PJ Harvey's
artist page. According to Apple, every artist will get one of these.
Note the "top downloads" and other comparison lists on the right,
all clickable.
ITunes, Musicians and Labels
During the presentation, Apple representatives explained that they
had approached the five major labels first -- Sony, Universal, EMI,
Warner and BMG -- because they knew they would need to have the
labels agree to the iTunes model for this to work. In addition,
the major labels control a vast amount of copyrighted material --
whether it's new releases or back catalog records -- and having
a good, broad selection of music in place for iTunes launch was
essential to the Store's success.
Now with a month of downloads under their belt, Apple was moving
on to the next stage of the iTunes Store -- acquiring more songs,
so on June 5 they invited representatives from some of the best
independent labels to their campus in Cupertino, CA to demonstrate
the store and encourage them to add their titles to the Store. Apple
emphasized that indie labels are getting the same "A" deal that
they offered the major labels. But in return for this they said
they were not willing to negotiate on the rates or the contract.
They said they don't have the time or the interest in talking to
200 lawyers on this stuff -- it's a "take it or leave it" offer.
The Agreement
The arrangement between Apple and labels is considered a "reseller
agreement". That means they're not licensing content from any labels
but instead buying songs "wholesale" and reselling them to consumers
-- a lot like a terrestrial retail store that purchases CDs wholesale
and sells them retail.
The deal is straightforward. Of the 99 cents of a download, Apple
keeps a portion and the rest goes back to the label, which is then
responsible for distributing back to the artists, songwriters, publishers,
and so on according to the existing terms between the labels and
their bands. This makes it really simple for Apple to acquire content
because they don't have to deal with stuff like licensing agreements
or paying publishers -- all that stuff is the labels' responsibility.
There's no cost for labels to join the store and, conversely, Apple
isn't paying any upfront advances for content (a method that has
been used in the past by other digital download sites to attract
certain labels to make exclusive deals with them).
ITunes Store:
Benefits for Labels and Musicians
Music is available through Apple's iTunes store as either a
single track or as an album download. Singles are all 99 cents
and albums are usually $9.99 (with some exceptions made for double
albums or EP's).
The Store's interface makes it very easy for folks to browse,
search and buy music.
No limited shelf space like in a terrestrial store, and no restocking
required. Once it's encoded and sent to Apple, it's up there forever
and available 24/7.
This is not an exclusive deal, so labels are free to make arrangements
with other digital distribution systems or retailers.
Easy to direct possible purchasers from your labels' website
to the Apple iTunes store with the click of a button.
Great sound quality with use of AAC compression format, and
strong but invisible digital rights management.
Labels get the strength of Apple's brand name, promotional efforts,
and leadership in this field. They're running print and TV ad
campaigns to support the launch of iTunes.
Concerns for Labels and Musicians
Apple repeated many times that "it's just about the music"
and that they're not taking any money for paid placement on the
website. Since Apple is a well-funded company they said they don't
need to add advertising or banners or buttons. We hope that their
listing, search returns and cataloging function remain as impartial
as they are now.
No Paid Placement
One of the most talked about pieces of Apple's presentation was
their stance on "paid placement". Apple insisted that "it's all
about the music" and that they're not interested in accepting advertising,
banners, or any types of payment for placement on the website. But
if you look at the home page you'll see that there are both banners
and these areas called "swooshes" that highlight 16 albums per swoosh
(new releases, up and coming, just added, etc). Apple said that
any highlighting of albums or artists -- whether for banners or
swooshes -- is purely at the discretion of Apple's music editorial
staff.
Once again, Apple has a unique position in this. As a technology
company with lots of assets they don't NEED to accept advertising
money to make this work, and they've never done anything like this
in the past (like selling space for icons on their computer desktops).
We hope that Apple will remain committed to this pledge. Not only
is it refreshing to see a list of songs that doesn't belie the "superstarness"
of any one track over another, or a list cluttered with smiley faces
or stars or other attention-getting icons, but it also stops the
iTunes virtual space from being sold to the highest bidder.
Simple Machines as Test Case
From 1990 to 1998, FMC's Jenny Toomey and Kristin Thomson co-ran
an independent record label called Simple Machines. Over its eight
year history, we released about 75 records that have sold about
250,000 copies worldwide to date. We are very interested in posting
the entire Simple Machines back catalog to the iTunes Music Store,
pending each band's consent. For us, there's really no drawbacks
or major issues. We don't have any complicated contracts, distribution
deals or licensing agreements with our bands and most of our back
catalog is sitting dormant in our basement anyway. Plus, it gives
us the opportunity to flow more money back to the bands.
Simple Machines worked on a simple profit split. Once costs were
recouped for recording and making a record, SMR split the profits
50/50 with the band. But with the iTunes Store, we intend to make
the profit split more favorable for the bands -- more like a 75%
band / 25% Simple Machines arrangement. We recognize that, after
some initial work uploading the existing CDs to Apple's store, the
rest of the work is constrained to administration of royalties and
some basic promotion. Because Simple Machines was set up as a profit
split, we're able to recognize the changes in distribution models
and compensate our bands accordingly.
The Money Flow for Major Label
Artists
For bands and artists signed to major label contracts, we have some
reservations about just how much they will benefit financially from
iTunes. While we would expect that Apple will faithfully pay the
labels their appropriate portion for each song sold, just how much
money will end up in the artists' pockets? That answer is contingent
on the contract that the artist signed with the label.
In the terrestrial world, artists' royalties for sales are computed
as a percentage of the record's suggested retail list price (SLRP).
The SLRP is an approximation of the price charged by retailers,
usually about $16.98 for a new release for a mega artist (note that
this is just a suggested price for retailers -- you know you've
seen CDs priced lower than this). Most artists get paid between
10 and 14 percent of the SLRP. But wait! First the record label
deducts a packaging cost -- usually 25 percent for CDs -- since,
in theory, artists are being paid for the music and not the packaging,
but really it's just a false way to pay the artists less. So now
it looks like this:
$16.98 SLRP -$4.25 25% packaging deduction
$12.73 royalty base price
But wait! There's ANOTHER deduction. Most major labels also hold
money in reserve to cover "breakage". This a ridiculous, antiquated
deduction that goes back to the days when vinyl records could actually
break during shipping, but it still exists. Now our formula looks
like this:
$16.98 SLRP for a CD -$4.25 25% packaging deduction
$12.73 royalty base price -$1.27 10% breakage deduction
$11.46 new royalty base price
But WAIT. There's ANOTHER DEDUCTION. Despite the fact that CDs
have been around for about twenty years, they're still considered
a "new technology" in many major label contracts. And because new
technologies imply some sort of "risk" to the labels, they feel
like it's within their right to hold some more of an artists' sale
royalties. The standard "new technologies" deduction is 25%, so
that makes our formula look like this:
$16.98 SLRP for a CD -$4.25 25% packaging deduction
$12.73 royalty base price -$1.27 10% breakage deduction
$11.46 new royalty base price -$2.87 25% new technologies deduction
$8.58 new royalty base price
So now the artist gets 10 to 14 percent of this price -- or somewhere
between $0.86 and $1.20 -- per retail sale. And, of course, artists
only get this money AFTER they've recouped the costs of making the
album which, in many cases, never happens at all. [note: This is
a simplified version of things using averaged figures and not dealing
with other common deductions like "free goods" and "reserves". For
a more nuanced explanation we suggest you read Donald Passman's
All You Need To Know about the Music Business].
The question is: how does the contracted royalty rate jibe with
the iTunes model? Unlike traditional retail sales with the iTunes
Store there is:
No overstock
No breakage
No returns
No packaging costs
...thus making all of those ridiculous deductions listed above
even more pointless.
So, in theory, musicians signed to major labels should be getting
100 percent of their 10 to 14 percent royalty rate since all of
those antiquated deductions are totally illogical. But even at that
price, these standard contracted rates seem dismally low. If the
same contract terms apply to digital sales as terrestrial sales,
at the $9.99 retail price for albums on iTunes, an artist would
get somewhere between $1.00 and $1.40 per sale. For a 99 cent single
download, an artist would get 10 to 14 cents.
Could Deductions Still Apply?
Once we open this digital can of worms there are other contract
clauses that may affect the rate at which you're paid. Will the
major labels try to say that electronic transmissions are a "new
technology" that, like CDs, kicks in a 25 percent deduction per
sale? Will the labels consider online album sales as "top-line"
sales, or does the price of $9.99 mean that it's considered a "discount"
sale? If it's a discount sale that may mean you only get HALF of
your contracted rate (5 to 7 percent from our example above). We'll
have to wait and see.
Contract Reform: Treat Digital Downloads Differently
With the music industry shifting towards digital distribution, now
is the time for artists, managers and advocates to push for major
label contract reform on the calculation and payment of digital
distribution royalties.
Instead of getting 10 to 14 percent of a sale, the FMC believes
artists could -- and should -- be getting something closer to the
rate that was agreed upon for non-interactive webcasting, which
is:
Labels: 50%
Featured Artists: 45%
Non-Featured Artists: 5%
In addition, while the iTunes Store is considers the transactions
sales, there is some discussion amongst artists that it might actually
be a licensing agreement, which in most cases would be much more
advantageous for musicians royalty-wise.
We urge major label musician to ask their label representatives
about the rate they're getting for digital download sales and what
deductions, if any, apply. If it's in alignment with their terrestrial
sales, think about renegotiating for a higher rate for digital sales.
With no deductions for shipping, storing, breakage, packaging and
returns, the marginal costs of selling songs through digital download
services is almost nil. As a result major label artists should demand
to be compensated for these sales at a unique and
higher rate.
Conclusion
Overall, we were impressed with the iTunes Store. Once again, Apple
has designed an interface that's both cool and completely functional.
We were also impressed with their reseller agreement. In true Apple
form, it's simple, user-friendly and egalitarian. Finally, we were
excited because of the unique position that Apple maintains in this
environment. They know they have all the puzzle pieces they need
to make this work, and they seemed unwilling to compromise their
goal of establishing broad user rights to alleviate the major labels'
fear of piracy. And the fact that they walked about 200 indie label
people through this arrangement together gave us a tacit feeling
of equality.
If Apple can stick to its mantra that "it's just about the music"
they may have designed a business model that will truly provide
a legitimate and accessible platform for all musicians to distribute
their music.
Check out these websites offer tons of current resources, tips, articles,
links, and connections for bands and artists.
CD Baby A
fantastic, practical way for indie musicians to sell CDs online and to post their digital tracks to all the major online music services.
Host Baby
From the folks at CD Baby, an affordable web hosting service with very
practical features for musicians including an online calendar, guestbooks,
links to online sales, and special email capabilites.
Just Plain Folks
With a membership of over 42,000 songwriters, Just Plain Folks has become
one of the best ways for musicians and songwriters to network, share resources,
and work together.
KnowtheMusicBiz is an online community for emerging artists, musicians and music executives. KTMB members can find, exchange and contribute valuable information about the business of music plus get advice and insight from industry thought leaders.
Independent
Online Distribution Alliance (IODA) helps independent labels to build a legitimate online
presence and ensuring their fair share in the digital music future.
TuneCore helps indie and unsigned bands have their music available on all the best digital music stores. Band keeps all the royalties for sales.
Ariel Publicity Great website chock full of novel ideas about how to use new technologies to your advantage to promote and distribute your music.
Indiecentre is a great resource for bands, musicians and aspiring labels. Includes
a directory of resources for manufacturing, distribution, and helpful
articles about starting a label, touring, and promotion.
Indie-Music.com A mind boggling amount of information for indie musicians and labels.
Practical articles, links, advice.
TAXI acts as
a liaison between songwriters and major label A&R representatives. Artists
submit songs which are then critiqued by former major label employees,
and the strongest submissions are passed on to the A&R reps.
