size of the production. And Lady Gaga, because when we took over we had to help her re-tool her show and book a tour in very short notice. But it has been great so far. I’m doing some Peter Gabriel shows where we are getting a whole orchestra; Sting is using a philhar-monic orchestra too. So they all have different challenges.

MBJ: What country or city have you en-joyed working in outside of the US?

GB: I’m Canadian, I love Toronto, but if I had to exclude Canada, I’ve loved working in many cities around the world. Tokyo and London were great. It depends on the act too, and U2 in Dublin was special. Also going to cities that we were visiting for the first time, such as Istanbul, or Madonna in Tel Aviv, was very satisfying.

MBJ: What strategies does Live Nation Global Touring apply to deal with entry regulations and rules in a foreign country ?

GB: When we go to a new place we have to find out about the country’s culture, the econ-omy, the ticket prices, the types of venues, how they run shows, and the infrastructure. You need to know whom you need to be in-volved with locally; you always need a local person to work on these things. Also, taxation and border regulations, as well as customs are important. Every country has its own idio-syncrasies and unique cultural differences. It is always a nice learning experience the first time, so every time you go to a new place, the next time you will know more about it, but

there aren’t that many places we have never been. We’ve always enjoyed working in South America: places like Argentina, Brazil, and particularly Chile, because it has a very young and interesting market. Also, Madonna played in Romania and Bucharest recently, which was interesting to learn about. We have offices around the world, so we are able to tap into the local knowledge of each country.

MBJ: This is something that you must re-ally master after visiting so many countries.

GB: Yes, and many times we have a very tight schedule, so we have learned a lot about how to deal with local rules regarding carnets (merchandise passports), work permits, cus-tom documents, licensing, currency exchang-es, and taxation, among other topics.

MBJ: While you were at Berklee, you men-tioned important international touring markets. What would those be?

GB: Japan is a big market. It is not big as it used to be because of the economy but it is still a good viable market. In Europe, cities like Paris and London. London might be the single best music market in the world for the amount of shows played, the amount of tickets sold, and the supply of artists.

MBJ: Apart from the American market you mean?

GB: No, I think London could be the biggest concert market in the world. And remember that you have some markets where domestic acts are bigger as well. In France, for example, an artist like Johnny Hallyday has sold more stadiums than any international act over the years. We are only coming in with interna-tional acts where sometimes there’s a local act that could be as big or even bigger than the acts we have.

MBJ: What are the main benefits that the merger that Live Nation’s merger with Ticketmaster can bring to music fans?

GB: The merger enabled us to distribute tick-ets easier, more efficiently, and helped us know who our customers are. Now we have an incredible distribution network to get the music out there and sell tickets, records, mer-

Global Touring with Gerry Barad By Silvina Moreno




Interview

chandising, etc. The technology has enabled us to reach a wider base of actual and poten-tial fans. Also, because of the Internet age, we are able to use a nice database to find out who our customer is, which is important to us. It doesn’t matter if it’s music or an item; if some-one manufactures a product, they still want to know who buys from them. But every country presents its unique challenges and situations.

MBJ: Do you think live music has taken the lead role in the music business as the main source of revenue for the artist? If so, is Live Nation playing a bigger role?

GB: Most of the revenue will be generated from live income until the whole digital dis-tribution is sorted out. First you had 78’s, then you had 45’s, 33’s, then the eight track, the cassette, the compact disc, the digital audio tapes and then the Internet showed up. What happened is the owners of those formats lost control because their product could be copied. You can’t copy a live show. You can bootleg a live show, but you can’t capture it: its either live or its not live. People need to figure out a different economic model of how you get your distribution out there other than putting re-cords in record stores or doing mail orders. It is a different era. No different than publishing, though. Now you can get books digitally. You don’t have to physically buy a book anymore, and it is the same with music.

The other problem we had with live music is that there are all these big chain stores, which are fine- they all serve their pur-pose, but the older kind of record store was a place where you went to hang out. You went and turned on the music and had people in common who loved it too. That is why con-certs are a good thing. The concert is not just the music itself- it’s a whole social experience as well. I like the whole notion of the gather-ing of the tribes, and the social aspect of the concert is important to people. You go with your friends to hang out, to have a drink, to support a favorite band, or even discover a new band you haven’t heard before. MBJ: So the live experience is irreplace-able, even in the digital age.

GB: Exactly, and you can get more technology in live performances to make shows sound bet-ter and have better lighting and video, which we have done. Let’s face it, concert production in the last thirty odd years has jumped leaps and bounds as far as quality of sound, lights,

and production- everything has evolved.

MBJ: What about other sources of music revenue?

GB: Publishing and copyrights are still a big part of it and they have changed dramati-cally. There a lot of new applications that did not exist before, like music for games. The gaming business is huge- people can license their songs to these companies, so in some way what’s lost in the recording gig has been gained by gaming. Also syncronization rights for movies and soundtracks. It’s whoever can capture the new model, the new era of the re-corded business, and how you can get your music out there at an affordable price. A lot of people can take your music and download it for free, so how can you control that at the end of the day? Copyright laws also vary from country to country, so now if you’re distributing via Internet you may also want to know what country you are actually in, which is a bit of a challenge.

I liked the concept of what Prince did. He charged a certain amount for his con-cert ticket, and that included his record, so he would give the record out to every person who came to the show. There are also other artists who offer a download when you buy a ticket.

There are lots of ways to get these things across, and much has changed. The shows are getting bigger now and therefore more challenging to take around the world. It is also a lot more expensive to have a tour and there are a lot more people touring and there-fore competing for the same dollars. Some are going to do better than others. If there is too much traffic out there, and you go to a city where there are too many concerts, none of them are going to do as well unless you do it when you’re extraordinarily big. The popular acts will sell but the marginal ones won’t as well. What night of the week it is, and what the economy of that city is like matters- just to mention a few of the challenges that we’re faced with everyday.

MBJ: Could you tell us about 360 deals and how your division has worked to be able to fulfill every need of the artist?

GB: We have done some 360 deals like Ma-donna’s, which are for her next record’s re-cording rights, merchandising, sponsorship, and endorsements among other things. My

division came from a previous touring and pro-motion company and we were already doing a lot of those things before. We shot a Rolling Stones movie on Imax, put out DVD’s, and while we didn’t yet have the licensing for the records, we had already worked with the mer-chandising companies, obtained sponsorships, managed VIP parties, etc. The model that you see now, i.e the all-encompassing rights deals, are something we’ve essentially been doing for a long time. It’s just that now we have incorpo-rated a recording model as well.

MBJ: So in the future you could see Live Na-tion as much more than just a concert pro-moting company?

GB: Yes. We are already in that business but who knows where the company could lead us. First and foremost we are a live entertainment company. We produce live events around the world. Now, because of the merger, we are a ticket distribution company as well. Then there is the cross marketing between these two divi-sions.

MBJ: You are expanding then, to be able to do more.

GB: Yes. For example, in my particular divi-sion, if someone like U2 wants to do a tour, we handle the production, do the consultation with the band, and deal with the designing, engineer-ing, and execution of the tour. The recording business is still great for U2, so we do the rest of the work for them. This is not merely putting the money up. We are allegedly pretty good at what we do.

MBJ: How soon before a tour do you gener-ally like to close a deal?

GB: It depends. It could be a year, it could be two to six months. The Lady Gaga deal was done in the shortest turnaround that a tour of that size has ever had, from the time the deal was made until our people went in and started organizing the concerts. That was probably the shortest window ever for the size of the produc-tion. For other tours in general, it could be a year.

MBJ: You keep getting better at it, if you are able to pull the last one off.

GB: Yes, we have an incredible, very experi-enced and extremely talented group of people who work our acts. Whether it is ticket sales,

(Continued on Page 7)


Currently, there are hopes that music streaming may become an important source of revenue, possibly replacing traditional physi-cal revenue. There are already two types of streaming models. The first is the interactive streaming model, also known as on-demand streaming, which enables users to listen to specific songs they choose. Websites that pro-vide these services are Facebook, MySpace, MOG, imeem, Lala and iTunes. On the other hand, sites like Pandora, Slacker, we7, Last.fm, and Internet radio in general are all examples of non-interactive stream-ing. A specific play list is created by these services based on the user’s choice of artists, but money is not being charged dur-ing the streaming of the play list (however, there are ads being played in between the list of songs, which helps these servic-es make revenue). Users of non-interactive streams are also often able to up-grade to premium ser-vices, where no ads are played in between the songs.

Many wonder if music streaming actually generates enough revenue for the labels and the artist. Accord-ing to a Billboard’s 2010 Money Maker list, revenue by even top artists is currently low. Non-interactive streams dominate and inter-active streams have yet to gather momentum. Excluding publishing royalties, only 10 out of every 100 artists on Billboard’s list make more than $2,000 in non-interactive streams, with Beyonce topping the chart. By compari-son, only twenty-five artists made more than $1,000 through on-demand, or interactive, streams. In the latter case, Michael Jackson topped the list. (1)

According to Billboard, moreover, a large amount of revenue was made by art-ists using digital channels other than stream-ing. There were at least thirteen artists who made $200,000 just from digital downloads. Michael Jackson was at the top of the list with $800,000, and next came twenty-six art-ists that sold $100,000 or more. Subscription

download services such as Napster showed even better receipts, and artists like Taylor Swift, Nickleback, and Jackson generated over $500,000. It is not surprising that labels wonder whether streaming can take the place of digital mainstream in the future. (2)

Research that was conducted by Lightspeed Research recently suggests that music streaming models might be a solution to piracy. According to their results, the num-

ber of people using streams and legal down-loads far exceed the number of people using illegal peer-to-peer downloads. Thirty nine million Internet users have willingly paid for legal music downloads and thirty three mil-lion have streamed music; apparently, there are only twenty nine million Internet users of peer-to-peer file sharing services offering downloads. (3)

As explained in Lightspeed’s study, consumers are downloading illegally due to a lack of practical alternatives online. In this sense, streaming can be the business answer to pircay. As Tom Smith, the Manag-ing Director of Trendstream (a firm that col-laborated with Lightspeed) says, “Why pirate when you can stream?” (4) Certainly, while streaming music is becoming more popular with fans, the paradox is that artists are complaining about the small payments received. Some British artists, for instance, complain about meager

The Complicated Business of Music StreamsBy Lau Meng Wai

earnings from Spotify. The Warner Music Group, one of the four major labels, recently argued that streaming was yielding such low returns that it decided that it was not even worth to consider licensing music to that end. Although it is not clear if Warner is removing their music from current services or simply de-clining new deals, this mindset might under-mine anti-piracy efforts by removing a market that could potentially be an answer to digital theft.

One can un-derstand, perhaps, why labels such as Warner may wish to stop licens-ing music to free mu-sic streaming services. Such services require a compulsory license, and herein is the rub.

When streams are played through these websites, they must obtain a perfor-mance license either from ASCAP, SESAC, BMI or directly from the copyright owner. If not, the websites are infring-ing copyrighted material. In addition, non-interac-

tive streams fetch a compulsory license from SoundExchange (SoundExchange collects the royalty and distributes it to labels, artists, and performers; the royalty is fixed between the webcaster and SoundExchange, with 50% to the sound recording copyright going to the owner of the sound recording, 35% going to the featured artist, and 10% to all featured mu-sicians in the recording).

The problem is that the compulsory license has a few conditions attached. Services are not allowed to play more than three songs from the same album or back-to-back tracks within 3 hours. Four songs from the same artist are not permitted in play three times in a row. Looped programming and archived program-ming are similarly restricted. Therefore, it may be hard for the labels to get their songs played frequently.

In addition, given the current low revenue from interactive streaming, the trans-


Business Articles




Business Articles

marketing, production, shows on sale, or deal-making. These are probably the most experienced people in the business. We’ve done it for so many years, and we are a really dedicated team. That’s why we are able to do what we do. Without our staff we wouldn’t be able to make it happen. Years ago, I doubt we could have done it at such short notice, but now we certainly can.

MBJ: At Berklee, you talked about less talent being available today. Could you el-laborate?

GB: There is enough talent. It’s just that when I grew up it was a different era, you had to actually really play, you didn’t have Pro Tools

or Auto Tune, and you couldn’t digitally modify records. You could do overdubs, but you actually had to play. If you go back to some of those great records, they didn’t have the technology that we have now. Still, musically and sonically they stand the test of time. Also, I’m a vinyl guy, I like ana-log. I think it sounds better, it’s richer, it’s warmer, and I think audiophiles would agree with me. I find a lot of the digital music very compressed, especially in old records that are made into digital. You want to keep the integrity of it all.

MBJ: After the House Of Blues’ success, are you thinking about expanding it to new American cities or even other coun-tries?

GB: Yes, we have expanded it already, and will continue to do so when an opportunity arises. The one we put in Boston has a great location across from the Fenway. Boston has a lot of college students, music listen-ers; it’s a good music market. We’ve had a long time presence in the market with Don Law, and this was an opportunity to build this great all-multi purpose room, being able to contract and expand capacity-wise and with less restrictions about staging that other Boston venues have. You also have to find the right real estate, neighborhood, locations and many other factors that come in place to be able to do it.

MBJ: What do you consider to be the vi-tal characteristics of a good touring man-ager?

GB: A tour manager has to be honest and organized, with good people-skills. Being level-headed and well traveled is important to better deal with situations in different lan-guages, cultures and customs. They are the tour guides and people are relying on them.

MBJ: How would you describe the evo-lution of ancillary revenue in the last de-cades?

GB: Well, the merchandising business has been there for years. But people want to go as well to VIP parties, or have a dinner be-fore a show, or buy tickets in the secondary market, or even auction their tickets. There are many different sources of revenue, and people need to find new revenue streams because, as mentioned earlier, income from recordings is no longer what it once was.

action costs of such licensing may be too high for the expected receipts. This is because in-teractive streaming has to recognize the exclu-sive rights of the copyright owner and record-ing label. Negotiations have to be done on a one-on-one basis and the process can be very frustrating, especially when there are very dif-ferent starting positions from which to build compromise. For that reason, transactions are challenging, complex, and very time consum-ing.

Finally, interactive streaming fol-lows more dynamic pricing for downloads and subscriptions in the marketplace. For example, typical single-track download are all over the place, typically at $0.49, $0.79 or $0.99, and $1.29, depending on the service. Album down-loads too range between $4.99 and $9.99. Un-limited music streaming range subscriptions, on the other hand, are priced at $6.99, $8.95 or $9.95 per month. (5) All of which, of course, increases the sophistication, detail, and due diligence that the licensee must consider be-fore granting the sound recording right. A re-cent document by Harry Fox, in March 2009, shows how complicated terms can be for inter-active download and limited subscriptions.(6)

Sources:(1) Billboard Magazine, March 6th 2010 (2) Billboard Magazine, March 6th 2010 (3) Lightspeed Research, December 16th 2009 (4) Lightspeed Research, December 16th 2009 (5) Money, Music and Success (6) Harry Fox, “New Licensing Options for Limited Downloads, Inter-active Streams, and Ringtones”, March 5, 2009.

Global Touring with Gerry Barad (cont.)

MBJ: And ancilliary revenues help promot-ers as well.

GB: Absolutely. Everybody is taking risks. It’s more expensive to do shows, insurance is higher and we have all sorts of challenges to face everyday. If the economy is bad, you have to know how you can make it affordable, bring as many people as possible, know what you want to offer and try to drive revenue streams while maintaining the integrity of the artist that you’re representing. Not every artist wants secondary ticketing, and not every artist is a big merchandising act. Everybody is differ-ent and they have different terms on how they want their production to be carried. You have to be able to adapt to each situation.

MBJ: What message would you like to send out to students who are interested in the touring business?

GB: Try to be a sponge, start at a low level and take in all the information you can. Work hard, follow up on what you are supposed to do, be dependable, and do the work. Have the right drive and work ethic. I got here by doing the work and I still do the work. I consider myself a pretty diligent person and therefore I do the best I can. If you start to take shortcuts, you may get lucky once in a while, but when you look in time your law of average is you have to do the work and be prepared. On behalf of the Music Business Journal, I would like to thank Mr. Barad for being gener-ous with his time and for sharing his extended knowledge about the concert and touring busi-ness.

(Continued from Page 5)


law section


Recently, I visited Nashville and was able to interview Linda Edell Howard, a top music lawyer. Nashville, where How-ard has her practice, has a different environ-ment than New York or Los Angeles. There is a large legal community working with many artists and songwriters. The pay, how-ever, is considerably less and there is a real component of artist service in the profession. For Howard, that service involves help-ing artists avoid mistakes, while taking care of their creative rights and freedoms. This is especially important as the music indus-try changes. As will be seen, the role of an entertainment lawyer often involves prepar-ing contracts with an exit strategy in mind.

Howard has worked on a range of contracts, from Lady Antebellum’s record deal to Wallmart’s online music operation, at Wallmart.com. Currently, record companies are trying to restructure nearly every aspect of their artist contracts to include 360 deals. “Nobody signs an artist now to make and sell records”, said Howard; “companies are not paying them to live” (while making those records). Artists are now only getting about a $100,000 split between the entire band, a much smaller figure than before. Solo acts are given much less. This lack of funds is affecting everyone and everything; there is less money disbursed among studios and engineers, and distribution has shrunk significantly.

Record companies are following the money, and are trying now more than ever to get in on every piece of the pie. The old lan-guage that appeared in recording contracts is now being manipulated to mean something en-tirely different. For example, touring now in-cludes anywhere an artist appears--and wher-ever they open their mouth. The definition is no longer exclusive to a musical performance. Sponsorships and endorsements are part too of the label’s revenue share. ‘Merchandise’, for that matter, has also been expanded to in-clude mobile phone applications, online icons, avatars, voice and ring tones (call backs, shout outs, greetings) and anything else that the artist can potentially make money from.

Currently, there is a dispute in the courts regarding the common packaging- deduction-and-breakage language found in contracts entered prior to the year 2000. The Allman Brothers Band have taken Sony to court over whether these fees should be taken out of digital downloads as well. If this lan-guage is disposed of due to the intangible na-ture of digital downloads, then the artist will receive fifty percent of the licensed income (thirty five cents as opposed to seventeen

cents for a sale). This also poses the question of whether one actually owns a download or if it is a license. Yet Sony may not be able af-ford a decision that favors artists--a symbol of how much things have changed. With so much at stake at stake, many contracts hang in the balance. Eminem, for example, raised a similar contractual issues, but litigation was dropped when the terms of his contract appeared solid. Record companies make the case that the goal of these 360 deals, if done right, is to try to create a partnership. The idea is that if a record company does what it is good at, i.e. distribution, and the management and the merchandising company pull their weight, success will follow. It has worked for some artists. As Howard notes, artists typically think that the 360 deals will work out, and in the end sign the contract. But they should be careful. “I spend a lot of my time now try-ing to get these artists out of these deals.”

All in all, the landscape of record-ing contracts has changed drastically. There is little difference between a deal from a major and an independent, and distribution deals are common. When looking at a contract, look out for the commitment expected by the artist, the exclusive rights granted, and what is recoup-able or not. Howard says: “It takes me four to six hours to read a contract through once...and I have no idea what I’m looking at now”. Contracts are often up to sixty or seventy pages long. The term or concept of an ‘album’ is no longer used in contracts; they are referred to as ‘projects.’ It is unclear what an artist is going to be making, whether it’s a single, an EP, or a full length record. In these contracts, labels only commit to the first ‘project,’ with noth-ing specific regarding the promotion they will be doing (marketing, advertising, buying into tours, paying for photo shoots, etc). Likewise, artists are given rights to merchandise and touring, but labels do not make promises on funding. Essentially, an artist may be signing everything away and getting nothing in return.

The terms of the contract have also changed. In regards to recordings, deals used to be seven to nine albums over the term, then four to five. They now require having five to seven ‘projects’ over a minimum of ten years. Howard has had some success negotiating that early gross earnings between $500,000 to $1,000,000 not be earmarked for recoupment. She also remarked that it has become easier to withdraw publishing rights from the deal.

The cash flow at major labels, natu-rally, has diminished considerably, and fewer artists are being signed. To compensate for

By Kerry Feethe lack of resources, record companies are trying to control every part of an artist’s live-lihood. One of the most outrageous require-ments seen in recent contracts is that a label demands ownership of everything an artist has done before signing up with them: the artist’s name, the website, any and all re-corded music prior to the contract, domain names, and even photos. Howard has seen a record company allow a band to remain in control of their original site, but become prohibited from streaming any music on it.

Bands that have become good at creating success under their own power while maintaining a fluid relationship with fans, sometimes sign it all away for the promise of “a team that will handle that now.” In-deed, there are some unnerving sentences within new contracts. Record companies are now trying to step in and take on the role of the personal manager, including the man-ager’s common sunset clause—i.e., want-ing to be part of that brand forever. Contracts are structured to allow labels ten to fifteen percent of all sponsorship money, and cross-collateralizations and recoupments are stiffer.

Singles are also changing the market strategy. In the past, once a song hit a certain point, it would go to retail. However, this rise used to take eight to twelve weeks--not up to forty weeks to climb the charts, as Howard says is the case now. In Lady Antebellum’s case, however, the group released a single for radio, which almost immediately went straight to number one. At the time of the release, the group was still in the studio working on the re-cord, and had only four tracks cut. There was immense pressure to rush the album in order to get it out, and the label ended up releas-ing the completed tracks, making them avail-able for download, with the promise to add the remainder of the album once it came out.

The popularity of single releases are affecting the market, and changing the terms of an artist’s contract. In general, there is also a great need now for copyright and technol-ogy lawyers. If artists are to be freed from poor contracts, they made need the advise of such experts. Artists have to understand the digital mindset and seek appropriate advise. An entrepreneurial outlook is also required for, despite everything, a large portion of an artist’s revenue is being made from merchan-dise, synchronization licensing, photos used in ads, touring, and sponsorships. As How-ard points out, “you need to be aggressive, but not entitled, and be willing to work with the industry and not against it, bear-ing in mind your own definition of success”.

Artist Contracts: What To Look For


Take a look at the people in the sub-way, at college students, or even at business-men at a Starbucks of a major city. Many will be carrying iPhones or smartphones, on which they will read, listen to music, watch videos, play games, and, generally, stay connected with the outside world. Mobile entertainment is now an integral part of daily life. Indeed, despite the current economic crisis, the mo-bile industry seems restless in its growth. Mo-torola’s Droid, via Verizon, was released in November of last year, in an attempt to gain a large foothold of the smartphone market. Re-cently, Sprint released the HTC EVO 4G as a powerful competitor--and it ran at speeds nev-er before seen on a mobile device in the U.S. In the meantime, mobile broadband capac-ity continues to grow, which produces added mobile applications and revenue streams.

Mobile gear and mobile applica-tions have been in existence for quite some time. Mobile applications, in particular, were originally used back in the 1990’s for repli-cating data processing functions of desktop computers, giving businessmen and trav-elers the convenience of managing their schedules on-the-go. As the development of new technology allowed a higher pro-cessing power for cellular devices, increas-ingly diverse and intricate applications were used for tasks beyond personal scheduling.

Soon, cell phones became power-ful enough to provide entertainment in re-mote places(1). The technology opened up a universe of new possibilities. For example, it created educational value by teaching exam materials with dedicated software and added content by providing quick access to diction-aries, and local maps.The iPhone certainly led the way, by building new platforms for distributing music but also by reshaping the entire mobile industry. Users were now able to create a personalized mobile device with software produced by third-party developers (whereas before they were limited to the ap-plications provided in each respective device). Then, in July 2008, the launching of Apple’s Appstore brought forth a new business mod-el, with incentives that favored developers. More competition followed, and a vast library of diversified applications became available for users—many of them attracted by new entertainment experiences and utilities(2).

Today, Apple Inc. claims that there are over 150,000 applications available for the iPhone, iPod Touch and the soon-to-be-released iPad(3). According to a report from Chetan Sharma Consulting, the overall global

subscriptions base for mobile applications is expected to exceed 5 billion by the end of 2010. The number of available mobile application stores has increased from eight to thirty-eight between 2008 and 2009, when the total number of apps downloaded stood at, approximately, 7 billion (Asian countries contributed 37% of this total). Overall revenue was over $4.1 billion in 2009, a number that is expected to increase to $17.5 billion by 2012, with more than 50 bil-lion downloads. As Digital Music News points out, this “easily trumps” an IFPI-published projection for CD sales of $13.8 billion(4).

It should be recognized that there is a growing number of applications related to the music business (see, for instance, Peon, T.; “iPhone Applications Open Doors for Mobile Music, www.thembj.org, Nov.2009). Music industry executives, of course, are determined to monetize that demand.The growth of smart-phone usage ensures safer investments for appli-cation developers, and creates diverse options for distributing a new type of product by artists and labels—producing a win-win scenario for both parties. A good example is the iPhone app toolkit, a service provided by iLike, which al-lows artists and bands to create their own ap-plications using a free, open-source platform(5).

As mobile applications have become a lucrative business and continue to improve in design and user-experience, a main concern is the rising competition between handset mak-ers. Recently, Apple sued HTC, the developer of the Google Nexus One smartphone, for a patent infringement. HTC has said it plans to “fully defend itself” from the allegations(6). Apple cites a long list of patent infringements, including one for a touch screen device (pat-ent #7,479,949), list scrolling and scaling on a touch-screen display (patent #7,469,381), and 18 other violations(7). Whether the case will be settled in a matter of months or years is debat-able. Regardless, conflicts in intellectual prop-erty are becoming increasingly prevalent. To-day, in fact, the legal protection of applications yields a “competitive advantage” and is stan-dard practice in business(8) —unless, that is, the lawsuit becomes too expensive and time-con-suming for the inequity that is being addressed.

The mobile ecosystem, moreover, has been fragmented into operating systems and applications that run on the same plat-form(9). But market domination, combined with an aggressive effort to defend intellec-tual property rights, might stifle innovation. Throughout history, of course, scholars have discussed the demerits of monopoly over competition, and its negative effect on creativ-

By Beam (Ben) Hongity and innovation. The economic rationale of intellectual property is that legal protection provides a mechanism for compensating cre-ators, encourages more artistic expression and technology, and brings about competition be-tween authors and inventors. Here, we should consider the value in “delivering services and applications” for a “wider base of custom-ers”(10). Indeed: 150,000 available applica-tions at the Apple Appstore sounds impres-sive, but it might be much more meaningful and better for society if all those applications were compatible with other mobile devices.

There is a large unmet demand for more iTune-like applications. Recently, at this year’s Mobile World Congress, Sony Erics-son’s eStore announced another mobile ap-pstore starting at 30,000 apps. This was good news, and momentum was added when Whole-sale Applications Community confirmed that twenty-four mobile operators around the globe would combine their efforts to build an open platform for all mobile apps. Clearly,individual developers, including those inside the music industry, understood that the production of mobile applications could bring an unprec-edented opportunity to generate new revenues.

Mobile applications have also be-come marketing and promotional tools for businesses. Future profitability might depend on strategic plans that recognize the value and uses of mobile technology, its intellectual property component, and its lifestyle implica-tions. This industry is yet in an infant stage; it will certainly grow and offer much opportu-nity as it moves forward. In the meantime, the younger generations will be keen to discover more ways to connect with other individuals—as well as with artists and entertainers. Iden-tity is likely going to be established through individualized mobile devices that include ac-cess to content and services in remote places.

Sources:(1) Go Test Go. “Cell Phone Applications” http://www.gotestgo.com/cell_phone_applications.html (2) Page 3, Chetan Sharma Consulting, “Sizing up the Global Mobile Apps Market” (3) http://www.apple.com/ipad/app-store/ (4) Digital Music News, “The App Eclipse, Bigger than CDs, Bigger Than Downloads.” http://www.digitalmusic-news.com/stories/031810apps (5) Wired.com, “The Album is Dead, Long Live the App” http://www.wired.com/epicenter/2009/08/the-album-is-dead-long-live-the-app/ (6) http://digitalmusicnews.com/stories/031910friday (7) Engadget, “Apple vs. HTC: a Patent Breakdown” http://www.engadget.com/2010/03/02/apple-vs-htc-a-patent-breakdown/ (8) ipCapital Group, “Mobile Device Applications and IP” http://www.ipcapitalgroup.com/?file=Mobile_Device_Ap-plications_and_IP (9) Jennifer L. Schenker. Businessweek.com, “Mobile Industry Strikes Back at Google and Apple” http://www.businessweek.com/globalbiz/blog/europeinsight/ar-chives/2010/02/mobile_industry.html (10) Jennifer L. Schenker.

The Value, Use, and Protection of Mobile Technology


law section

Business Articles


Every year in mid March, thou-sands of people descend upon Austin, TX for the South by Southwest Music Conference & Festival. The festival, which began in 1987 with 700 Music registrants, has grown over the years to include both film & interactive segments and now has over 12,000 music and 11,000 film and interactive participants. While the music portion has traditionally been a stomping ground for unsigned and up-and-coming indie acts, mainstream acts are now using the festival to reunite or create buzz about new projects. Last year, Metal-lica stopped by Stubbs in Austin to promote Guitar Hero: Metallica. Kanye West has also stopped by to promote his new artist Kid Cudi, and Tinted Windows (a supergroup featuring members of the Smashing Pump-kins, Fountains of Wayne, Cheap Trick, and Hanson) also made their debut at SXSW. This year was no exception, as Courtney Love showcased her latest incarnation of Hole, Stone Temple Pilots reunited, and Muse played a not-so-secret show at Stubb’s.

Attending SXSW is not just about seeing the nostalgic band reunions or even experiencing surprise shows by arena level acts, but it is also about learning what the latest industry standards are while having a chance to see the hottest acts to book for your venue. I had the opportunity to see about 45 performances over the course of four days. I met with industry members ranging from agents to top talent buyers like Lisa White from Washington DC’s 9:30 Club, and Dawn Holliday from San Fran-cisco’s Slim’s. I ran into multiple artists the likes of The Kin, Daphne Willis, Anya Ma-rina, Greg Laswell, and others who were receiving significant buzz at the festival.

While many of the panels are geared toward artists, there are many that discuss the latest promotion and marketing tactics. It was at last year’s South By Southwest that Twit-ter made its debut. The conversation this year was about how many venues and promoters have taken a serious step back from tradi-tional and print marketing. Instead they are saving money by focusing on non-traditional social media outlets such as Facebook and Twitter. While there are still some who are holding on to print ads to target audiences that may not be plugged in to social media,

most venues and promoters have seen great returns from their social networking sites.

Another notable conversation among panelists and attendees was the LiveNation/Ticketmaster merger. While the merger is still in its infancy and most agreed that less competition is not a good policy, many of the smaller venues have already transitioned from Ticketmaster to other ticketing software. Dawn from Slim’s in San Francisco said she is not longer lim-ited in her ticketing options as was the case ten years ago. There are many different companies that offer ticketing software and allow for greater control than ever before.

Somehow, SXSW grows in size and scope every year. In addition to the of-ficial showcases there are now hundreds of unofficial showcases that run concurrent to South-by that don’t require wristbands or conference badges for entrance. I highly rec-ommend anyone with the time and the means to get to Austin to make the trip. You never know if you’ll discover the next big thing in a tent in a parking lot somewhere on 6th Street.

Shawn Wolfgang is an Event Manager/Talent Buyer for The Red Room @ Cafe 939 in Boston.

Live Music Galore at SXSW By Shawn Wolfgang

Contributions

welcome!

Please write to

[email protected]




Business Articles

Over the last year, as the economy and the music industry lingered, many asked where the money was. Indeed , a hot topic at Billboard’s 9th Annual Music and Money Conference, early in March, was the financial situation of EMI, one of the big four record labels.

In 2007, EMI was acquired by the private equity firm Terra Firma for $4.73 bil-lion. EMI had reported a 61% fall in profits, and pinned its hopes for recovery on Terra Firma’s acquisition and restructuring plans. At first, EMI saw small signs of improve-ment, but progress was slow thereafter. Many of EMI’s successful artists, such as The Roll-ing Stones, Radiohead, and Pink Floyd, soon left or will leave the label.

Moreover, Terra Firma has strug-gled to find investors for the second half of the multi billion-dollar deal. EMI now holds on to life with its lucrative publishing cata-logue, and is resorting to selling off its assets to stay in business. In February there was even speculation that it was going to sell the historical Abbey Road studios. The most re-cent development has been an EMI offer to rival labels for the management of their North American catalog- at a price of $600 million. Terra Firma, believes that such a deal could potentially save EMI’s financial problems, and prevent them from losing the label to Citigroup (however, some artists are unhappy and have threatened to take their music to an-other company).

There is also the potential acquisi-tion of EMI by Warner Music Group. Noth-ing has been confirmed officially, but there has been speculation of talks between WMG and another private equity firm about buying EMI. If such a purchase were to happen, it would be a major game changer in the music

industry, leaving only three major labels.

As large investments in the shrink-ing record industry are risky, investors may be-gin to direct their money elsewhere. Billboard has tracked music related deals from 2008 to early 2010 and found that one third of these deals were small venture capital infusions(1). While the music business is in a state of flux, firms are only investing in new models that show promise. Last summer Nettwerk, Mama Group, and ATC started a new fund for new artists, and called it Polyphonic. Polyphonic will offer a new model of invest-ment that is very different than the standard record label deal, allowing much more art-ist freedom, while adapting concepts of a 360-deal. Artists will keep all of their copy-rights, while Polyphonic receives a share of the artist’s income. All artists wanting to “make it big” need, of course, strong financial backing, and these deals would allow for more of them to grow. Co-CEO of Mama Group Adam Driscoll recently told MusicWeek, “ It has been apparent for some time that there is a real barrier to artist development - and that is a lack of available investment capital.”(2)

Other companies innovate in the delivery of music. Online Streaming service Spotify has received capital investments from private firms as well as some major labels. By the end of Summer 2009, Spotify had received $50 million from Wellington Partners and the Li-Ka Shing Foundation.(3) The company’s net worth is around $270 million, and in February Spotify was reported to have received another

multi-million investment from the Founder’s Fund(4). Spotify has convinced most Europe-ans that it is the new way to listen to mu-sic, but they are having trouble convincing labels in the United States. If Spotify were to launch in the US, they could possibly see a significant increase in investment funding.

Mobile music applications are con-tinuing to grow, and are getting more sup-port from investors. The mobile music “app” Shazam has rapidly grown in popularity. At

the end of 2009, it had over 50 million down-loads. In 2010, Shazam hopes to double that. Shazam has received funds from investors such as DN Capital, Acacia Capital Partners, and Kleiner Perkins Caufiled & Byers (KPCB has invested in Google and Amazon)(5). No official amounts have been disclosed, but if

Shazam continues to grow at the same rate, more investors are likely to jump on board. As technology continues to change, mobile music is likely to adapt, reducing risk. Many companies that have cleverly adapted to tech-nological change have done extremely well and are continuing to grow: Nimbit and Top-

spin Media, in particular, have continued to capitalize on the potential of a direct-to-fan artist platform. Many online streaming services have been acquired or have received funding from capital investors- Apple’s acquisition of Lala being the largest of 2009. Mobile music applications have innovated the way we listen to and find music and are receiving backing from investors that have supported Google and Amazon.

Overall, the problem is that the in-dustry seems to be less in control of its destiny than in the past, and investors cannot assess risk as clearly. Established publishing cata-logs may be the exception, as returns there are more predicatble. But publishing is in much less need of an overhaul than the recorded music business. That is unlikely to happen in the short-run, if at all—and may further dampen spirits at next year’s Billboard’s Mu-sic & Money symposium.

Sources:(1) Peoples, Glenn. “Analysis: Where’s The Money?” Web.(2) “Mama, Message and Nettwerk Go on Polyphonic Spree.” Web. (3) “Spotify Reveals Investment From VC Hommels, Adds Him To Board.” Web. (4) Saint, Nick. “Spotify Picks Up “Substantial” Invest-ment From Founder S Fund.” Web (5) Wray, Richard. “Shazam Secures Heavyweight US Backing.” Web.

Recent Financial News in the Music IndustryBy Steven Gringer


book reviews


The English poet Alexander Pope once wrote that a “little learning is a dan-gerous thing.” The fallacy of that statement lies in the belief that one would cut short an intellectual pursuit just as his inter-est is piqued. Similarly, Music Law in the Digital Age, by Allen Bargfrede and Cec-ily Mak, may not make its readers experts in the labyrinthine Copyright Act, but it is an excellent place to start for those getting acquainted with copyright and its complex interaction with digital music distribution. Perhaps the greatest accomplishment of the authors is to take a complex topic, and make it not only interesting, but immediately ap-plicable to the musician reader as well.

The book is presented in two parts. The first part, “Introduction to Music Law,” provides just that, a brief overview of copyright basics for musicians. While no text, save perhaps a multi-volume treatise such as Nimmer on Copyright, can accu-rately cover all copyright law as it applies to music, Music Law in the Digital Age suc-cessfully lays out the most common copy-right issues faced by musicians. The sec-ond part, borrowing its name from the title, “Music Law in the Digital Age,” examines the functionality and licensing structure of various digital music distribution models. In addition, the authors go on to discuss both perceived gaps in the law that were made apparent by the advent of digital music and several hot-button issues being discussed today in industry and copyright circles.

The first section begins with a short history of the music industry and copyright law. This is often an afterthought in books on music copyright; however, Bargfrede and Mak inject life into the topic by draw-ing analogies between the advent of radio and illegal digital distribution. Ultimately, the authors distinguish the two phenomena by arguing that radio has a complementary effect to recorded music sales, while illegal digital distribution is substitutional. Interest-ingly, though there is a brief discussion of the drop in record sales between 1929 and 1938 during the advent of radio and how some of those drops were likely related to the Great Depression, there is little men-

tion of the global economic downturn begin-ning in 1999, coinciding with the rise of free music services like Napster. However, the authors fortunately do not correlate falling recorded music sales since 1999 solely to ille-gal downloading; rather, they note the impact caused by the end of the CD conversion era of the nineties, in which consumers replaced their tape and record collections with CDs.

The discussion on copyright basics that follows gives a useful overview. Right out of the gate, the authors do an outstand-ing job of differentiating the two copyrights applicable to recorded music, those of the musical composition and the sound record-ing. Too often, musicians are unaware of the difference, but here it is laid out clearly and concisely. What follows is a discussion of the basic rights granted to authors in a copyright, using large amounts of text taken directly from the Copyright Act. While some of that text is dry and perhaps confusing, it was intel-ligent to include, as all musicians should be at least somewhat familiar with the actual text of the Act. However, it should be noted that there is one mistake. In the authors’ discussion of sound recordings as works made for hire

By Caz McChrystal

(which determines who is the author of a work and whether an artist can retrieve his masters from his record label after a thirty-five year period), the statute that is cited was repealed in 2000, after only one year as valid law.

Throughout the text, dialog boxes that contain questions and answers are used to apply copyright law to specific situations faced by, or of interest to, musicians. These inclusions alone justify reading this book. The Q&As run the gamut from the simple, “Can You Borrow a Riff?”, to the more complex, “How To Set Up an Internet Radio Station;” however, it is fair to say that any musician will find at least some of these dialogs helpful. In fact, as an attorney, I was pleasantly surprised by how many of the questions that I receive on a regular basis were covered by the authors. However, these dialog boxes also point out one of the problems that a book like this faces. That is, the extent to which it pro-vides information not that a musician could use, but the extent to which it provides infor-mation that a musician should use. Bargfrede and Mak rightly include an authors’ note ex-plaining that the book is not a substitute for le-gal advice, but often fail to relay the complex-ity and unpredictability of many copyright issues, particularly in the context of litigation. For instance, in their discussion of fair use (a defense to copyright infringement in which the use of another’s copyrighted work does not constitute infringement), the authors include a list of the four statutory factors that courts use in determining whether a use is fair and include a sample analysis of those fac-tors taken from the landmark Supreme Court decision Campbell v. Acuff-Rose. While the analysis is certainly correct, it is a simplifica-tion. The outcome of fair use cases are no-toriously unpredictable and the analyses use many words recognizable to the layperson but which are terms of art in the legal profession. These terms often have differing or far more precise meanings in the context of fair use. It is often folly, for musician or attorney alike, to predict whether a use of copyrighted mate-rial is a fair use. Furthermore, because fair use is a defense to copyright infringement, it is an expensive argument to raise, since those using it are likely already being sued.

Music’s Legal CanonAllen Bargfrede and Cecily Mak, Music Law In The Digital Age (Berklee Press, 2010)


book reviews

Let me make it plain that the above should not be read as a criticism of the dia-log boxes, or the inclusion of a fair use dis-cussion; quite the contrary. The real value comes not from giving readers an absolute course of action should these issues arise, but rather to make them aware that these le-gal principles exist. By being able to spot these issues before they become a problem, a musician is in the more desirable posi-tion of knowing that she may face a prob-lem. That knowledge allows a musician to engage in a cost-benefit analysis, weighing potential exposure to liability for copyright infringement against the benefit of making entirely unencumbered artistic decisions. Another area in which Music Law in the Digital Age excels is the discussion of digital music delivery formats. The authors break the digital music market into six for-mats: “Permanent Downloads,” “Condition-al Downloads,” “On-Demand Streams,” “In-ternet Radio,” “Ad Supported,” and “Free/Promotional/Upsell Offerings.” In turn, the first four (and most commonly used) of these models are each given separate anal-yses, broken down into three categories: “Functionality,” which discusses the basic end-user experience, “Business Model,” which discusses how the online distributors generate revenue, and “Licensing,” which discusses each of the licenses that a distribu-tor must obtain from labels, publishers, and performing rights organizations. Th i s sort of side-by-side analysis makes easy work of understanding how the various rights associated with recorded music, such as master use rights, mechanical royalties, and public performance licenses interact.

Following this discussion of the various formats for digital music delivery, the authors focus on a more philosophical look at the difficulties, particularly early on, of applying the existing Copyright Act to the new reality of digital distribution, and how the industry and others affected by it may adapt to the changes created by it. It is safe to assume that technological innovation will always outpace changes in the law. The process of amending copyright law is slow, and Congress is, unfortunately, ill equipped to anticipate changes like the advent of free music on the Internet. Furthermore, the role of courts on these matters tends to be reactionary. That is, a new piece of technol-ogy (e.g. Napster) enters the marketplace, and the courts can’t really do anything to shut it down until a lawsuit is filed, the

parties make initial appearances, interroga-tories are exchanged, the discovery process begins, etc. Needless to say, the process is slow. Therefore, it really is no wonder that Congress and the courts cannot keep pace.

This seems to be Bargfrede and Mak’s take on the matter. It is not that the law should move faster, but by using leg-islative and judicial examples, they illus-trate why that is not possible. However, the authors do take an opportunity to suggest a possible change to the law. Section 115 of the Copyright Act creates the framework for the compulsory licensing of music pub-lishing rights for use in distributing sound recordings (known as mechanical licenses). Currently, the Harry Fox Agency acts as a clearinghouse for many of these rights, but far from all. This means that digital distri-bution services must contact hundreds, and perhaps thousands, of publishers individually to obtain a license. Bargfrede and Mak argue that the Copyright Act should be amended to create a single clearinghouse through which all mechanical licenses could be obtained.

That suggestion is an excellent and intelligent idea that would be relatively easy to incorporate into the Copyright Act. It is also an idea that many people would ben-efit from, and that seems to be at the heart of Music Law in the Digital Age. Unlike earlier books that focused on either put-ting a stop to free music on the Internet or on declaring a new wild west in which the record industry is obsolete, Allen Bargfrede and Cecily Mak describe a changing industry and how all parties may find a way to ben-efit from it. Furthermore, it does so in a way that will give its readers a better understand-ing of copyright law and the legal issues fac-ing musicians. Finally, the clarity and ease with which even a novice can read through this material is sure to spawn new questions, and in turn encourage further study into an interesting and ever-changing area of law.

Caz McChrystal is an MB/M graduate. He recieved his J.D. from Marquette Univer-sity Law School in 2006, and is currently a partner at Creative Legal Collective. The practice provides legal services to Milwau-kee’s diverse and vibrant artist community.

Find us

online at

www.thembj.

org


book reviews



Seldom does a non-fiction book by an MIT professor make the top five on the New York Times bestseller list. Neither is MIT, one of the world’s top scientific and engineering schools, noted for discarding logic and rationality. But Predictably Irra-tional achieved one and implied the other at its release in 2008 (the revised edition in 2009 looks at the recent banking crisis). The book, in the emergent field of “behavioral economics”, contains valuable insights into human psychology for the aspiring business-person as well as the layman.

Here is an example: There are three subscription options for The Economist, i.e., web only for $59, print only for $125, and print and web for $125. Do you notice anything unusual about this price structure? Why would anyone purchase a print only subscription, when they could get a print and web subscription for the same amount?

The answer is that nobody does. The purpose of the print-only option is to serve as a “decoy,” in order to make the print and web version look more attractive. The author illustrates this in an experiment. With only two options, web and print + web, under one-third of subjects selected the more ex-pensive print + web option (out of 100 busi-ness school students who had to purchase a subscription of some form). However, when the print-only option was added, suddenly over five-sixths of that population selected the more expensive print + web option and nobody selected the decoy choice.

This suggests, of course, that the decoy influenced more than half of the stu-dents. Yetaccording to conventional economics, indi-viduals are perfectly rational actors. People spend money on what makes them happiest, and corporations seek to maximize profit. We clearly do not seem to operate this way. Why do so many advertisements for cars fea-ture classic rock or other music and images of driving through scenic vistas, but precious little information is given about fuel econ-omy or mechanical reliability? Why does Coca-Cola spend over $2.7 billion per year advertising a drink that virtually everyone on the planet has tasted?

Dan Ariely catalogues ways in which people do not behave rationally, often conducting psychology-type experiments to pinpoint predictably irrational patterns. Per-haps his most interesting observation is that people have two modes of functioning: the economic mode and the social mode. In the social mode, we do not keep track of the value

of every little thing, but are generous and fig-ure that “what comes around goes around.” However, when money is brought into the equation, people snap into the economic mode. Indeed, an experiment is conducted in which people are either paid well or nothing at all, and tasks are performed equally quick-ly; when a small amount of money is given in payment, the completion of the tasks takes much longer.

This has surprising implications. If you are trying to put together a concert for a charitable cause, you are more likely to get successful musicians to play if you ask them to play for free (or perhaps you can cover their travel expenses) than if you offer them a small amount of money. If you need a business as-sociate to make a phone call on your behalf, offering them something in return can damage your prospects. The placebo effect, where just the hint of a cure is perceived as helpful, and

By Kevin Block-Schwenk

our preferences for free items over low cost ones, are other examples of predictably irra-tional reactions.

The book ends with Professor Ari-ely’s thoughts on the subprime mortgage cri-sis of 2008-9, and the federal rescue of large banks whose poor business decisions trig-gered and then exacerbated the crisis. We learn from experimental evidence that too high a salary can impede performance, that people generally do not accurately compute the maximum amount of money they should borrow, and that if we do not understand the rules of a system we are less likely to act in our own best interest. Professor Ariely ends with an analogy. Imagine if our roads were designed under the assumption that everyone was a perfectly rational driver. Lanes would be narrow, traffic lights would have no delay between red and green, and there would be no need for rumble strips or guard rails—our roads would really be far more dangerous than they are now. Conversely, our financial regu-latory system is designed under the assump-tion that all actors are perfectly rational, when it is patently not the case.

Finally, a common fallacy is to as-sume that seeing right through a “decoy”, neutralizes its intended effect. What is true for an individual, however, may not be true for a collective. Indeed, in the study, nearly half the people’s choices were unchanged by the decoy. Of course, the key to successful mar-keting is not to convince everybody to buy a product, just to convince more people to buy it.

Predictably Irrational is strongly recommended to the aspiring businessmen, including independent musicians, who want to understand people and thus promote them-selves and their products more effectively--as well as to anyone who wants the ability to spot when they are being manipulated, or wishes to see the world as it is, not how we wish it to be.

Kevin Block-Schwenk is an Assistant Profes-sor in the Music Business/Management De-partment.

OxymoronDan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions

(Harper Collins, 2009)

Business Articles


Music Business Journalc/o Dr. Peter Alhadeff1140 Boylston St. FB-359Boston, MA 02215

_______________________________________

_______________________________________

_______________________________________

_______________________________________

MBJ

Some of the topics we will tackle in next month’s issue of the Music Business Journal:

• Focus: Internet Marketing

• Producing Music for TV Award Shows

• Mobile Music Trends in Japan

The Music Business Journal will be released three times in the Fall, three times in the Spring, and once in the Summer.

For more info, please contact any core member of the editorial board. The journal’s e-mail address is [email protected]. Also, our website is www.thembj.org, where we have not only our current issue (as well as all back issues) available, but also, much more.

Volume 5, Issue 8 April 2010www.thembj.org

Visit the MBJ online!

www.thembj.org

To subscribe, please contact us

[email protected]

Berklee College of Music

Music Business JournalBerklee College of Music

Upcoming Topics

berklee college of music music business journalthembj.org/pdfs/april10.pdf · music business...

Documents