The Future of the Music Business: How to Succeed with New Digital Technologies

Hal Leonard Books

An Imprint of Hal Leonard Corporation

7777 West Bluemound Road

Milwaukee, WI 53213

Trade Book Division Editorial Offices

33 Plymouth St., Montclair, NJ 07042

Copyright © 2005, 2008, 2011, 2015 by Steve Gordon

All rights reserved. No part of this book may be reproduced in any form, without written permission, except by a newspaper or magazine reviewer who wishes to quote brief passages in connection with a review.

Fourth edition published in 2015 by Hal Leonard Books

Third edition published in 2011 by Hal Leonard Books; second edition published in 2008 by Hal Leonard Books; first edition published in 2005 by Backbeat Books

Cover design: Patrick Devine

Front cover photos: Powell Burns (top), Comstock Images © Getty Images (bottom)

Book Design by John Flannery

Printed in the United States of America

The Library of Congress has cataloged the Backbeat Books edition as follows:

Gordon, Steve.

The future of the music business : how to succeed with the new digital technologies / by Steve Gordon

p. cm.

Includes index.

1. Music trade—Vocational guidance. 2. Sound—Recording and reproducing—Digital techniques. I. Title.

ML3790.G67 2005

780’.68—dc22 2005007155

www.halleonardbooks.com

For Amy

Contents

Foreword to the Fourth Edition

Preface

Online Files and Free CLE Credits for Attorneys

Updates

Disclaimer

Introduction: The Current State of the Music Business

I. Current State of the Recording Industry: Cataclysmic Decline from Approximately 14.5 Billion in 1999 to Less than 7 Billion Although Revenues Have Not Decreased as Much in the Last Several Years

Cataclysmic Decline in Revenue

Reasons for Decline

The Majors: Further Consolidation but Continuing Relevance

The Emergence of Streaming as the Revenue Model of the Future

Paid Subscription vs. Ad-Supported, On-Demand Streaming

Lack of Success in Converting Listeners to Customers

Will Streaming Turn Around the Record Business’s Cataclysmic Decline?

Apple’s Purchase of Beats Music

Licensing Recordings for Movies, TV, Games, and Ad Campaigns

II. Music Publishing Business: Performance Income Up, Mechanical Income Down, Total Income Stagnant

What Are Publishing Revenues?

Global Publishing Revenues

US Publishing Revenues

III. Current State of the Touring and Live Performance Business: The Only Sector of the Music Business That Is Making More Money than Before 1999

Gross Income vs. Guarantees and Net Profits

Anecdote from My Own Practice

Top DJs Also Get PAID

Stars vs. Indie Artists and Baby Bands: A True Case of Income Inequality

IV. Branding

V. Current Conditions for Most Full-Time Musicians: Overall the Same as in Prior Years; Digital Has Not Lived Up to the Promise of Leveling the Playing Field

PART I: MUSIC LAW AND BUSINESS PRACTICES

This section offers overview of the laws, business practices, and contracts that apply to the music business and the new rules and business practices that apply to downloading, streaming, webcasting, and other forms of digital distribution.

Chapter 1. Music Law and Business Primer

Copyright Law: The Foundation of the Music Publishing and Recording Businesses

What Is Copyright?

The Works That Copyright Protects, Including Musical Compositions and Sound Recordings

The Exclusive Rights That Copyright Affords

Copyright Registration: Why Do It, and How

Why Register?

How to Register

Duration of Copyright

Works Originally Created on or after January 1, 1978

Pre-’78 Works

Special Rules for Sound Recordings

Termination Rights (How to Get Your Copyrights Back)

Sections 203 and 304(c)

Special Issues Regarding Termination of Post-’78 Sound Recordings

The Work-for-Hire Issue

The Artist May Not Be the Only Author

What Happens Now?

The Steps Artists Need to Take to Terminate Grants

Who Can Terminate

When Must Notice Be Served?

Content of Notice

To Whom Should Notice Be Sent?

How the Fair-Use Doctrine Applies to the Music Business

Performing a 30-Second Excerpt to Sell Ringtones Is Not Fair Use

Using 15-Second Excerpts in a Documentary Is Fair Use Since the Use Was Transformative

Minimum Use and Sampling

Creative Commons: An Alternative to Copyright

Attribution Noncommercial No Derivatives (BY-NC-ND)

Attribution Noncommercial Share Alike (BY-NC-SA)

Attribution Noncommercial (BY-NC)

Attribution No Derivatives (BY-ND)

Attribution Share Alike (BY-SA)

Music Publishing Business

Principal Sources of Income

Public Performance Rights and Royalties

The PROs: ASCAP, BMI, and SESAC

Origins and the Direct-Payment-to-Writers Business Model

Who They Represent and the Purpose They Serve

How They Operate and the Direct-Licensing Controversy

Important and Growing Source of Income

How Much Various Users Pay the Pros

How They Pay Their Members

How You Can Get Paid

Dramatic Works

Mechanical Rights and Royalties

Section 115 Compulsory License

The Harry Fox Agency

Sync Rights and Licenses

Sheet Music and Other Sources of Income

Sheet Music

Other Income

Role of the Music Publishers

Who They Are

What They Do

Music Publishing Contracts: Single-Song, Traditional-Term, Co-Pub, and Admin Deals

Other Players: Sync Reps and Music Libraries

Interview with Jake Wisely, Cofounder of Bicycle Music

Interview with Adam Taylor, President of Leading Music Library APM Music

The Record Business

Why Radio Does Not Pay for Broadcasting Sound Recording

Record Companies vs. DIY

The DIY Model

Recording Agreements

Exclusivity

Transfers of Copyright

Duration and Options

Advances and Recording Royalties

Standard Deductions to the Artist’s Royalty

Recoupment at Artist’s Royalty Rate

Controlled-Composition Clauses

The 360 Deal and How to Avoid Getting Completely Screwed

Master-Use Licenses

Role of Major Labels: Interview with David Massey, President of Island Records

Role of an Indie Music Label: An Interview with Jay Frank, President of DigSin Music (How to Run a Successful Record Label by Giving Away the Music for Free)

Managers and Artists

The Manager’s Role

Management Contracts

Definition of the Commission

Duration of the Agreement (The Term)

How Long the Manager Is Entitled to a Commission

Who Collects the Money

Other Important Terms and Issues

Interview with Emily White, Cofounder of Whitesmith Entertainment

Additional Resources

Chapter 2. Practical Advice in Response to Clients’ Most-Asked Questions

Somebody Stole My Song! What Can I Do? How Much Can I Get?

How Can I Protect My Name or My Band’s Name? How Much Will It Cost?

Protectable Forms of Marks

Quasi-Protectable Marks

The Benefits of a Federal Registration

The Application Process

Domain Names

Band Names

Special Update for 4th Edition

How Can a Music Lawyer Help Me? Will My Lawyer Shop My Music, and How Much Will It Cost?

Chapter 3. Overview of Digital Music Law

Introduction

Statutes Applicable to Distribution of Digital Music: AHRA, DPRA, and DMCA

Audio Home Recording Act of 1992

Private Copying

The Digital Performance Right in Sound Recordings Act of 1995

The Digital Millennium Copyright Act of 1998

Distributing Digital Music: Downloading, Interactive Streaming, and Noninteractive Streaming

Downloading

Interactive Streaming

Noninteractive Streaming, Including Webcasting and Satellite Radio

Application of the Copyright Law and the Statutes to Downloading, Interactive Streaming, and Noninteractive Streaming

Musical Compositions

Sound Recordings

Chapter 4. Downloading

Overview

How Much the Services Pay for Copyrighted Music

How the Money Flows from the Services to the Labels, Artists, Publishers, and Songwriters

How Much the Labels Receive

Major Record Companies and Their Wholly Owned Affiliates

Indie Labels

How Much the Artists Receive

Artists Signed to Labels

Eminem’s Lawsuit against Universal

Unsigned Artists

How Much the Music Publishers Receive

Mechanicals: DPDs Are Subject to the Statutory Rate

Downloads Are Not Subject to Public-Performance Royalties

Previews of Songs Are Subject to Public-Performance Royalties

How Much the Songwriters Receive

Chapter 5. Interactive Streaming

Overview

How Much the Services Pay for Copyrighted Music

How the Money Flows from the Services to the Labels, Artists, Publishers, and Songwriters

How Much the Labels Receive

Major Labels and Their Wholly Owned Affiliates

Indie Labels

How Much the Artists Receive

Artists Signed to Labels

Breakage—Are the Majors Paying Artists Properly?

Unsigned Artists

Is Spotify Underpaying Indie Artists?

Another Controversy: The Majors’ Equity Interests in Interactive Digital Services

How Much the Music Publishers Receive

Statutory Rate Applicable to Audio Interactive and Limited Download Services

How Much the Songwriters Receive

Public Performance

Mechanical

Chapter 6. Noninteractive Digital Streaming, Including Webcasting and Satellite Radio

Overview

How Much the Services Pay for Copyrighted Music

How the Money Flows from the Services to the Labels, Artists, Publishers, and Songwriters

How Much the Labels and the Artists Receive

The Services Pay SoundExchange and It Pays 50 Percent to Artists and 50 Percent to Sound Recording Copyright Owners

How SoundExchange Calculates the Value of Each Performance

The Rates Payable by Various Noninteractive Streaming Services

Stand-Alone Digital Services, Including Pandora

Sirius XM Rate

Broadcast Radio Services That Simulcast Their Signal

Other Rates

How Much the Publishers and Songwriters Receive

Performance Rights in Pre-’72 Recordings: Lawsuits against Sirius XM and Pandora

Chapter 7. The Direct-Licensing Controversy

Will Publishers Be Able to License Public-Performance Rights to Digital Music Services Directly (Instead of through the PROs), and What Are the Consequences for Songwriters?

Collection Societies

The PROs

Consent Decrees and the Rate Court

Major Publishers Make a Move but the Rate Court Rebuffs Them

The ASCAP-Pandora Rate Proceeding and Judge Cote’s Summary Judgment Decision (September 2013)

The BMI-Pandora Rate Proceedings and Judge Stanton’s Summary Judgment Decision (December 2013)

The Publishers’ New Strategy: Amend the Consent Decrees

Why Direct Deals May Be Horrible for Songwriters

Many Writers Are Unrecouped

Publishers Generally Do Not Have to Share Advance Monies with Their Songwriters

Direct Deals Could Hurt Independent Publishers and Songwriters

Proper Solution to Avoid Screwing the Writers

Final Note: Even if the Consent Decrees Are Amended and Major Publishers Withdraw Digital Rights from ASCAP and BMI, Certain Songs in their Catalogues, Including Huge Hits, May Be Excluded

Chapter 8. International Digital Music Licensing

Overview of the Global Digital Music Business

Introduction to Global Digital Music Licensing

Interview with International Copyright and Music Attorney Amanda Harcourt

Distributing Digital Music

Impact of Foreign Publishing Business Practices on Direct-Licensing Controversy in the US

Terrestrial Radio

Digital Music Streaming

Downloading

PART II: MUSIC CLEARANCES

Music clearances means licensing songs that were previously written and musical recordings that were previously produced and commercially released. It does not pertain to original music written for a particular project. Part II provides the basic legal principles and business practices pertaining to clearing music for a wide variety of both traditional media projects and stand-alone digital ventures.

Chapter 9. Introduction to Music Clearances

Songs vs. Masters

Copyright Owners: Music Publishers and Record Labels

Sync License vs. Master-Use License

When You Don’t Need to Clear the Master

Footage Licenses

Labels’ Blocking Rights

Lip Syncs

Public Domain

Special Rules for Public Broadcast Stations Are Favorable to Producers

Charitable Projects

Most-Favored-Nation Clause

Approvals

Credits

Public-Performance Licenses and Cue Sheets

Research Techniques

What if You Can’t Find the Copyright Owner?

Chapter 10. Audiovisual Projects

Movies

Standard Terms and Practices

Price

Step Deals

MFN’s Application to Features

Trailers: In-Context, Out-of-Context, and Other Promotions

Relationships and Music Clearances

Television

Standard Terms and Practices

Prices

Documentaries

Standard Terms and Practices

Strategies for Saving Money

Home Video

Other Windows

Discounts for Very Obscure Music

Concert Programs

Standard Terms

Discounts for Benefit Concerts

Advertising

A Brief History of Music in Advertising

Standard Terms and Practices

Rights and Fees

Other Factors in Determining Price

MFN, Exclusivity, and PRO Licenses

Sound-Alikes

Practical Tips for Clearing Music in Ads

Instructional Videos

Special Event Videos

Exhibits and Installations

Chapter 11: Audio-Only Clearances, Parody, and Fair Use

Audio Compilations

Songs

Masters

Covers and Parodies

Covers

Compulsory License

Harry Fox Agency

Audiovisual Covers

Parodies

Are Parodies Protected by Fair Use?

Sample Clearances

Sampling Defined

Brief Legal History

Sample Clearance Process

When Is Sampling De Minimis?

The Bridgeport Case

The Beastie Boys Case

The Madonna Case: Conflict between Jurisdictions

Caution Advised

Chapter 12. Special Cases

Musical Theatre

Grand Rights

Standard Terms and Practices

Licensing Music for Fashion Shows

PRO Licenses

How to Avoid the PROs

Licensing Music for Fashion Shows for Television

Licensing Music for Fashion Shows for the Web

Public Performance

Sync and Master-Use Licenses for the Web

Chapter 13. How to Clear Music for Various Stand-Alone Digital Projects

Artist Websites

Audio Covers

Video Covers

Music Websites and Blogs

How to Avoid Clearance Issues Altogether

Music Websites

Music Blogs: A Gray Area of Law

Simulcasting

Public-Performance Licenses

Live Streaming Services

Webisodes and Web Series

Indie vs. Well-Funded

Clearing Music for Indie Webisodes and Web Series

Crowdfunding Video Promos

Rates and Terms

Internet PSAs

Rates and Terms

Music-Based Mobile Apps

Introduction

Major-Label Blanket Licenses Are Expensive

Online Lyrics Sites

Why Permission Is Required

Rap Genius and the Fair-Use Argument

How to Acquire a License

Digital Sheet Music

Rates and Terms

Ringtones and Ringbacks (Ain’t What They Used to Be)

Licensing the Masters

Compulsory Licensing for Songs

Ringtones Are Not a Public Performance

Video Games

Licensing Parameters

Chapter 14. Tips and Commentary

Practical Tips for Clearing Music for Any Project

Billboard Commentary: Music Documentary Filmmakers Deserve a Break on Licensing Fees

PART III: THE RECORDING INDUSTRY IN TRANSITION: A BRIEF HISTORY OF DIGITAL MUSIC, CURRENT STATUS OF THE BATTLE AGAINST UNAUTHORIZED FREE MUSIC, AND CURRENT CONTROVERSIES AND TRENDS

Income from sales and licensing of recorded music has dwindled to less than 35 percent of what it was in 1999, accounting for inflation. Part III focuses on the recording industry’s struggle to come to grips with the digital era and recover from its precipitous decline.

Chapter 15. A Brief History of the Recording Industry’s Struggle with Digital Music

Introduction: A Business Affairs Conference at Sony Music in 1999

Labels vs. P2P File Trading: Why the Record Industry Supreme Court Victory against Grokster Actually Hurt Its War on Piracy

The Legal Battle with Napster

Labels vs. the Consumer Electronics Industry and the Failure of the Secure Digital Music Initiative (SDMI)

Labels vs. Technology: The Rootkit Disaster

Labels vs. Fans: RIAA’s Lawsuits

Labels Enter the Digital Music Business: MusicNet and Pressplay

Labels Give Away the Store: The Birth of iTunes

Recording Industry Pushes Antipiracy Legislation but Tech Industry Pushes Back: The Failure of SOPA

Chapter 16. Update on Piracy

The Recording Industry’s Battle with Free Music

Introduction

Pirate Sites; P2P and BitTorrent; and Cyberlockers

Pirate Sites

P2P and BitTorrent

Cyberlockers

Private Sharing: Ripping, Burning, Instant Messaging, E-mailing Music Files, USB, and Hard Drive Sharing: A Bigger Source of Unauthorized Free Music than P2P and Cyberlockers Put Together, but One Which the Industry Can Hardly Do Anything to Stop

Stream-Ripping Programs

Piracy Goes Mobile

The Forces Amassed against the Recording Industry: Google, Apple, and Other Partners

Chapter 17. Network Neutrality

What Is It? Will It Survive? And the Consequences of Its Demise for the Music Business

A Brief Overview

Dangers of Eliminating Network Neutrality

FCC’s Classification of ISPs

The Right but Not the Will to Reclassify

Current Controversy: The New Proposed Rules and President Obama’s Call for the FCC to Reclassify Internet Service under Title II

Impact on the Music Business

Net Neutrality and Mobile Broadband Services

Chapter 18. Current Controversies, Trends, and Developments

Discussion with Glenn Peoples, Senior Editorial Analyst at Billboard Magazine

Vinyl Makes a Comeback

Will Streaming Kill Downloading?

Will Streaming Save the Record Business?

The Significance of Beat Music’s Partnership with AT&T

Who Does BitTorrent Piracy Hurt Most: Music, Movies, TV, Games, or Porn?

Chapter 19. Current State of the Music Business in the Largest Potential Market on Earth—The People’s Republic of China

Q&A with Eric de Fontenay, Founder and President of China.Musicdish.com

Music and Traditional Media in China

Music and New Media in China

State of Live Music in China and the US

PART IV: WINNING STRATEGIES AND COMPELLING IDEAS

This section is designed to serve as a road map for success in the digital era for both artists and entrepreneurs.

Chapter 20. How to Write Hit Songs in the Digital Age

An Interview with Jay Frank, Author of FutureHit.DNA

Chapter 21. How to Market a Record in the Digital Age

Twenty by Boyz II Men

Chapter 22. How to Use Spotify to Expand Your Fan Base and Make Money

No One Wants to Talk Numbers When It Comes to Streaming Revenue. Well, Here Are Mine

Chapter 23. How to Use YouTube to Get Discovered (And How to Use MCNs to Expand Your YouTube Audience and Make Money)

Using YouTube to Get Discovered

How to Use MCNs to Expand Your YouTube Audience and Make Money: Interview with Fiona Bloom, Founder of the Efficacy Channel

Chapter 24. How to Use Other Digital Tools to Succeed (And Why There Is No Guarantee That They Will Work)

Music Blogs: How to Use Them to Get a Deal

Who Are Bloggers?

Which Blogs Should I Approach?

How to Attract Bloggers to Your Music

Aggregators

Your Website: How to Make It Great and Why It Is Still Important

Why Your Own Website Is Essential in Crafting an Online Presence

Methods to Easily Create Your Own Website

What to Include on Your Website and Why

Twitter vs. Facebook: How They Compare in Popularity

Twitter: How to Market Your Music and Make Some Money

Facebook: Still a Major Force in the Social Media World

Facebook for Artists: Do’s and Don’ts

The Fan Page

How to Set Up Fan Your Page and How to Use It

The Benefits of Having a Facebook Fan Page

How to Use the Facebook Fan Page

Criticism of Facebook

Why Musicians Don’t Like Facebook Changes

Chapter 25. How to Use Crowdfunding

Create a Successful Crowdfunding Campaign: Interview with Brian Meece, Cofounder of RocketHub

How to Maximize Your Crowdfunding Campaign and How One Indie Rock Club Used Crowdfunding to Survive: Interview with Nick Bodor, Cofounder of Cake Shop

Chapter 26. How to Develop a Successful Internet Radio Station

Interview with Elias Roman, CEO of Songza

Chapter 27. How a Jazz Club Is Using the Internet to Reach a Worldwide Audience and Create New Revenue Streams for the Artists Who Play There

Interview with Spike Wilner, Jazz Pianist and Co-Owner of Smalls Jazz Club in NYC

Chapter 28. How to Use a Music College Education

Is It Worth the Time and Money?

Interview with Jonathon Batiste

Interview with Linda Lorence Critelli

Acknowledgments

About the Author

Notes

Foreword to the Fourth Edition

When I was a boy, and I would see scary things in the news, my mother would say to me, Look for the helpers. You will always find people who are helping.

—Mister Rogers

If you’re reading this, you’re already not normal—normal people generally don’t want to legitimately work in the music business. If you’re reading this, you’re either an artist, in which case you’ve taken a decidedly difficult path in life (why not go into insurance sales?), or you’re somehow affiliated with the giant variety of jobs that are supposed to help the connection between the artist and the rest of the world: a club booker, a music lawyer, a producer, a sync agent.

I say supposed to help because this basic truth can get lost when people head into the noisy, confusing marketplace of sharing, selling, and commodifying music—especially as things are changing at the speed of the Internet.

The music business I experienced as a kid was the golden cage/age of the 1980s and ’90s, in which the goal was to get signed, and in which the middlemen (the managers, agents, promoters, and mainstream media) provided the conduit from the artist to the wide world. The artist’s job was to make music and tour, and it was the music business’s job to carry the heavy load of records out the door, make people listen, make people come, make people care.

That era is over.

We now live in a world where artists, if they want to, can skip most of the old-school steps and make their own material (recorded on the relative cheap), release it (uploaded to the net at no cost to the artist), promote their own music and book their own tours (via web tools and e-mail lists); and, if their music is any good, they can make a living wage. If they have a strong work ethic and good enough material, and a few thousand fans, they can earn enough to survive without ever being successful in the eyes of the mainstream media. You’ll never hear about these people. They are out there, working, and they probably have a small handful of people helping them.

A lot of the jobs that used to be executed by a manager, agent, or producer-engineer are now doable by the small-to-mid-level artist, or the artist’s girlfriend or boyfriend (if the artist’s girlfriend or boyfriend knows basic GarageBand and/or Facebook techniques). Google and e-mail have unlocked of lot of the doors to which only the experts in the music business once had the keys.

It used to be that if you needed to rent gear, only the local promoters knew how to come to your aid. Now, you can google, make a cell phone call from the back of the van, or, if you’re well-loved, tweet to fans to please loan you an bass amp because yours got blown out last night in Chicago.

It used to be that if you had a handful of fans in St. Louis, you had to rely on the middlemen to get the word out to those people if you were going to return to town. You needed radio. You needed a label with a street team. Now you can post a pdf to your website and e-mail it to your fans in St. Louis, asking them to please hit the coffee shops and college bulletin boards on your behalf.

This may all seem to spell the beginning of a giant DIY culture—and in a way, it does—but in a way, it’s the opposite: no artist can do absolutely everything himself.

Here’s the thing everyone has to bear in mind as we transition from a stiff hierarchy in music to more of a level playing field, with room for a bigger middle class:

Working artists still need HELP.

Someone has to design that pdf. Someone has to make sure it gets to the fans. Someone has to organize and maintain the e-mail list once the artist gets too big to keep track of everything.

People are constantly wondering what’s going to become of the labels of yore. They’ve already collapsed. The old majors are shadows of themselves, or they’ve merged into super-structures.

The ones that are succeeding, and the ones that will survive, have to somehow managed, in the thick of things, to find a way to do one fundamental thing, to fulfill a need that will never vanish. The artists need help.

The companies and individuals who are evolving in the new landscape are able to see that fundamental truth as a ground zero and work upwards from there.

Whether an artist is trying to make a living via Bandcamp and Kickstarter or signing their entire future and firstborn child to Giant-Major-Label-Promoter-Conglomerate (and both of these things are totally legitimate, depending on the artist), they are still the same: they are working artists.

If they’re going to actually work on art:

They need help getting from place to place.

They need help answering calls.

They need help getting the word out.

They need help collecting their paychecks.

They need help sending and delivering goods and services to their fans.

The women and men I know working on the support side of the new-model music industry who are blazing new trails (and blowing by all the people who are bemoaning the past and clinging to the old rules) all have this one thing in common: they want to help. (Or, to be honest, they’re really good at faking it—whatever, it works most of the time.)

Those winning in the music business today adopt an attitude of service. They look at the world and locate who wants the music. They assess the crazed artists who want to make a go of it, and they don’t ask:

What’s in it for me?

They ask:

How can I help?

And they project this attitude toward those they court and work with.

In 2010, I broke very loudly and openly from my label, Roadrunner Records. I decided not to sign with another label, and instead, I worked with a small team and we sold things directly to my fans. We used Kickstarter. We used Twitter. We blogged and e-mailed up a storm. We went direct, we mailed records to tens of thousands of homes. It was a shit-ton of work. I needed a lot of help. I was on tour. From the ground control of Amanda Central, people had to man the phones, filter the help lines, provide customer service, and arrange ALL sorts of inexplicable things. By the time my Kickstarter was over, at least a couple hundred of my fans were on a friendly first-name basis with eric@amandapalmer.net, the guy on my team who helped everyone, tirelessly, with their nitty-gritty order questions. We didn’t know what kind of help he was going to have to provide for me until the crises happened, but when help was necessary, he helped.

I’ve been through a mill of managers, assistants, agents, and publicists. Some of them wanted to make money more than they wanted to help. Some of the members of my extended team have been with me for 12 years, and some have only lasted six weeks.

What’s the general pattern? The ones who wanted to help more than they wanted to make money have stayed with me.

My booking agents used to just call up halls and book gigs for me. Things were simple. Then Twitter and Facebook came along and made flash gigs possible. (I call them ninja gigs, and I recommend them to any artist with an acoustic instrument.)

After endless phone calls, explanations, and arguments, some of my agents began to understand that my desire to show up and play a Twittered flash-event in a public park on the day before a gig in Detroit is a feature, not a bug. People would come to the free gigs, connect, and then I’d take polls at the ticketed, money-making show the next night. A lot of people came because they were turned on to the information, one way or another, through the existence of the free flash gig the day before. Promoters used to call my agents, screaming that I was sucking away ticket sales. But the numbers would eventually speak for themselves. Now they listen. They even help.

The agents who didn’t listen to me, who didn’t try to help, who fought me . . . they didn’t last.

Managers used to roll their eyes when I asked them to please, please, please read my blog comments and my Twitter feed, so they could understand the day-to-day vibe of the community, so they could listen, and therefore know how to help me and the fans to connect in the best ways possible.

The ones who never got it didn’t last.

Publicists used to agonize, telling me to please shut up and lie low whenever I traipsed into a controversial situation. I ignored them, kept talking, arguing and engaging people, and all of that work eventually landed me a TED talk that’s been viewed almost 10 million times, my own book deal, and a gig writing this foreword. You can’t force people to want to help you, but you can walk away and gravitate toward those who really do want to help.

And how do you help someone with a big mouth? Or how do you help an artist who barely wants to talk?

It’s HARD to help an artist. This will also never change.

Artists are inherently weird. Music is intangible. Music isn’t concrete, even though it can sometimes seem to be. You’re dealing in the business of feelings, and a strange kind of exchange that extends far beyond the eye-for-an-eye exchange of most businesses. The gray area between help and coercion is wide, and many artists don’t even know what kind of help they need. Worse, many artists have an allergy to certain varieties of help. Letting the artist take the lead is essential if you’re going to be seriously helpful. You can’t assume that all artists want the same things. Ask first, then attack.

To put it crassly, but it’s a fine analogy . . . you can’t insist that someone have an orgasm by simply pounding away at them. Asking how they need it may be hard, or awkward, but it’s essential if you’re going to be a good lover.

All of the tools that Steve is laying out and explaining in the pages to come are for your arsenal of tools, artist and helper alike. Keep everything handy, and know that using the right tool in the right moment is what makes you truly helpful (and, if you’re an artist, able to help yourself and those around you who need a lift up).

The roles that exist in music business land (manager, publicist, lawyer, promoter, etc.) originally developed to serve the artist and the audience. To act as a bridge. A connector. A helper. Through the years, that concept has been obscured in a jangle of label expense accounts, self-aggrandizing gatekeepers, and gold chains.

So, as the whole system goes up in beautiful new flames, ask yourself: where are you? In the burning building?

Or are you looking for a way to act as a bridge somewhere on the long, craggy trek a soulful song takes from a Finnish musician’s heart to the heart of a 16-year-old kid in rural Wisconsin, who’s listening with headphones in a crowded cafeteria or standing in the back of a shitty local bar, having snuck in with her fake ID, crying her eyes out?

Can you imagine yourself thinking—assessing what you’re doing with your time, your energy, your talents, your life—not about your own success, but something even more divine:

I helped make that moment happen.

And if you can’t imagine that moment being the most satisfying moment of your life, more satisfying than making all the money, more satisfying than climbing up the corporate ladder, you probably shouldn’t go into the music business.

Choose something more concrete.

Go into insurance sales.

Amanda Palmer

February 28, 2014

Preface

People often ask how I got my start in entertainment law. I got my foot in the door by helping my entertainment law professor at NYU, Mel Simensky, research and write a casebook he co-authored.¹ Mel was also a litigator at a small firm and eventually hired me as an associate. But I’ve continued researching and writing legal articles ever since, and have been writing and revising this book in new editions since 2005. Much of my knowledge of the law and the entertainment business comes from my experience as a litigation associate and then as a lawyer for entertainment companies including SESAC (one of the three US performing-rights organizations), De Laurentiis Entertainment Group (a Hollywood movie studio), Atlantic Records, and then Sony Music. But since leaving Sony in 2002 and starting my own firm, I’ve gained knowledge and experience that would be impossible to acquire by only working in the legal or business affairs departments of an entertainment company. At Sony, I worked on matters involving stars like Michael Jackson and Bruce Springsteen. In private practice, my client list includes indie artists and labels, songwriters and publishers, music producers, and music business entrepreneurs. I work with a wide variety of people, companies, and cultural organizations on indie films, reality TV shows, musical theater, and stand-alone digital projects as well as the production and distribution of recorded music. Compared with this diversity of projects, my experience with each of my old employers seems incredibly narrow. Of course, working with those companies was great in a number of ways, including a steady pay check, vacation pay, health insurance, and I could go on. But the knowledge I gained there can’t compare to the experience of the last 12 years. And in this edition of the book I’ve striven to make the reader the beneficiary of that experience. For instance, in Part I of the book, I give practical advice on the questions that are most asked of me by clients. In Part II, I provide actual numbers that a producer can use to determine his music budget for projects ranging from indie movies, to musical theater, to apps involving music.

The purpose of the book has always been, and continues to be, to provide a road map for success for both creators of music and music business professionals and entrepreneurs. The recording industry and the music publishing business have been profoundly impacted by new technologies: entirely new rules, business practices and business models have emerged. This book explains them and their application to songwriters, recording artists, music business executives, and entrepreneurs.

The introduction analyzes the music business as it exists today by focusing on its three main components: recording, publishing, and live performance. We use documented facts and figures demonstrating that the recording industry has declined drastically to only 35 percent of what it was at its highpoint in 1999, although in the last several years it has been stabilizing. Since 1999 the publishing business has also suffered a decline, although not as severely as the record business. Paradoxically, only live performance has grown in the digital era.

Part I provides an overview of the basic rules and business practices that apply to the record and music publishing businesses, including the most recent developments spurred by new technologies. Chapter 1 summarizes the copyright law as it pertains to the recording and music publishing industries. Chapter 2 discusses the most often asked questions in my practice concerning copyright infringement trademark and whether to use a lawyer to shop. We transition to digital music in Chapter 3 by setting forth the principal statutes concerning the digital distribution of music and explaining how they apply to downloading and streaming. In Chapters 4–6 we provide overviews of the business of (i) downloading, including iTunes; (ii) interactive streaming, including ad-supported services, such as YouTube and free Spotify, and subscription services, such as Spotify’s premium service, Beats Music, Rhapsody, and YouTube’s new subscription service, Music Key; and (iii) noninteractive streaming, including Pandora, the Internet radio service, and Sirius XM, the satellite service. In each of these chapters, we explain

1. How much the services pay for copyrighted music

2. How the money flows from the services to the labels, artists, publishers and songwriters

With regard to each of these three digital music businesses, we present a chart from the Recording Industry Association of America (RIAA) showing exactly how much money each of these sectors generates, followed by a chart developed by the Future of Music Coalition (FMC) illustrating exactly how that money flows to labels, artists, publishers and songwriters. We also address current controversies about how labels, particularly the majors, pay their artists (or don’t).

Chapter 8 explains one of the hottest issues in the music business today: how major publishers are breaking away from ASCAP and BMI to make deals directly with digital music services.

Chapter 9 discusses the global digital music business and the intricacies of international digital music licensing.

Part II is intended both for producers of audiovisual works such as films, documentaries, and television, and for record producers who often need to license music to use in their projects. We also discuss how to clear music for stand-alone digital projects as well as special projects such as musical theater and fashion shows. Each chapter in this section focuses on practical issues that arise in clearing music and how producers can save money.

Part III offers a history of the recording industry’s struggle to come to grips with the digital era, explores current issues and controversies, and provides some hope for the recovery of the record business.

Part IV provides a how to guide to the business of music in the digital age, ranging from how to write hit songs in the digital era, to how to market a record now, to how to raise money for a project, to how to use a music education to succeed.

Online Files and Free CLE Credits for Attorneys

Attorneys can obtain two free CLE credits by watching the online videos included with this book. The videos can be accessed at the following web page:

http://www.halleonardbooks.com/ebookmedia/150006

The videos consist of two programs, including a conversation between myself and Bob Clarida, a leading copyright lawyer and adjunct professor at Columbia University Law School, in which we discuss Robin Thicke’s legal battle with Marvin Gaye’s estate, and whether Thicke’s Blurred Lines infringed the copyright of Gaye’s song Got to Give It Up. The other program is a lecture on the fundamentals of the music business and law. Lawyers can obtain the CLE credits by watching the videos and registering at the following web pages:

Thicke v. Gaye: Musical Copyright Infringement (http://bit.ly/17vdMBZ)

Legal Fundamentals of the Music Business (http://bit.ly/14F1xzw)

Updates

This book was submitted in January 2015. To keep it current after it goes to print, I created www.futureofthemusicbusiness.com. Through this site I will continually update the book, particularly the Introduction and Parts I and III. This site also provides author news, speaking engagements, podcast interviews with music industry leaders and experts, and links to other music business resources.

Disclaimer

This book has been created for informational purposes only and does not constitute legal advice. The book should be used as a guide to understanding the law, not as a substitute for the advice of qualified counsel. You should consult an attorney before making any significant legal decisions.

Introduction:

The Current State of the Music Business

It is a mistake to equate the recording industry with the entire music business. There are two other major components: music publishing (which is the business of generating money from songs rather than records), and live performance and touring. The recording industry has experienced a cataclysmic decline during the digital era, beginning in 1999 with the emergence of the original Napster, but the music publishing business, which has always been much smaller than the recording industry, has also declined, although not as much. On the other hand, the live performance and touring business is thriving and in better shape than it was at the dawn of the digital era. Spending to see iconic artists such as Paul McCartney, Bon Jovi, and U2, as well as younger superstars like Taylor Swift, Beyoncé, and Justin Timberlake, has increased threefold. In addition, for these famous artists, there is additional money to be made from branding, that is, partnering with corporations to use their celebrity status to create even more money than they make from selling records. But most people who pursue careers as artists or songwriters continue to struggle financially just as they did before the digital era.

The irony is that technology created and nourished the recording and contemporary music publishing businesses—from the invention of the record player and the radio to the introduction of new distribution formats, such as the CD. But in the last 15 years, newer technologies, specifically the Internet and high-speed digital networks, have taken back much of that financial success by creating a panoply of ways—some illegal and some legal—to consume recorded music without paying for it. And now, the only sector of the business that is growing, live performance, is the part that existed before any of those technologies.

I. Current State of the Recording Industry: Cataclysmic Decline from Approximately 14.5 Billion in 1999 to Less than 7 Billion Although Revenues Have Not Decreased as Much in the Last Several Years

Cataclysmic Decline in Revenue

The following graph, which was generated by data from the Recording Industry Association of America (RIAA),¹ shows the crisis that has beset the recording industry:

The graph shows that in 1999, income from sales and licenses of recorded music in the United States was approximately 14.5 billion dollars.² Since that year revenues have dropped to less than $7 billion—a decline of more than 50 percent. Worse, this graphic shows that, when accounting for inflation, the record business is only about one-third of what it used to be in terms of income; revenues have declined by more than 65 percent.³

In fact, accounting for inflation, the recording industry is at its lowest level since the RIAA began keeping tabs on industry-wide income in 1973.

The numbers above indicate that the record business has declined horribly. However, these numbers also indicate that since the publication of the last edition of this book, things have not gotten significantly worse. By 2010, gross revenues had declined to approximately 7.01 billion dollars. Although by 2013 revenues had dropped to $6.99 billion, the decrease over those three years (less than 1 percent)⁴ was less severe than in any years since 1999. This is not exactly good news, but it’s the best news that can be reported. On the other hand, the RIAA’s 2014 Mid-Year Industry Shipment and Revenue Statistics indicated that for the first half of 2014 overall revenues were down 4.9 percent compared to the first half of 2013.⁵

Worldwide, the figures are even bleaker. According to a report from the International Federation of the Phonographic Industry (IFPI) issued in early 2014,⁶ global revenues from recorded music fell 3.9 percent to approximately $15 billion in 2013. In 1999, those revenues exceeded $38 billion, according to IFPI’s report in 2000.⁷ That’s a steeper decline than in the US.

Reasons for Decline

Many have speculated on the causes for the decline of the recording business. The two main theories are (1) the Internet has made it easy to provide and share unauthorized music, and (2) the major record companies did not respond quickly enough to the digital revolution. These critics maintain that the labels did not act early enough to create or support alternatives to free music, and that by the time they backed the launch of iTunes in 2003, it was already too late to cure the fans of their habit of getting music for free from unauthorized services such as the original Napster, Kazaa, Limewire, and now BitTorrent sites. I think both theories are true, but I also contend that the emergence of iTunes itself was incredibly harmful to the business. iTunes turned what had been an album business into a singles business. Steve Jobs’ insistence on offering to sell individual tracks encouraged those people who continued to actually buy records to cherry pick their favorite songs rather than pay for an entire album. The labels, desperate to compete with free and monetized digital music, probably thought they had no choice but to cooperate. I discuss these theories, corresponding events, and the recording business’s continuing efforts to battle piracy in Part III of this book.

The Majors: Further Consolidation but Continuing Relevance

As income went down, consolidation of the majors, which still distribute over 80 percent of recorded music, continued. Instead of the five majors that dominated in the ’90s, when I was at Sony (specifically, Sony, BMG, EMI, Warner, and Universal), there are now only three (Sony, Universal, and Warner). However, they are still relevant because, unlike most indies, (1) they still provide (although not as often) significant advances that support new and emerging artists who are working to establish themselves, and (2) more importantly, they are still the only players that can provide the worldwide marketing, promotion money, manpower, and expertise to raise an unknown English art school student such as Adele (Sony) or an obscure New Zealand schoolgirl (Lorde) to superstar status. Even Prince, who famously declared war on his label, Warner, many years ago, has rejoined the fold. He decided to re-sign with Warner in 2014, probably because of a massive cash offer and because of the worldwide marketing machine at the label’s disposal. See Chapter 1 for my interview with David Massey, president of Island Records.

The Emergence of Streaming as the Revenue Model of the Future—Revenues from CDs, as the following chart indicates, continue to fall:

However, for the first time since the introduction of iTunes, income from downloading has declined as well:

The current hope of the recording business is the possibility that streaming can save the day. There are three types of streaming, as we discuss in much more detail in Part I of this book. They are:

1. Noninteractive Internet radio services such as Pandora and iHeart Radio, and Sirius XM’s noninteractive satellite radio service

2. Advertising-based interactive streaming, such as the free version of Spotify

3. Subscription services, such as premium Spotify, Rhapsody, and Google Play Music

Pandora claims that it pays approximately 50 percent of its income in royalties to the recording industry (via SoundExchange, as we discuss in more detail in Part 1). Spotify claims it is paying an even greater percentage of its income to the labels (although those deals are confidential). It is true that these three sources of new income have been growing, as the following chart indicates:

However, if you compare downloading with streaming, the majority of money still comes from downloading:

Paid Subscription vs. Ad-Supported, On-Demand Streaming

Which generates more money? Subscription, hands down. The goal of many of the services has been to convert free, ad-supported listeners to premium subscribers. As the chart immediately above indicates, most of the money from interactive streaming comes from subscriptions (Paid Subscriptions as opposed to On-Demand Streaming Ad-Supported). This is also the case for Pandora. Pandora has 76 million active users and only 2.5 million paid subscribers. That’s 3.3 percent. However, the subscribers account for over 18 percent of Pandora’s income.⁸

The money that music streaming services such as Spotify and Pandora earn from advertising is limited because money from advertisers will always be at the mercy of marketing budgets, which have been slow to adopt streaming audio as a place to buy. Neither Pandora nor Spotify is profitable; in 2013, Pandora lost $38 million.⁹

Lack of Success in Converting Listeners to Customers

Pandora charges $4.99 per month for premium service (no ads); Spotify Premium, Rhapsody, and Google Play all charge $9.99 per month (no ads and mobile service).

Streaming services have had limited success converting users to paying customers. Spotify, which launched in 2008, has over 50 million users but only 12.5 million paying subscribers.¹⁰ That means that less than one out four people who listen to Spotify are paying for the service. Pandora, as discussed previously, streams to only 2.5 million subscribers out of 76 million total listeners. And Rhapsody, which has been in the game for 13 years, has only just recently hit 1.7 million subscribers.

Will Streaming Turn Around the Record Business’s Cataclysmic Decline?

Although the success of streaming has softened the losses that the recording industry has experienced year after year, the industry is still declining, although not as rapidly as in prior years. The conversion rates from free to subscription by Spotify and Pandora are disappointing to anyone hoping for the recovery of the recording business. Expecting people to pay $10 per month, or any amount of money per month, seems almost overly optimistic when you consider how easily available music is for free, sometimes by the same services that are asking money for premium listening, and more often by quasi-legal software and apps such as programs for converting YouTube to MP3s or apps that make free playlists from YouTube. It may be unrealistic to expect young people to pay subscription fees, because (a) they may not be able to afford them; (b) they are not used to paying anything for prerecorded music; and (c) they have many alternative ways of listening to music for free—both legal (e.g., YouTube) as well as illegal (pirate sites, and online and off-line sharing).

Free streaming has also undercut efforts to bring in revenue through partnerships with wireless service providers. By including a music service in the cost of a basic phone plan, mobile carriers could raise their rates and share the surplus with the music service—yet customers would perceive the bundled music service as free. These deals would also benefit artists by increasing streaming services’ royalty payments to the recording industry. But the carriers have been reluctant to take this step precisely because users can already get free music from Pandora and in many other ways, including sharing on private networks, converting YouTube videos to MP3s, using a variety of apps to make playlists of any songs contained in online music videos, or using BitTorrent sites.¹¹ Customers are used to free music, period.

With the exception of a deal between a small carrier, Cricket Wireless, which was recently purchased by AT&T, and a music service called Muve Music, carriers have not elected to include a music service in the cost of a basic phone plan. They are making a lot of money already without bundling music services, so they lack the incentive to develop these bundling partnerships with the streaming services. Instead they may offer customers a special deal on a premium music service. For instance, when Beats Music rolled out in January 2014, AT&T offered an exclusive $14.99 family plan to let five users stream to 10 devices total. Despite a Superbowl ad featuring Ellen DeGeneres, this strategy was a disappointment, and in October 2014 AT&T announced that was no longer offering Beats Music subscriptions.

Apple’s Purchase of Beats Music

On May 29, 2014, Apple announced that it would purchase Beats Music for 3 billion dollars. In so doing, they acquired both the financially successful Beats headphones business and the far-from-successful Beats Music streaming subscription service—yet Apple may have wanted the streaming service even more than the revenue from the headphones business. Downloading is going down, and streaming is going up. Apple already has an Internet radio service, iRadio, but Beats puts Apple in the interactive streaming business. And considering their revenue reserve of over 150 billion dollars, the 3 billion that they paid for Beats was a drop in the bucket. Apple could also decide to charge less for subscriptions to Beats Music than Spotify or the other streaming services charge, or give Beats away for free for a limited period of time to purchasers of new iPhones or even bundle the service with the price of an iPhone, that is, give it away free. Even if Apple had to pay major record labels minimum guarantees or advances and lose money on Beats Music, offering the service could presumably increase sales of their gadgets. This was exactly Steve Jobs’ strategy for initiating iTunes. Although the iTunes store has sold over 25 billion songs worldwide¹², no one can be sure how much Apple has profited from iTunes. That’s because iTunes generally pays 70 percent of the retail price of each download to copyright owners of the recordings and songs (see Chapter 3 for a breakdown of how much they pay for each), plus the expense of bandwidth, marketing, transaction costs, staff, overhead, etc. But it is beyond dispute that, after the introduction of iTunes in 2003, Apple’s sales of iPods, introduced in 2001, skyrocketed.

In January 2007, Apple reported record quarterly revenue of $7.1 billion, of which 48 percent was made from iPod sales.¹³ Apple has made even more money from iPhones than from iPods. In fact, iPhones are the most profitable product on earth.¹⁴ In the first quarter of 2014, which runs from the beginning of October to the end of December, the company earned a record $57.6 billion in revenue;¹⁵ 56 percent of that income came from iPhones and only 7.6 percent came from iTunes (and some of that revenue was from movies, videos, and other content besides songs).¹⁶ But, as with iPods, the success of iPhones is largely based on the device’s ability to play recorded music, including free services such as YouTube and Pandora, and apps such as InstaTube that allow you to listen to free music without advertising. The point is that Apple has used music to sell technology more than it has used technology to sell music.¹⁷ And if Apple bundles or discounts Beats Music with purchases of new iPhones, Apple will sell even more iPhones.

In Chapter 6 we’ll talk about how streaming services