Independent Labels: What’s the Deal?

With the music industry in a state of flux and digital music all the rage, independent labels (“indies”) are multiplying and finding creative and alternative methods of doing business. Indies are often successful at discovering local talent, encouraging more specialized musical genres, and can usually bring music to market more quickly than a major label. This article will describe the different types of indies and the different types of deals an artist might encounter, and describes some of the most important deal points artists should consider, including how to compromise if necessary.

TYPES OF INDEPENDENT LABELS

The major distinction among indies is how they handle their distribution. Besides funding, distribution is the most important aspect of running a label. Due to the increasing use of the internet for the distribution of music, indies now have more options and choices in this regard.

Major-Label Distributed: With a major-distributed indie, the indie finds and signs the artists and records the albums. The indie then contracts with the major for promotion and distribution, and possibly also the manufacture and release, of the album. Such indies can be small record labels or production companies.

Owned by a Major Label: These indies distribute their records through independent distributors, but are owned by a major label.

Pure Independent: These labels are not affiliated with any major label. Their records are distributed through independent distributors, who are usually regional.

TYPES OF INDEPENDENT DEALS

Looks Like a Major Deal: Many deals offered to artists by indies look a lot like major label deals. This can be for several reasons: 1) Indies distributed by a major will have to sign major-label deals themselves with that major. The indie would therefore want to make sure the same issues are covered in its contracts with its artists as are covered in its contract with the major. Such contracts will also require the artist to sign a “side letter” or “inducement” letter directly with the major. 2) Some indies just want to look professional and serious to their artists or figure, if this contract works for the big guys, it will work for them! 3) Some indies might have signed a particular artist that has garnered critical or media attention, or might have a well-known producer associated with it such that it could be eventually be dealing with a major or major distributor. Record contracts often last quite a long time, so an indie that thinks it will eventually be dealing with majors might want their contracts to look similar to avoid too much re-drafting later.

Pressing & Distribution (P&D): This is a deal only to manufacture and distribute the records. This is ideal for artists who have the means to record their albums themselves. Indies may also enter into P&Ds with major labels instead of a full-blown deal (which would typically include promotion, etc.).

Joint Ventures or 50/50 Net Splits: These can be between an indie and a major or between an indie and an artist. Such deals more resemble partnerships, with both entities sharing (or assigning) the various duties and splitting the net profits. One major issue with a 50/50 net split deal is that the artist has to agree to forego her mechanical royalties (the fees paid by the label to the artist for the use of the underlying songs), because otherwise the artist will actually receive more than 50% of the net profits. This can be a sticking point in such a deal, because most artists hate to give up their mechanicals!

Creative, Casual and Other Types of Indie Deals: Indies often desire a friendlier, less adversarial relationship with their artists, or want to distinguish themselves from majors as much as possible. Therefore, indie deals can sometimes barely look like recording contracts at all, and some indies do not have written contracts! Contracts might include net profit splits instead of percentage royalties, few or no options (more about options later), few restrictions, no mention of tour support, promotion, radio promotion, videos, and other clauses traditionally in major contracts. However, all of these certainly can be negotiated and included, depending on the indie’s capital and expertise.

Indie deals also often include other streams of income such as publishing and merchandising, while these are almost never included in major deals. (There are several things artists should consider when deciding whether to have an indie handle their publishing or merchandising – more about this later). In addition, with record sales down (by most accounts) and internet-based music sales just starting to pick up speed, licensing income from other sources is now more important, so indies may want to make sure that since they are putting the money into the recordings, they will benefit as much as possible if a song is used in a film, or if the band sells a lot of merchandise at shows.

Indies may also strike licensing deals with artists instead of the usual contracts. Like P&D deals, this type of deal might work for artists who can pay for their own recording. The artist would record the songs themselves, and then license the recordings to an indie for the indie to do the release, promotion and distribution, with some kind of revenue-sharing arrangement.

INDIE DEAL POINTS

Even with a small, local indie, there are issues where the interests of the artist and the label are just not the same, and with indies that have contracts more like majors, there are more issues like this. Artists should know what to expect in any kind of recording contract, what is industry standard (for major contracts) and what is negotiable.

1. Copyrights: Most artists know enough about copyrights to know that they think should keep them at all costs. However, in the music business, no matter what kind of label you are dealing with, it is most common for the label to own the copyrights to the recordings. This is not quite as unreasonable or scary as it sounds.

Those who create songs and other original works of expression have the exclusive rights to copy, distribute (sell), perform and create derivative works of those works. Copyrights in songs and other works are separate from ownership in the physical work itself, which is why we can all buy CDs and own those physical CDs, but we do not own the copyrights in those CDs. Artists should also understand that when they record songs that they have written, they have created two separate sets of copyrights – one set in the songs themselves (the music and the lyrics) and another in the sound recordings. The label, if they are paying for the recordings, will want to own those recordings, or masters. The rationale is that the label, indie or not, is taking all the risk up front, and will also need the copyrights or at least an exclusive license in order to do their job, such as manufacture (copy) or distribute the record. In addition, any label dealing with a major will have to guarantee that it has the right to grant certain rights to the major -which it cannot do if it does not have those rights in the first place! So it makes good business sense for the indie to own the recordings they paid for. Remember, just because the label owns the copyrights in the recordings, does not mean they will own the copyrights in the songs themselves – those rights are separate. Obviously, in a deal where the indie and the artist are sharing recording costs, or where the artist is paying for the recordings instead of the indie (such as with a P&D deal, or a licensing deal), then the artist should own or co-own the copyrights in the recordings.

Artists hell-bent on owning the copyrights in the recordings should be prepared to give up a whole lot of other things to get this, and should realize that they will have to grant the label many rights temporarily (like a license) so that the label can do their job without stopping to speak to the artist about every little detail. This could be a deal-breaker. Alternatively, artists could try to have the copyrights to the recordings revert back to them in the event the record is not released, or after the passage of a certain amount of time.

2. Term, Options. Major label deals are usually only for a term as long as it takes to record and release one album, with the label then having many options to renew the contract and release more albums for the artist. Artists will always want to commit to the fewest options possible. Especially with an unestablished indie, an artist should not want to be tied down for too long in case the label does not do well. From the label’s point of view, it will want some flexibility to keep working with an artist if she shows promise, and will want to avoid the scenario where it puts much time, effort and money into an artist and helps that artist achieve some recognition, only to have that artist skip out and sign with a major (or bigger indie), leaving the indie unrecouped.

Artists trying to negotiate fewer options with a label without success could ask for a buy-out clause. A buy-out clause sets forth the rules that will apply should a bigger label want to sign the artist. Buy-out clauses can include pre-negotiated dollar figures that the major will have to pay the indie for the indie to release that artist, or they can simply state that the indie will negotiate in good faith should a better deal for the artist come along. This way everybody wins – the artist can take the better deal, but the indie will have the right to make a nice exit deal for itself to compensate for all the time and money it spent.

3. Royalties. Royalties in indie deals can look just like those in major deals, where the normal range is 9-15% of Standard Retail List Price (SRLP) depending on whether the deal is “all-in” (artist pays producer royalty out of artist’s royalty). Royalties can also be expressed as a percentage of the indie’s income from the records, with a range of 50-75%, again, depending on who pays the producer. Artists unhappy with the percentages offered them could negotiate for escalations – where the royalty increases upon certain sales milestones, or for subsequent albums.

4. Advances. Artists should first realize that advances, or funds, are not gifts. Advances are more like loans, except that the label will not try to collect the money back except through the artist’s record royalties – a process called recouping. The advances offered to artist by indies, if any, will be much smaller than those offered by a major label. Indies often will simply agree to pay a certain amount in recording costs, with no actual “advance” going to the artist, but these recording costs still have to be recouped by the label before it pays the artist any royalties. The advantage of having a small or nonexistent advance is that the artist will have less to pay back from his or her royalties, and could be earning record royalties more quickly. The disadvantage is that since there are so many costs for the label to recoup before paying the artist his or her royalties, an advance is often the only money an artist will see for some time. The size of an advance can also depend on the artist’s leverage (bargaining power). An artist who has more than one label interested in him might be able to get things such as a bigger advance, but just remember that it all has to be paid back!

5. Free Goods, Compilations. Free goods are the records that labels have to give away in order to promote the album and keep its retailers happy. This is important to artists because artists do not receive royalties on records given away for free. Major label deals usually limit free goods to 10-15%, but indies may have to give away more records to successfully promote an artist. Artists signing with an indie should be prepared to agree to allow the label more free goods.

Indies, as well as marketing and promotion companies, will also want to put songs on compilation CDs to showcase the artists on that label, or artists in a particular area. Major labels want the right to put individual songs on compilations also, but these are often sold and bear royalties. Compilation CDs put out by indies are usually given away, and artists should not expect any income from this.

6. Publishing. Many indie deals will include a clause giving the indie publishing or co-publishing rights. Publishing simply means licensing the songs themselves (not the recordings – remember, this is separate) and administering those licenses (collecting the licensing fees, doing all the paperwork, paying the artist his or her share). A publishing deal normally grants the publisher the copyrights in the songs in exchange for 50% of whatever income that publisher receives from licensing the songs. More common today are co-publishing deals, where the artist and the publisher co-own the copyrights and the artist receives 75% of all income received.

New artists should decide whether they want to try to find a separate, established publisher, self-publish, or let the indie do it. The artist’s decision here will depend on many factors – the quality of the artist’s songwriting and license potential of the songs; the indie’s funding, plan for publishing and connections to the television and film worlds; the artist’s ability or connections to find license opportunities himself, etc. Artists who think the indie can do the publishing or who do not have another option can always start out with the indie but have a buy-out clause covering publishing should a better publishing opportunity come along or just an “out” should the indie not meet certain goals within a certain time frame. The same principles apply to merchandise.

The main issue to watch out for when granting other rights such as publishing or merchandising to an indie is cross-collateralization. Cross-collateralization is the label practice of recouping the debts of one album from other sources of income – typically the sales of a later, more successful album. What artists should not allow is the cross-collateralization of their records with their publishing or merchandise, or with the artist’s mechanical royalties for controlled compositions. Artists giving an indie their publishing and/or merchandising should watch out for language in the contract such as “recording costs and other advances may be recouped from any royalties owed artist under this contract or any other contract with Indie.” Artists should ensure that recording costs and other recoupable amounts are only recouped from the artist’s recording royalties.

This list is by no means inclusive – there are, of course, many other factors to consider and deal points to understand and decide upon. Again, the nice thing about independent labels is that unless they are linked to a major and are required to structure their deals just like that major, indies are often more flexible and more willing to take chances and be creative. Now that more independent distribution options exist, an indie can offer an unknown or off-beat artist a chance at getting their music heard, or at least be a kindler, gentler alternative to seeking a major label deal.

Suggested Resources:

• Passman, Donald S., All You Need to Know About the Music Business: Revised and Updated for the 21st Century, Simon & Schuster, NY, 2000.

• Thall, Peter M., What They’ll Never Tell You About the Music Business: The Myths, the Secrets, the Lies (& a Few Truths), Watson-Guptill Publications, NY, 2002.

Stacey Friends, Esq. is the founder of and principal attorney for Stacey Friends & Associates, a law practice specializing in copyright and trademark law, licensing, entertainment law, and general corporate and business legal services. She is the co-chair of the Art, Entertainment and Sports Law committee of the Boston Bar Association, teaches a course at the New England Institute of Art entitled, “Legal Issues in the Music Industry,” and is a panel attorney for the Volunteer Lawyers for the Arts. She is also a summa cum laude graduate of Suffolk University Law School.

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