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Taking a Glance at New Media Deals in the Music Industry...

By Dina LaPolt

It seems as though music is now available everywhere. Today, music is available through digital download services such as iTunes and Napster; streaming interactive subscription services inlcuding Rhapsody and MusicNet, as well as non-interactive subscription services via MusicChoice, Sirius, and XM Satellite; through video games such as Grand Theft Auto and Madden Football, as well as through your cell phone. Below are the descriptions for some these new formats and the breakdown of some of the income paid to the artists and songwriters.

Digital Downloads

Although there are numerous digital download services available throughout the world, the most prominent seems to be Apple's iTunes. Through mass marketing campaigns that extend throughout the world, which feature such globally recognized artists as U2 and the Black Eyed Peas, iTunes is offered via both PC and Mac computers, then downloaded to a handheld device called an iPod. As of January 2004, iTunes reported a whopping 250 million downloads! 135 million of these were downloaded in the United States and iTunes reports a current average of more than 1.25 million downloads per day. Pursuant to the iTunes agreement with the record labels, the iTunes share of income is $0.34 cents out of each $0.99 download.

The following sets forth the way in which some record labels, most certainly the major labels (i.e., Universal, Sony-BMG, EMI and Warner Bros), pay third parties with respect to each $0.99 download, assuming that the recording agreement allocated the artist an "all in" royalty rate of 15% (i.e. which includes a producer royalty of 3%, leaving a "net artist" rate of 12%):

Artist iTunes Royalty
$0.99 download single song price to the consumer
less $0.34 to Apple
left $0.65 x 130% (wholesale markup) x 12% (net artist net rate) = $0.10

Producer iTunes Royalty
$0.99 download single song price to the consumer
less $0.34 to Apple
left $0.65 x 130% (wholesale markup) x 3% (producer rate) = $0.025

Some record labels take this even further by first deducting the mechanical royalty off of the $0.65 cents prior to calculating the iTunes royalty, which is then paid to the artist and the producer, resulting in a lower royalty rate.

See the following:

Artist iTunes Royalty
$0.99 download single song price to the consumer
less $0.34 to Apple
left $0.65 less a digital mechanical royalty of $0.085 cents
left $0.565 x 130% ( wholesale markup) x 12% (net artist net rate) = $0.088

Producer iTunes Royalty
$0.99 download single song price to the consumer
less $0.34 to Apple
left $0.65 less a digital mechanical royalty of $0.085 cents
left $0.65 x 130% (wholesale markup) x 3% (producer rate) = $0.022

One major label in particular goes so far as to take a packaging deduction!

With respect to mechanical royalties paid for digital distributions of musical compositions, record companies in the U.S. have been using a notice of compulsory license when notifying music publishers of their intention to offer digital downloads of musical compositions. This 'notice' usually lists the record company, the recording artist, the name of the musical composition, the identity of the songwriters and music publishers and the expected distribution date of the 'digital phonograph delivery' of the song. These compulsory licenses are typically referred to as "DPD Licenses" and they are paid at the maximum statutory rate, which is currently 8.5 cents for songs under 5 minutes or 1.65 cents per minute if the song is over 5 minutes. For recordings produced pursuant to contracts entered after 1995, the law prohibits a controlled composition provision of the artists' contract from discounting the compulsory DPD rate, so even if there is a controlled composition clause in the contract, the singer-songwriter should receive the entire 8.5 cents.

Can Unsigned Artists be digitally distributed through iTunes?

An artist who has not signed to a major or independent record label can still get their music distributed via iTunes by a number of various companies now affiliated with Apple. The two that I will mention in this article are Cdbaby.com and iFanz.com. Out of the $0.65 cents left over after Apple takes its $0.34 share, Cdbaby.com only takes a 9% fee off each download, passing along to its artists a whopping 91% of the income! iFanz charges 40% per download. In both cases, the artist is responsible for all third party payments, including any royalties payable to producers of the recordings and digital mechanical royalties, which are paid to owners and/or controllers of the musical compositions contained on each recording.

With respect to digital mechanical royalties, the online service (i.e. iTunes), like a physical retailer, pays these royalties to the record companies (who own and control the recordings containing the songs), who in turn pays either the songwriters, music publishers or the Harry Fox Agency, who in turn pays the music publishers.

Internet Interactive Subscription Services

Two notable interactive music subscription services are Rhapsody (through RealNetworks) and Napster, both of which offer continuous interactive streaming music, which also allows the user to download tracks to a CD for a separate fee, sometimes as low as $0.79 per download. These services are considered "interactive" because the consumer can interact with the service to hear a specific recording and to create personalized radio stations and play lists. Specifically, with respect to Rhapsody, once logged on, it plays all day long. The user can create personalized radio stations such as Classic Rock Vault and Ultra Chill. To create a personalized radio station, the user designates up to ten artists for each respective customized radio station and the 'personalized station' plays those particular artists - plus any other artists like those particular artists - all day long. This service costs $24.99 per quarter (i.e. four times per year) or $9.99 per month. Although some artists are notably missing (like The Beatles and AC/DC), Rhapsody is rapidly increasing its content every day. Generally, these services pay $0.01 (i.e. 1 cent) to the record label each time a recording is streamed. Since this is licensing revenue, the label should split this amount with the featured artist.

For subscribers, Rhapsody announced a service similar to the widely popular Napster to Go for a monthly fee of $14.99, where subscribers can download as many records offered by the service as they would like onto certain portable devices (notably, not the iPod). The subscriber maintains access to the recordings for as long as he or she retains the monthly membership.

For the non-subscriber, Rhapsody just introduced a version of its software that allows non-subscribers to listen to 25 songs for free each month. Users are welcome to listen to one song 25 times or any 25 songs from its extensive library once. Rhapsody hopes that making it as easy to obtain songs illicitly through a file-sharing network like KaZaA will draw new paying customers. "Today, the number of people who use legal services are in the millions, and the number of people who use pirate services is in the tens of millions," says Rob Glaser, Real Networks' chief executive. Accordingly, to compete, Rhapsody is attempting to fight 'free' with 'free.'

Although permanent royalty rates are still being worked out between the record labels and some of their artists as the industry evolves more into the digital realm, a partial list of interactive digital subscription services and information pertaining to approximate royalty rates and fees can be found by logging onto www.cdbaby.net. Once logged on, click on "Sell Your Downloads" and then click on "companies" on the left side of the page.

Internet Radio Stations and Non-Interactive Subscription Services

Most of the prominent terrestrial radio stations have corresponding Internet radio stations that broadcast the station over the Internet waves. Under the Digital Millennium Copyright Act of 1995, Congress provided for a Webcasting Royalty to be paid to the owners or controllers of the recordings being streamed. This Webcasting Royalty is only paid for "non-interactive" radio and subscription services. Unlike Rhapsody and Napster's interactive services, the consumer cannot pick and choose which particular songs or artists they want to hear.

The two FCC-approved non-interactive satellite digital subscription services are XM Satellite and Sirius. With respect to Sirius, it charges a nominal activation fee of $15 and costs $12.95 per month thereafter. Both of these digital subscription services stream music in virtually every genre to listeners seven (7) days a week-twenty four (24) hours a day. Accordingly, the listener can choose to listen to Smooth R&B and that station will play such artists as Al Green, Ray Benson, and Toni Braxton continuously without any commercial interruption. In addition to Sirius and XM, there are also non-interactive music subscription services available via most digital cable television lines. These services are MusicChoice, DMX or Muzak.

All of these services must pay the statutory performance license fees for the master recording, as discussed below, and must also pay the performance rights organizations for the performance of the musical compositions.

Public Performance Royalties for Internet Licenses

The Master Recording

With respect to the non-interactive subscription services and Internet radio stations, SoundExchange collects money for owners and controllers of the master recordings and featured artists.

SoundExchange is the first performing rights organization in the U.S. to collect and distribute royalties to sound recording copyright owners and featured artists. SoundExchange is a not-for-profit organization governed by a board of both artist representatives and major and independent label representatives. The law provides that the statutory license revenues be split:

50% to the owner of the master recording (i.e., most often the record company)

45% to the featured artist

5% to the non-featured musicians and vocalists (through the AFM and AFTRA Intellectual Property Rights Distribution Fund, www.raroyalties.org)

SoundExchange receives license revenues from satellite, cable and Internet radio, with licenses for both commercial and non-commercial services, which include track level accounting of performances to its members and the most up-to-date information on streaming and digital transmissions. More information can be found at www.soundexchange.com.

The Musical Composition

With respect to the musical composition, there are three (3) performing rights organizations in the U.S. — ASCAP, BMI, and SESAC. ASCAP, BMI, and SESAC collect public performance income with respect to musical compositions and all have various licenses that allow these Internet services, whether interactive or non-interactive, to perform all of the songs in each of their repertory. These Internet licenses do not allow the reproduction or distribution of the songs, nor do they allow the pubic performance of the master recordings (which is handled through SoundExchange).

According to the music business person's bible, Music, Money and Success: The Insider's Guide to Making Money in the Music Industry (4th edition) by Jeffrey Brabec and Todd Brabec, the following applies to the public performance of songs via the Internet: The Brabec brothers point out that a lot of these licenses are still in their 'experimental stages' and urge the songwriter and/or publishers to regularly check the website of their respective performing rights organization to make sure they have the most up-to-date and accurate information.

ASCAP currently offers three (3) types of Internet licenses. The first is a non-interactive license that does not allow consumers to download or otherwise select particular songs. The second type of license is an interactive license that does allow consumers to download or otherwise select particular songs. ASCAP's third type of license authorizes the public performance of its songs in its repertory via wireless devices such as mobile phones. The fees paid to ASCAP by these Internet sites are based on revenue or the activity of each Internet service. For more information, please log on to the ASCAP website at www.ASCAP.com and click on "customer licenses" on the left side of the page.

BMI's main license type is one where fees are computed on a 'gross revenue calculation,' where music is the primary feature of the particular site - or a 'music area calculation,' where music is only a part of the total website traffic for that particular site. For more information, go to www.BMI.com

SESAC also offers licenses that provide for fees based on the number of monthly page requests, as well as whether or not there is advertising on the site. For more information, go to www.SESAC.com

Ringtone Deals in the U.S.

Usually, these agreements are made between a cell phone aggregator (i.e. distributor) and music publishers and/or songwriters for the re-creation (i.e. "replay") of a song either monophonically (archaic) or polyphonically (preferred).

The terms of these agreements are short ranging - from 1 to 3 years. Although most of the deals are worldwide, the music publisher most often will try to limit the deal to the U.S. and Canada.

The way in which the aggregators pay royalties to the owners and controllers of musical compositions in the U.S. is usually the greater of ten cents ($0.10) or ten percent (10%) of the ringtone price paid by the consumer. Accordingly, there is always a floor of ten cents ($0.10) per ringtone, which is a step up from what songwriters and publishers are used to being paid on sales of record albums, pursuant to the statutory rates set by the U.S. Copyright Office. (As stated above, the current minimum statutory rate for record albums is $0.085 cents for under 5 minutes of playing time). Accordingly, if a ringtone sells for $3.00, then the royalty paid to the owners and controllers of that particular musical composition would be $0.30 cents. In addition, most agreements have a 'most favored nations' clause in them, which states that if another music publisher (or songwriter) receives a higher royalty rate for its share of the copyright relating to the ringtone, then the same higher rate shall apply to all. The 'most favored nations' clause will usually apply to all the provisions of the agreement (i.e. term, territory, advances, etc.), not just the royalty rate. Many ringtone agreements are contingent on the company's also obtaining licenses from the respective public performance organization (i.e. ASCAP, BMI or SESAC) and those monies will flow to the publisher and songwriter as well.

Although the technology in the U.S. is not quite as advanced as the technology available in Asia and the rest of Europe, the U.S. is catching up fast.

In Japan, iMode is one of the leading cell phone aggregators and they boast that they have over 47 millions subscribers. In Europe, Vodaphone is the biggest cell phone aggregator, boasting that they have over 146 million subscribers (this would mean that approximately 1 out of every 4 cell phone users in Europe signed up with Vodaphone). Using 3G technology, iMode and Vodaphone provide customized cell phones which can offer a number of personalized services, such as music shops, music video channels, buying tickets to concerts through mobile ticketing, visual radio, personalized content - such as wallpaper and imaging featuring your favorite artist - and editorial content. Taken from lectures presented by the Mobile Music Forum at the MIDEM Music Business Conference in Cannes, France, in January 2005, the Forum reported that studies show a person takes the following three items each time they leave their house: keys, a purse (or a wallet) and a cell phone. Accordingly, it is only a matter of time before the cell phone becomes the ultimate multimedia device, which will incorporate technology used by other devices such as the iPod and be able to receive streaming services. The ability to receive streaming services on portable devices like cell phones may make devices containing fixed music, like the iPod, unnecessary. In fact, Asia and Europe have been utilizing these types of customized cell phones for several years already.

However, most of what we have in the United States are still only monophonic and polyphonic ringtones, whereby the actual song is recreated through a series of tones - most of them through MIDI (i.e. musical instrument digital interface). According to lectures taken from the Mobile Music Forum at MIDEM, monophonic and polyphonic ringtones generated an estimated 4 billon dollars in 2004. Currently, with the use of the relatively new 3G technology, a consumer in the U.S. can now download the actual master recording to a cell phone, as opposed to downloading a monophonic or polyphonic ringtone. These new types of tones are being referred to in the industry as "truetone masters" or "mastertones." In some Asian countries where cell phone technology is more advanced than in the U.S., revenues from the secondary usage of master recordings (e.g. mastertones, ringtones and ringbacks) have already surpassed revenues from the primary market of recordings.

Video Games

The use of music in video games is becoming a huge source of income for record companies, recording artists, songwriters and music publishers. Although there are a few exceptions, most game companies license music as a 'buy out,' as opposed to paying a royalty per each game sold, as is customary for CDs. Buy outs are somewhere between $5,000 to $10,000 per master recording and $5,000 to $10,000 for the musical composition embodied on the master recording, which is then divided up among the songwriters and/or music publishers, relative to each parties' copyright ownership interest.

Most of these licenses tend to be short term - usually spanning 5 to 10 years, with some stating that they are for the 'term of copyright' or for as long the game is being distributed. The territory is usually the world unless the artist has a lot of leverage. Additionally, there may be language providing for the game to be available online, as well as any other 'new media' format that is developed in the future.

Beware of language in these agreements that grant the game company the right to release the music in the game on an audio-only CD or a DVD. If this language is in the agreement, try to take it out – or, at the very least, try to pre-negotiate the royalties for the CD, for instance obtaining a full mechanical royalty for the song (usually it will be 75% of the statutory rate) and a 'most favored nations' artist royalty rate for the master recording.

By the time this article is published, some of the foregoing may have already changed! The digital realm in the music industry is moving at such a rapid pace – it's almost too hard to keep up! The good news is that there are plenty of new opportunities for artists – both signed and unsigned. The bad news is that all these legitimate services that pay artists are dwarfed by the numbers that use the illegitimate services. Hopefully, as the legitimate services improve, these services will be more attractive than free. Maybe then, the playing field will finally be leveled off!

* Dina LaPolt is an entertainment attorney at LaPolt Law, P.C. in Los Angeles. LaPolt Law is a boutique entertainment firm that specializes in representing clients in the music, merchandising, film, television, and book publishing industries. The firm's clientele include recording artists, artist- and producer-owned record companies, music publishers, producers, managers, film production companies, directors, writers, authors, and actors. In addition to practicing law, Dina teaches "Legal and Practical Aspects of the Recording and Publishing Industries" in the Entertainment Studies Department at UCLA Extension, she is an instructor of Music Contracts at the Musician's Institute in Hollywood, speaks regularly on panels at music industry conferences all over the country, and still has time to perform in her all-girl rock band. On the film production side, Dina was the Co-Producer of the 2005 Academy Award- nominated feature documentary film entitled, Tupac: Resurrection.

For more information on Dina LaPolt or her firm, please log on to www.LaPoltLaw.com