lawyer services

okay, awesome! well, let's get started. so, i’m excited to be presenting today on“music service contracts 101.” this is an introductory overview to some ofthe major aspects of music service agreements. who am i and why am i talking about this topic? well, my name is franklin graves and i'm anattorney based out of nashville, tn. i'm currently general counsel for naxos musicgroup, the world’s leading classical music company. i've included some ways to get in touch orconnect with me across the web.

so, feel free to reach out! before we get started, i do need to give asmall disclaimer. first, this is a personal presentation foreducational purposes only. everything i'll be sharing or saying representsmy own views and opinions, not those of naxos, the aba or any other organization. second, this should not be considered legaladvice and i am not your attorney. please consult your own legal counsel forany specific issues you may have. i've provided a roadmap to give some guidanceas to the topics i'll be covering today. i have time for questions built-in at theend, but that doesn't mean you can't interrupt

me or ask questions along the way. i think it’s important for you, as an attendee,to understand what this presentation is about and why it’s important to you. so, the “what.” this presentation is about key terms of amusic service agreement or contract. i’ll use “contract” and “agreement”interchangeably as they both mean the same thing. the goal is for you to leave with an entry-levelintroduction to these kinds of agreements should they ever run across your path.

what are music services? they’ve evolved quite a bit over the pastcouple of decades, but i’m sure everyone listening has interacted with one in somefashion. has anyone on the call every purchased musicfrom the itunes music store, or streamed music through a service like spotify or tidal? great. it may be safe to assume we’ve all utilizeda digital music service at least some point in our lifetimes. these logos on the slide are examples of variousdigital music services that will be the focus

of the presentation today. some of them you have likely heard about,others are only available in europe, asia, or other ex-us countries. continuing with the “what” of the presentation, i've put together this flowchartto show the basic breakdown of music services and the ways they operate. music services can be broken down into twobasic functions: streaming and download. sometimes both are available on the same platform(like apple music and the itunes store). streaming platforms come in two varieties,as well: interactive and non-interactive,

and then both of those offer options to listenby way of a subscription fee or ad-supported method. download stores are fairly straightforward,with most now also having a locker service or cloud component included. i'll get to what all of these definitionsmean in a couple of slides. the way music services operate is becomingmore complex. examples include genre-specific services (suchas classical-only or country-only), device-specific services (such as amazon’s $5 per monthmusic streaming only on an alexa device), and multimedia services (such as youtube red offering both ad-free youtube access and

music streaming through google play). we, as an industry, are seeing a huge increasein the number of services offering subscription streaming options. just during the last half of 2016 alone, iwas dealing with the launch of soundcloud go, pandora’s subscription service, andiheartradio’s service, plus 3-4 additional genre-specific services launching outsidethe u.s. it seems like everyone wants to offer a musicsubscription! a great blog i recommend you check out ismark mulligan’s “music industry blog.” there is a link on the slide.

here you can see a pie chart showing the numberof global music subscribers surpassed the 100 million mark at the end of 2016. as you can see, spotify is clearly ahead ofthe rest, but it should be noted apple music, which launched only a year and a half ago(not counting its time as beats music), is already at just under half of the subscribercount as spotify. i recommend checking out the additional in-depthanalysis mark provides on the blog. for the sake of time, i’m going to skipover this slide. now, let’s dive in! we’ll first take a look at terms, or definitions,you should know.

as maria von trapp from the sound of musicsays, “let’s start at the very beginning.” two terms you may encounter are “aggregator”or “distributor” and the differences between the two can be confusing. an aggregator is a company that offers businessto business (b2b) services, specifically the delivery of music content to a music serviceon behalf of the content owner. a distributor is a company that takes themusic content for a record label, or owner of the sound recordings, and coordinates thedistribution to music services. both an aggregator and distributor managedirect relationships with major music services for delivery of content.

the main difference is that a distributortypically offers additional, more hands-on services such as marketing and promotion ofcontent. for example, sony music owns a dist. companycalled red distribution and warner music owns a distribution company called ada. two of the biggest artists when it comes toalbum sales are on independent labels, but rely on major label distribution. taylor swift and her label big machine recordssigned a deal to have universal handle distribution for albums. adele’s previous albums were distributedby sony music in the u.s.

drm, or digital rights management, is softwarethat prevents consumers from access music files in an unauthorized manner, such as burningto a cd or playing back on a different computer or device. drm software can take many forms, such asa proprietary music format or an application for playback. dsp, or digital service provider, is anotherterm commonly used to refer to the music service. file locker (or cloud storage) allows fora consumer that purchases content to download, stream, or further access purchased contentfrom a service provider. metadata is data that provides informationabout other data.

the easiest way to visualize metadata formusic files is in itunes. as you can see in this wonderful example ofour wonderful friend, ms. ariana grande, metadata for music includes information such as songtitle, artist(s), album title, composers, genre, release date, track information, andmore. companies specialize in providing music metadata,such as gracenote (which was just purchased by nielson in december) and rovi. for example, if you open spotify and checkout an artist profile biography or album information, you’ll see the data that is supplied comesfrom rovi. or, if you put a cd or dvd into a sony player,you’ll likely see it accessing the gracenote

database to get the metadata to display. when it comes to streaming, there is a statutorydifference to understand. interactive service allows a consumer to choosethe music that is played back on the service. examples include apple music, spotify premium,tidal, and deezer. music services must negotiate and enter intodirect deals with content owners to offer sound recording catalogs on their interactiveservice. that’s why you see taylor swift’s 1989album only on apple music and not on spotify. a non-interactive service does not permitthe consumer to choose specific songs for playback.

examples include pandora, spotify free, andiheartradio. music services rely on what’s called a compulsorylicense in the u.s. with royalty rates not negotiated with the content owners directly,but rather pay based on rates set by the copyright royalty board (crb). as i mentioned before, many services now offermultiple types of playback to consumers, so you may encounter both types of services withinthe same agreement. xml refers to the code, containing the metadata,that accompanies delivery of sound recording files to a music service. i’ve put together a simple example of xmlcode in this slide.

if you know basic programming, you may recognizethis as lines and lines of just opening and closing tags, specific to the music industry. for instance, this xml, again using our friendariana grande, on lines 14 and 15 will communicate to the music service the publishing and soundrecording copyright information. those two lines will then be what you seeif you scroll to the bottom of an album or single in spotify, itunes or another service. the full xml data for a single album can easilybe upwards of 1500 lines of code, and can even include pricing information and lyrics,too. as with most industries, there is a standardizedprocess that’s been developed and adopted

by the major players. ddex refers to an organization that has establisheda series standards when it comes to delivery of xml data, meaning the code used to delivermusic metadata to amazon can theoretically also be used to deliver to spotify. license v. distribution. what kind of rights deal are we making witha music service? as you may be aware, section 106 of u.s. copyrightlaw creates what is commonly referred to as the “bundle of rights” that are exclusiveto the content owner. therefore, a music service must be granteda right in some form to be able to exploit

the content. an entire presentation could be put togetheron this topic alone. if you are interested in learning more aboutthe differences between the 106 rights when it comes to the music industry, i’d encourageyou to google about the rapper eminem and his fight with universal on the applicationof these rights to music service agreements. overall, i just want to make sure you knowthat these three rights i’ve listed are the main ones that are being negotiated whenit comes to music service agreements. next let’s take a look at some of the standardterms you might see or negotiate within a music service contract.

an important note because i know we have somelaw students on this call. make sure you take a contract drafting courseto learn the basics of contract formats, boilerplate provisions, mfns, and more. easily one of the most important books i havecarried with me from law school is “kohn on music licensing” written by al and bobkohn. it’s currently on the 4th edition, and idon’t think it’s been updated since 2009. however, the information in this nearly 2,000page book and the accompanying cd of standard forms is invaluable! as a content owner, you obviously only wantto have one-year terms, but a music service

wants multi-year terms ranging from 2-5 years. with multi-year terms, you typically see advancesor guarantees being given in exchange, which i’ll get to in a couple of slide. from the consumer perspective, they don’twant to see their music disappearing from their playlists or favorites. territory should be negotiated based on wherethe service currently operates. as a content owner, you don’t want to grantrights beyond what is necessary, so you’ll try to limit the territory. however, as a music service, you may havegrand plans to become the next big global

company, so you’d want worldwide rights. it’s also standard for the content ownerto withdraw or limit rights if they don’t have the authorization or legal right (maybedue to different copyright laws in a particular country) or lose the rights to offer somethingin their catalog. music services will always allow for thistype of language. windowing is when a time limit is put on whenan album is made available on a particular platform following its initial “street date,”or release date. windowing can be anywhere from a week or twoto a couple of months. examples include adele and taylor swift notallowing their albums to be streamed during

the first few weeks or months of its release. however, in the edm genre, artists like avicii,calvin harris and david guetta thrive off streaming revenues, so windowing wouldn’tbe a smart business decision for their releases. another thing we’re seeing, but perhapsless of going forward, is exclusives - a kind of hybrid or offshoot of windowing. exclusives can also be service specific, suchas the streaming service tidal being the only place to stream rihanna, jay-z, beyonce orkanye west releases. however, exclusives are typically for onlya short period of time, despite what kanye west may tweet.

either way, the contracts typically addressthe content owner’s right to set windowing periods or offer exclusives to both that particularmusic service and others. format is another important point to negotiate. standard definition, typically a max bitrateof 320kbps in mp3 format, is standard and the point at which most services operate. lossless, or cd quality, is considered thenext level up and typically offered on a music service for a higher fee to the consumer,such as tidal. high-resolution, or hd audio or master copies,are rarely included in a standard deal, unless the music service specializes in offeringthat quality, such as with the hdtracks store.

the contract should also clearly explain themethods for exploitation, such as download and streaming, or free and ad-supported offerings. fees and royalties. for a while, apple tended to set the standardwhen it came to royalty splits for download music services. spotify broke the mold with streaming andoffering a free, ad-supported tier. however, they’ve been in heavy negotiationswith the major labels, which don’t want to have the free tier available any longer. it’s suggested that one of the strategiesapple is using is setting higher royalty splits

for streaming, including payments made tosongwriters, since they have cash to back up their service, while spotify has gone throughseveral rounds of funding and is reportedly looking at an ipo in the future. by now, it’s common knowledge in the industrythat download store splits are typically 70% to the content owner and 30% kept by the musicservice. this revenue percentage changes when you addin factors such as whether the store is offering lossless or hd audio to the consumer, whichoften entails higher technical costs and maintenance for the music service, so may result in adifferent revenue spit. streaming services, however, are all overthe map.

luckily, with apple music’s streaming service,our friends over at digital music news published an article that purports to be a full agreementwith apple for their music services, including the itunes download store and the apple musicstreaming service and more. of course, no one knows whether this is areal thing, or if it’s the final version since the article leaked the contract beforetaylor swift wrote her open letter to tim cook. however, if you look in the agreement, therevenue share split for the streaming service is 58%. therefore, perhaps we can assume the royaltyrates for streaming services are somewhere

in that ballpark. let’s take a closer look at this purportedapple music agreement! in the definitions section for the streamingservice, you can see the term used is “pro rata share” and includes a written out methodof calculating the content owner’s share of the music service royalties that it paysout. if after reading that you feel like this. don’t be afraid. it’s complicated and take a lot of practiceand experience to read through and actually make sense of it all.

i’ll take us on an illustrative journeyto get a basic understanding of what pro rata share means. with every subscription music service, therevenues collected from the consumers is put into a gigantic pool. there are typically many pools that are separatedbased on the type of subscription they collect, such as full premium, student discount, cellphone service bundled discount, 99-cent promo, etc. for the sake of this illustration, we’reonly going to look at one pool generated from the standard 9.99 per month subscriber.

let’s assume there are 20 million subscriberspaying 9.99 a month. that would mean the “gross subscriptionrevenue pool” for that service, the big green circle if i haven’t lost you, is roughly$200 million. now, going back to that purportedly leakedapple music deal, that would mean of the $200 million, a music service would keep almost$84 million, and the music services would split almost $116 million. okay, now what do we do with that $116 millionand how is it paid to content owners? here’s an example of what an artist with5,000 streams would receive according to that leaked alleged agreement.

the artist’s streams are divided by thetotal number of streams generated on the music service for that month, to give us a pro ratashare, or that content owner’s portion of the streams. we then multiply that $116 million that’spaid to the content owners by this artist’s pro rata share, and end up with roughly $960in royalties. this calculation is based on an assumptionthat every user is only streaming around 30 tracks each month, or roughly 3 albums, whichfalls closely in line with the estimated 20 billion hours of music listened to on theservice in all of 2015. some of you musicians or industry people mightbe looking at this and wondering, what the

heck… i don’t make that much money! again, this is just an overly simplified visualfor the language of how some of these contract calculations are written. an actual music service pays based on factorssuch as the country where the content is streamed (which is a much different royalty rate thanin the u.s, europe, or more economically developed countries), currency conversions, the premiumstreams vs. ad-supported streams, streams based on a family account or student discountaccount, the label’s or distributor’s cut that is being taken, songwriter royalties,and more.

when it comes down to it, a per-stream rateis not the way to view royalties from music services that operate a streaming package. spotify, for instance, has admitted they have“an average ‘per stream’ payout to rights holders of between $0.006 and $0.0084.” now that we’re all enjoying a massive headacheor have completely zoned out by this point, let’s move on! advances and delivery fees can be alternativeways to get money up front. advances are given to the content owner fromthe music service. recoupable, but not refundable is best explainedby an example.

if a record label receives $10,000 in advancefrom a music service, that means that when people listen to the music on the serviceand generate royalties for the record label, before paying the royalties the music servicegets to keep the first $10,000 in revenue generated before it starts paying money. however, it’s typically non-refundable,meaning that if the music service doesn’t end up being successful or that record label’scontent isn’t streamed enough to generate $10,000 in royalties, the record label keepsit. advances can range from a couple thousandto $100,000+ depending upon factors such as: how large of a music catalog is being negotiated;what formats are being delivered; what quality

is being provided; how extensive of metadatais requested; and how established is the music service? for instance, a tech company that makes devicesand offers a music service as a secondary business to their main business, may be ina position offer advances, compared to a music streaming startup. advances can also be in the form of marketingcredits or commitments, so that a record label can get their album included on the frontpage, or a newsletter sent to subscribers, or advertise to users that listen to ads. delivery fees are charged by the content ownerto the music service.

they are typically non-recoupable and non-refundable. the theory behind delivery fees is that theycover the technology investment involved in content delivery (bandwidth, encoding, storage,future deliveries, metadata updates, takedowns, etc.). you may have heard (or can easily go google)about the ebooks price fixing issues from the early 2010s, or the cd “minimum advertisedprice” lawsuits in the early 2000s. basically, it’s illegal for companies toconspire and price fix. that’s where minimum guarantees, sometimesreferred to as a “wholesale price” or “minimum resale price,” come into play.

let’s start with download stores. music service contracts will have a minimumwhole price chart or table that lists out wholesale tiers of pricing for content. the tiers provide the content owner a minimumamount of revenue they will receive when music is purchased, allowing them to set differenttiers for different products. for instance, you may see a term called “backcatalog” and “new release / priority titles.” back catalog is typically anything releasedover a year or two years ago and can be offered for a less expensive price tier. here is an example of what that table or chartmight look like in the annex or schedule to

the music service contract. a tier 1 album might be priced by the musicservice to the consumer for $12.99, and a midline, tier 2 album, may be priced at $9.99. for single tracks, it’s similar price structure. the tables will be more complex dependingon the size of the record label’s catalog, multi-disc sets, bonus or extended editions,and more. you’ll also see additional tables includedfor lossless/cd-quality pricing and hi-res audio pricing. to make things more complicated, the contractswill include a “greater of” calculation.

the “greater of” language protects thecontent owner from the music service selling at a high retail price and keeping the revenuesfor themselves. let’s take a closer look at what this meanswith an example. he’s sample language i made up to illustratewhat you might see in a contract. "music service will pay to label the greaterof 70% of the retail price, excluding taxes, and the minimum wholesale price as set outin the table below." the greater of language means the music servicewill pay one of the two options: either 70% of the retail price paid by the consumer,or the minimum amount specific in the tables we just looked at.

here are three different scenarios in whicha music service would sell an album. let’s say service a sells an album for $10,and pays the label $7 per the contract. service b sells the album at a heavy discountof $1.00, still has the pay the label the $7.00 minimum, and operates at a loss of $6.00per sale. this is actually based on what amazon didwhen they launched amazon music. they offered lady gaga’s “born this way”album for $0.99 as a way to capture a consumer base away from the then-dominating itunesmusic store and promote their online cloud library service. moving on to service c. service c appearsto market toward a consumer base that is willing

to pay more for music, and they are able toget someone else to pay $20 for the same album. in this case, the music service won’t getto keep the profit all to themselves, and the “greater of” calculation comes intoplay. let’s move on to streaming. with streaming services, contracts will typicallywhat is called a “per-subscriber minimum.” per-subscriber minimums ensure that the musicservice will pay at least a set amount into the subscription royalty pool each month forevery subscriber. think back to that big green circle visuali had in an earlier slide. that is what content owners want to make suredoesn’t fall below a particular amount,

thereby giving a minimum value to the contentthat consumers are paying to access. mechanical royalties are the payments due,by statute, to songwriters. for music services that operate in the u.s.,agreements typically pass responsibility off to the content owners for paying mechanicalroyalties on the sales that occur. for music services that operate outside theu.s., the responsibility for mechanical payments is handled by the music services because theycan often pay directly to local collection societies within the territory. harry fox has some helpful charts for thosetrying to understand the royalties due to

songwriters. it’s easy when it comes to downloads andsales of digital music. it’s just like with physical cds where forevery song sold, the songwriters are due 9.1 cents. if a songwriter writes all 10 songs on a 10-trackalbum, then they would get paid $0.91 cents when it sells. same concept with singles, if a song is sold for $0.99, then the songwriter would get 9.1 cents. however, streaming makes things more complicated.

for the sake of time, we’re not going todiscuss this. just know that information is available ifyou need it over at harry fox. to wrap up this presentation, let’s takea look at the differences between reporting and accounting. a simple phrase to remember is: first comesreporting, second comes accounting. reports are typically raw text files thatcan be opened as excel spreadsheets (or equivalent formats). a report contains detail information aboutthe exploitation of the content that has occurred by the music service.

accounting is when the music service paysany money, revenue, or other income generated from the exploitation of the content, andshould match what is sent in the reports. reports typically include information aboutthe artist, album, and track, date of the activity, country the activity took place,isrc code, and more. for streaming services, report informationincludes number of seconds streamed, country in which the stream took place, currency,the stream rate for that accounting period, for download or retail stores, report informationcan include whether it was an individual track or whole album sale, wholesale price, andprice paid by consumer (retail price). european services, due to their laws and regulations,will require an invoice be sent back once

a report is sent before they account for anyamounts owed. when it comes to streaming services, the reportstypically have 100s of thousands of lines detailing each stream that occurred. that wraps up the “music services 101” presentation! are there any questions or comments? again, i can be reached at any

of the methods listed on the slide, so feel free to reach out!