It is our belief that indie artists will be disproportionately affected by a loss of revenue in a post-copyright era. We send out a challenge to all those working in the Internet music business to put their “substitute royalties” and ancillary revenue streams where their music-fan mouths are and to figure out a legitimate way to compensate musicians for their songs. We are excited to support any innovative payment strategy that seems feasible, and we refuse to support any business model that does not guard the financial value of musicians’ labor. This is exactly what we told Napster when they contacted us to ask us for our support. And here is why…

It’s the end of copyright era! Or so you would think if you had been listening to the majority position at the three Internet music conferences we attended last winter. What does that mean for the artists and musicians who stand to lose mechanical royalties as a revenue source? Nothing good.

Royalties 101

For the past 50 years, most musicians have been compensated through a variety of revenue-generating activities: selling CDs, playing shows, radio play, or licensing their songs to TV or movies. Almost all of this money falls under three umbrellas — mechanical royalties, artist royalties and performance royalties.

In order to understand the difference between these three types of royalties, it’s important to understand that there are two different claims of copyright on every piece of recorded music. One focuses on the “sound recording” and one focuses on the “underlying work” or, in other words, the intangible intellectual property that is a “song.”

Mechanical royalties are paid to the songwriter per unit sold. Artist royalties are paid to the performer of the song per unit sold. Performance royalties are paid to the performer and the songwriter when the song is broadcast (TV, Radio, Jukebox, etc). Physical CD sales generate artist royalties, which are split between the label and the band/artist.

Even in this nutshell explanation of royalties you can get a sense of how complicated this payment system can be. We are not discussing the standard royalty breakdown at major labels in this article, but there are several books that explain the subject in detail, including Donald Passman’s book All You Need to Know about the Music Industry.

In our experience in the independent music community, many labels and bands simplify the payment system by agreeing to a profit split, where the net profits from sales are usually split 50/50 after the costs of manufacturing and promotion are covered. With a profit split it’s understood that the mechanicals and artists royalties are folded into one payment, since the songwriter and perfomer are usually the same person. For example, if Simple Machines sells 5000 Ida CDs to the distributor for $6, which in turn sells them to stores, that’s $30,000 in gross profit. If each CD costs about $2.00 to make, that’s about $10,000 in costs. Doing the math: $30,000 gross - $10,000 costs = $20,000 net profit. Split 50/50 it’s $10,000 for the label and $10,000 for the band. This example is based on 5000 CDs….imagine the potential profits if you’re a band like Sleater-Kinney that’s selling 20,000+. Of course, they have more expenses but, all in all, it’s clear from this example and from our experience that mechanical royalties are the most significant source of revenue for independent bands and artists.

Basic royalties also generate a huge chunk of revenue for major label bands. Artists who control the copyright in the underlying song are guaranteed basic royalties on every unit sold under the Copyright Statute, whether the album has broken even or not. Considering how much the deck is stacked against major label artists, this is sometimes the only guaranteed source of revenue, aside from any advances. (Major label artists are forced to play by accounting practices muddled with crazy caveats, advances and “points” that we can’t tackle in this article. Luckily, Steve Albini has done this in “Some of Your Friends Are Already This Fucked”. Read it.)

Why It’s The End

The fundamental way that this mechanical royalty system has worked over the years is that the record labels had access to the three components needed to mass produce the music: the master tapes, the means of production, and the distribution channels. With the recent advances in digital technology, labels are losing their exclusive control over all three. Digital technology allows for perfect copies, so every store-bought CD becomes, in essence, a master tape. Plus, the cost of buying the means of production — CD burners — has dropped into a widely affordable price range. And now, because of digital download technology, the distribution of music itself is changing.

Now we’re faced with a huge problem: piracy. As eloquently stated by Brian Zisk: “If music can be heard, it can be copied.” In the same way that cassette recorders enabled low-fi pirates (or high-school nerds) to illegally record Doobie Brothers concerts or stow away illegal copies of Casey Casum’s Top Twenty countdowns (albeit with kinda crappy quality), MP3s and digital download technology are making it simple to copy and send near-perfect quality music files across the Internet.

Music Business Fights Back

This is what all the record labels are talking about when they are pointing fingers and yelling “bloody piracy!” What are they gonna do about it? Their solution is two-fold:

1. Fiercely enforce the existing copyright laws through the courts and government.
2. Find a way to encrypt music files in order to make it impossible to copy or send files illegally.

But how does it work? Unless you’re the kind of masochist who longs for the comfort of Big Brother and a world where our computers are legally policed for our own good and the good of the community, you can already see the impending problems with chasing down Internet piracy. As for solution number two, from what I’ve been told, it’s impossible to come up with an encryption program that is crack proof. The basic explanation of that position says that any encryption program is just a mathematical algorithm. If it can be written, it can be unwritten — it’s just a scientific fact. I don’t know if this is true (I can’t even spell “algorithm” much less “unwrite” one) but for the most part the smartest, hippest computer folks that we speak with are all in agreement on this point. Plus, the anecdotal evidence speaks volumes. DVD code has been hacked to work on Linux machines, and Microsoft’s supposedly “impervious” music encryption program was hacked within a day of its launch.

True or not, it’s fair to say things have changed and it’s going to be quite difficult getting the copyright genie back in its seemingly broken bottle. It is very likely that musicians are facing a future where it will be impossible for labels to ever fully secure music files to prohibit piracy and to ensure that those who create music are compensated.

Benefits of Digital Downloads

What does that mean for the artists? That depends on who you ask. For the most part, music fans that work in the Internet community believe that the overwhelming benefits of digital download technology outweigh impending copyright failures. Their argument is based on a belief that digital download technology frees artists from the stranglehold of major label, media and chain store monopolies.

Before the Internet age, artists had to sign over the majority of their potential profits and align themselves with corporations in order to attain a certain level of national distribution or radio airplay. Now with the Internet, musicians can download free software to encode their songs as MP3s and sell near-perfect quality music directly to anyone who comes to their website. Gone are the days when manufacturing, distribution, shipping and storage costs made it impossible for indie artists and labels to compete with major distribution sources. With digital downloads there are minimal manufacturing and distribution costs and, theoretically, immediate access to an international audience.

Post-CD World

Sounds great, doesn’t it? Even better news is the fact that, at least for now, MP3s seem to be increasing CD sales rather than reducing them. Anecdotal evidence suggests that bands that are most pirated will also see a general increase in CD sales. The obvious parallel here is radio, where free access to a band’s single often drives sales for the album. But this is what’s happening now when CDs are still the preferred format for music consumption. What happens if CDs as a format become less relevant?

Many of the very same music fans that work in the Internet and love talking about the wonderful “post copyright” age are also, ironically, creating business models based on the belief that a majority of music sales will eventually go entirely digital. If digital distribution becomes the preferred method for music consumption and there is no foolproof way to encrypt downloaded songs, then it’s fair to say that a whole lot of artists who would have made money selling CDs will lose those future potential digital sales to piracy.

Leaving Mechanicals Out of the Internet Business Model

So what are these entrepreneurial music fans doing to ensure that the artists they love will get paid for their music? Not very much, as far as I can tell. After sitting through a week’s worth of “music & internet” panels at The Signal or Noise Conference, The New York Expo and South by Southwest, I was astounded by two things. First, the under representation of artists on the panels, other than ones who were busy branding their own internet deals or internet related technologies. Second, I was further frustrated by the basic lack of understanding displayed by many of these Internet companies about how artists actually make the lion’s share of their money now. Without the slightest twinge of irony, panelist after panelist would cheer the end of antiquated copyright protection while holding up a nebulous new carrot for the artist to pursue: Ancillary Revenue Streams. After hearing this phrase repeated ad nauseam, we have come up with a more succinct acronym: ARS.

A Plate of Paprika

Ancillary Revenue Streams, or ARS, are just what they sound like: other ways to make money off of music. Some examples of ARS are touring, or selling songs to movies and television. These streams are not new. Artists have always supplemented their royalties by playing live and selling music through other channels but, up to now, those means of getting paid were always seen as spice on the meat and potatoes of mechanical royalties. To hear these Internet tech heads speak you’d think that as musicians in the Internet age we’re going to be expected to live on a plate of paprika.

Here are just some of the most obvious problems with ARS as a substitute for mechanical royalties within the independent music community.

1. Touring

While touring is a great way for bands to raise their profile, make fans and generate press, it is very rarely a big money maker in its own right. For the most part, only the most successful smaller scale indie acts and the huge major label acts make money on tour. Ironically, major label acts often make the majority of their tour profit because of ancillary to ancillary streams in the form of corporate tour sponsorships. For example, Lauryn Hill’s tour last summer was sponsored by Levi’s. Because of these sponsorships, bands are able to defray the massive costs of going on tour, which often includes a hefty road crew, semi-trucks, staging, buses, hotels and paying the traveling musicians. Without sponsorships, many hugely successful artists would never break even on the road. Even an internationally-acclaimed and Grammy winning artist like Beck who refused sponsorship contracts generally lost money on sellout tours and had to eat those tour support losses out of his major label royalties (these are the same royalties that would disappear in a post-copyright world). While the Internet might make an artist free of major labels through the benefits of digital downloads, it will very likely make them prisoners to sponsorship deals with other corporations.

Well-known indie bands like Fugazi and Superchunk can make money touring but that is often due to their streamlined operations, meticulous attention to booking details, and willingness to sleep on floors. Even with the frugality, margins on these bands’ tour revenues are generally quite tight. It’s not unusual to hear stories of how the majority of a tour’s profits disappeared the moment the band’s van broke down. Profits also disappear if a band raises the stakes i.e. if they choose to tour with their own PA or light set up, or through larger clubs that involve more expensive advertising campaigns, more security, and union-scale pay.

Furthermore, it’s often difficult for bands to write good music or live fulfilling lives if they have to pull up the stakes every few months just to ensure they can meet their mortgage payments. And we all know what’s going to happen when these artists decide they’d like to have a family. If there are no mechanical royalties and touring is a musician’s primary means of support, it’s not difficult to guess that these rockers will hang up the ax and get a day job. Rolling Stones aside, we all understand that the overwhelming majority of musicians will not be touring into their 30’s and 40’s. This just continues to ensure that the majority of music will be made by teenagers for teenagers.

2. Music for TV Commercials & Movies

It’s good work…if you can get it. The most common route from rock record to TV commercial is through a publishing company. If you know how that works you can skip ahead. If not, here’s the summary:

• Performance Rights Organizations:
  When a songwriter writes a song s/he is the sole owner of that copyright. If that artist wants to receive royalties from radio play, TV or movie soundtracks, he or she has to align with one of the two non-profit performance rights organizations, ASCAP or BMI, or with the one for-profit organization, SESAC. These associations take a percentage of the artist’s royalty as payment for their “work” collecting royalties from radio stations and other places where the artist’s work is publicly performed. The payment system is based on a complicated formula that weights potential audience, time of day and song duration in order to come up with a “per play” rate. An artist whose song gets played at Superbowl halftime will make a lot more money than a song that’s played on the local rock station in Des Moines at 3 am.

  Performance royalties generated by radio play can be a significant source of money for artists, but only if you’re part of the commercial radio world. We’re sure that Led Zeppelin is getting some serious cash from BMI or ASCAP every three months, but what about the throngs of bands that don’t get radio play? Tsunami is registered with BMI, and our average quarterly royalty check is, oh, about $30. The bottom line is there is no other way to participate in this revenue stream without aligning with the performing rights organizations — BMI, ASCAP or SESAC. Furthermore, what are the chances that your work will be played consistently on radio stations that have a significant audience share? Unless you’re being pushed by a major label radio promoter, they’re next to nothing.

• Publishing Companies:
  Next in line for a bite of your performance royalties are the publishing companies. There are many different types of deals but these groups generally take a half of your total royalties (i.e. mechanicals, performance, synchronization, etc.) as payment for trying to get more of your songs used in TV shows, commercials and movies. The theory is this: a well known publishing company with friends in high places is more likely to be in a position to get your song in the new Coke commercial than you would be while you are sitting in your garage rocking out with your buddies. You know you can make a lot more money from a Coke commercial than you can playing in the local bar, so you make the decision to risk another half of your potential performance royalties in order to benefit from the publishing company’s connections.

• Royalties for Film/TV/Ad Placements:
  When a song is licensed for film, TV or ad placements there is a synchronization license and associated royalties for the use of the song, as well as a master use license and any associated royalties for the use for the recording. The sync royalties are paid to the songwriter and publisher, and the master use royalties will go to the record company and the artist. These are generally negotiable fees set on a one time basis to cover whatever uses are intended.

Getting Paid

Now that we understand the basic mechanics of performance royalties and publishing, let’s apply this to ARS and consider how this kind of TV and movie work will take up the slack for mechanical royalties that will disappear in the “post copyright age”. For starters let’s take a second and think about how many of your friends have had songs in motion pictures and on television. Good, now think about how many of them get steady work like that. Great, now think about how many of them are actually getting paid the full amount of what they are legally due for a royalty in that situation.

Getting Paid Less

Oh yeah, we forgot to mention that, although there are standards and protections, it’s not uncommon that artist get paid less than they’re worth. Despite its flaws, copyright law has attempted to protect the rights of the songwriter in the face of the monopoly (big capital). Thanks to copyright law and music unions, certain rates were put in place to guarantee players a certain wage, per hour, per song, per play, etc. This was a way to use the collective bargaining power of writers to guarantee they didn’t get bowled over by corporate power.

Major labels, TV networks and movie companies realized they had an easy way to get around that. They would do the same thing that the publishing companies did. They would say to the artist, “Hey, we’d really like to use your song for our show, but we don’t want to have to pay you the full amount of money that the law says we should pay you, including residual royalties for reruns etc. So how about you sign away your rights to residual royalties and we’ll give you this prestigious position on our TV show and a chunk of money?”

Most artists in this position say, “Well, that’s a lot of money and if they don’t use my song they will use someone else’s so I guess I will let the TV show pay me less than I deserve to get.”

The Mechanism for Underpayment

There you have it, ladies and gentlemen, the mechanism for underpaying artists that exists in every area of the major music business. Did you know, for example, that MTV’s basic video submission agreement states that if you give them a tape for possible play you agree to allow them to use the music for incidental footage at a reduced royalty rate. This means that if you ever hope to have MTV play your video on 120 Minutes you have to agree to give them the rights to let them use your music elsewhere at a reduced rate. That’s why “Cheap Cuts”, a song by my band Liquorice, regularly graces reruns of The Real World and yet your humble servant has yet to put a down payment on her desired tiara.

These trade-offs are so common that even respected musicians will agree to get paid less than they deserve. For example, Alex Chilton whose Big Star anthem “In The Street” graces the opening moments of “That ’70s Show” has been quoted saying that he is taking home an alleged chicken scratch of $70 each time a new show airs. Compare that with the amount of revenue that same station charges for 30 seconds of commercial time and you’ll understand how inadequate this ancillary revenue stream is as a replacement for mechanical royalties.

What’s worse, this new post-copyright world where music is “free” just serves to reinforce the clearly demonstrated desire of business interests to avoid having to pay fair wages to musicians for their work. “After all, if no one else is paying for music why should the corporations have to?”

3. Merchandise sales

Some bands make a lot of money on merch, some make less. There are several problems with this as a substitute for mechanical royalties. First of all, it’s not a steady stream of income. To sell a t-shirt, you most likely have to be on tour, and as noted in item 1, sometimes that’s a losing proposition in itself. In some cases, bands sell merchandise because it’s the ONLY way they can make money on tour. But the bigger problem with depending on t-shirt sales as a new revenue stream is the very nature of the argument. Bands write songs and play music, so they should be compensated for their skills as musicians, not for their skills in making a neat sticker or beer cozy.

4. Websites and Ad Revenue from “Click Throughs”

Now this is an interesting one. Some of the genius internet panelists are suggesting that artists should set up a subscription area of their websites where they ask folks to pay a certain amount of money to get into that private area because they are your fans. So, for example, every month Kristin and I could put up different photos of us working on The Machine, or maybe rough edits of articles and outtakes from interviews and you, the super-fan public, would pay us $5 a month for the privilege of accessing that information. The same argument that was made about the difficulties in encrypting music applies here. If it’s impossible for Microsoft to create a method of encrypting music then how do indie rocker novices like us insure that only the proper people get into our restricted sites?

Another idea that has been implemented on a number of MP3-based sites is sharing advertising revenue with artists. On these mega-MP3 sites, the name of the game is traffic. The number of unique visitors to the site is held up to investors and potential advertisers as a powerful indicator of the site’s popularity and influence. But it’s rough going out there — nowadays bands and artists have lots of choices as to where they post their sound files. In order to entice more bands and artists, some sites have started to reward bands that direct fans (aka “eyeballs”) to that site by giving them a cut of advertising revenue. Others have taken it one step further and rewarded bands for “click through” traffic that comes to their site based on band-generated links. Considering that these free MP3-based sites have paid virtually nothing for the content that has, in turn, propelled these companies to multi-million dollar IPOs, sharing a bit of the ad revenue seems like the right thing to do. Still, this is not a legitimate ancillary revenue stream. From what we hear, revenue sharing programs pay artists a pittance. Who knows, this model might turn into an interesting way to supplement artists’ revenues, but as it stands, it’s not successful. Indie artists should not be expected to give up actual payment for hypothetical payment.

Even more, these models further reduce the artist’s role to a pawn in a much larger chess game. Sure, we all participate in the capitalist system, but this kind of stream has nothing to do with the intrinsic value of the artist’s work. The idea behind mechanical royalties is that music is valuable and that the workers who create this music should be compensated for that music. I find it humiliating that these internet companies see nothing wrong in unseating the value of my work (work that their business models benefit from) and then giving me the responsibility of getting paid for some unproved ancillary sizzle.

5. Virtual Tip Jars

This theory proposes that artists set up an area on their site where fans can volunteer to pay them money. Ha ha ha! We’re not musicians, we’re trained monkeys! Actually, there is precedent for this business model in open-source software development where users are asked to pay an honorary donation for the privilege of using a software program. The difference here, however, is that open source software developers have the choice to give away their work, whereas in the post-copyright era where music is seen as free, artists may not have that choice.

6. Grants and Foundations

This is the theory that instead of paying musicians for their work, we can turn to government or to privately endowed foundations to support the arts like they do in Europe and Canada. It would be wonderful to be able to put out our own records, like Canada’s Julie Doiron did this year. It would be even nicer to be able to apply for and receive government touring grants, as she has done. Even better, she was not only eligible but capable of winning the Juno award (Canada’s Grammy). Still, after 32 years of life in this bastion of capitalism I don’t see that transformation happening here any time soon.

What’s worse, without a cultural history that respects this kind of patronage we would be setting our labor up as somehow less valuable than other general types of labor that are paid through the market. It’s easy to see how artists would become second class citizens in this scenario, not workers, with a valuable contribution that deserves to be compensated but arbitrarily endowed artisans looking for charity. Oh, and we all know that artists are never influenced by their patrons. That’s why many bands stop taking risks once they’re aligned with a major label.

Is ARS All Bad?

Don’t get us wrong, there are people who make a majority of their money through ancillary streams. Actually, many of the most outspoken musicians who are supporting Internet music commerce these days are setting themselves up to make a bundle through other channels. Chuck D himself has said that he will use his music as a loss leader in order to raise money in other areas. If his website rapstation.com becomes the main portal for rap information on the Internet, he won’t need to worry much about Public Enemy mechanicals — he can make his cash selling ads or mailing lists. The same is true for Thomas Dolby and his internet music software and Jerry Harrison from the Talking Heads and his garageband.com site. These folks saw the changes coming down the pipe and they got into the fray. We don’t fault them for it one bit; they are doing the smart thing and adapting to a changing world. They are working hard and they should be compensated. What worries us is that these articulate artists get paraded around as spokepersons for the artist in the post copyright age when they’ve all got their personal ARSES taken care of. How many rapstation.coms can there be out there? Will all rappers benefit equally from the post copyright age? Hardly.

Worse for the Indies?

No, it doesn’t look too good for musicians in a post copyright age, and it looks the worst for those of us who have been working in the indie communities with no thought of working with the majors. Think about it; we’ve already disassociated ourselves from the traditional promotion and distribution chains, albeit on a smaller, more expensive level by relying on mailorder and mom and pop stores. This Internet technology offers us better distribution and a higher profile at a cheaper price, but we were never much tied to the shackles of the corporate ogre in the first place, so those gains are somewhat moot.

What’s worse, every sale we lose comes out of our own pockets. This is doubly distressing considering the fact that many of us who work in indies are also musicians who have never relied on these traditional ancillary revenue streams in the first place. Furthermore, when you realize that the great majority of people who are trafficking in pirated digital downloads are college students i.e. the demographic that makes up great majority of the indie buyers, it just follows basic logic to believe that indies are being disproportionately affected.

Now What?

What should we do? It’s hard to say. The RIAA, who are doing a lot of the suing of pirates, is clearly identified with the interests of the major labels and therefore more worthy of contempt than support. On the other hand the great majority of the entrepreneurial internet music folks who are developing these new technologies and services often really do seem to care about musicians. Their belief in open-source technology which informs their rationale for moving towards “free music” is utopian and idealistic so they are a fun group to align with, aside from the fact that their technological innovations erase the value of my music production. Maybe I’m giving them the benefit of the doubt, but it just seems that they have had other things on their mind besides guarding our rights.

The Challenge To Do Better

The Machine hereby sends out a challenge to all those working in Internet music business community to put their substitute royalties where their music-fan mouths are and to figure out a legitimate way to compensate musicians for their work. We are excited to support any payment strategy that seems feasible, and we refuse to support any business model that does not guard the financial value of our labor. Gone are the days when Internet companies can say they are working to compensate the artist without really doing so.

Second, we issue a challenge to all the innovative members of the independent community to create legitimate business models that will not only utilize the power of the internet, but fairly compensate artists for their work.

And third, we challenge all the musicians, artists and members of the independent music community to think hard about their position on these issues before they choose to participate in systems that may end up biting them in the arse.