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The music licensing agreement in the new music industry

11/01/2012

Written by Sébastien Lachaussée

& François Kraft
 

The music market is currently being restructured. The physical market is still more important than the digital market, but the curves tend to cross. Cd or physical medium aspires to become more an advertising medium to promote the artist than a real source of benefits. According to the 2011 report of the SNEP, between 2008 and 2011, digital sales rose up to 45% in France, from 76.3 to 110.6 million euros. The physical market is constantly reducing, from 662 to 412,8 millions euros euros over the same period.

The music is now available on the market differently than it was 10 or 20 years ago. The distribution system and contracting practices relating thereto must necessarily evolve. The licensing agreement whose origin is attached to the traditional distribution system must undergo this change.

The licensing agreement is the one in which the owner of a record (the producer) gives to a specialized agency (the licensee) the right to reproduce this record and for its commercialization. This right may be exclusive or non-exclusive. The producer finds in this contract a way to ensure the marketing of records for which he has the rights. Alone, this initiative is very complicated, because it involves a large infrastructure and financial ressources to reach a wider audience. This is the reason why the producer uses the licensee, who works on the manufacturing of the copies, the payment of copyright, the publication and distribution of copies and their promotion to the public. The producer transfers to the licensee the right on the records for him to sell them. In exchange for this assignment, the producer will receive a royalty on each copy sold.

To determine the value of such a contract, it should be put in its context, examine its actors, its procedures and its purpose, in order to question: to which changes is subject the licensing agreement today?

 

1-     The value and purpose of the licensing agreement:

In order to examine the exact role of the licensing agreement in the system of the music market, it should be asking who are the actors of the licensing agreement (A), and defining the essential elements of this particular contract (B). This analysis will highlight the exact purpose of this act (C).

 

A)    the protagonists of the licensing agreement:

The contracting parties are the producer and the licensee. The licensing agreement is considered as a commercial act. Music labels are sometimes associations, but it does not prevent a contract license. An association may indeed have a commercial activity, although it is a non-profit organisation.

When it is registered in the URSSAF as an “individual entrepreneur”, an individual person can also be part of a licensing agreement.

Among other things, only the producer of the record has the legitimacy to enter into a licensing agreement. Indeed, the producer owns all rights of the record that is distributed and he is the only one to have legitimacy for exploiting them.

The artist cannot sign directly with a licensee unless he has the dual role artist / producer. Thus in electronic music for example, when a composer DJ mixed and mastered the song itself, he is also the producer of the song because of the work he has done mastering it. Then he usually signs a licensing agreement with the label that takes the place of the licensee. It is then to the label to make every effort to promote, communicate and publish the project.

This is a very specific case, but which is not negligible, considering how the number of producers DJ tends to increase. However, in most cases, the producer of the artist is the one who signs the contract, and he must ensure the licensee that he has all the rights on the recordings of the artist, and this for a period at least equal to the period of the license. Association or not, artist or not, the most important thing is to be the producer of the track. The “cour de Cassation” resumes the situation very well by a judgment (Polygram c / Mariani) made in its first civil chamber 18. October 1994: "A licensing agreement is concluded with a contractor simply as a music producer, even if he has other qualities (performer, songwriter, etc.)".

 

B)     the essential elements of the licensing agreement:

There are two types of exclusive licensing agreements: optional licecing or firm licencing. Firms licencing are those that the record company is committed to commercializ and optional licencing are those that the firm agrees to comercialize under certain conditions. Most often, the contract will be signed on a firm EP, with an option on another EP or LP. This way, the record company limits its risk as it is formally committed for one support, while ensuring the exclusivity of the following.

In addition to the mechanism of the option, some elements are essential in the licensing agreement. With regard to duration, there is identity between the lust of exclusivity and length of commercial exploitation, unlike artist contract where the duration of exclusivity is different from the license period. The exclusivity granted to the licensee generally ranges from three to five years after the commercial release of the last record. For the territory, the license fee may be granted for a certain territory (France), a part of the world (countries of the European Union) or even the world. It just depends on the willingness of the parties, according to their business strategies and targets. The licensing agreement must ensure the marketing of products licensed by specifying a notice.

In addition to that, the support of reproduction, of communication or marketing provided in the licensing agreement, includes current and future technologies. You do not sign a licensing agreement for exclusive CD release only.

 

C)    the purpose of the licensing agreement:

The licensing agreement is the concession by the producer to the licensee, the right to reproduce, and to communicate to the public the record that the producer owns. It is not a permanent transfer. The producer only gives its exploitation rights  for a definite time,  and he remains the owner of the record.

The public is the final element of the creative process in the music system, the one which will be source of benefits or not. Whatever the quality of a product, if it is not properly available to the consumer, it will be difficult to make good sales. The public is therefore a crucial element. Reach the right audience, in the right way is not something given to everyone.

Thus, it is a gamble to be a multidisciplinary artist wanting to be producers and distributors in the same time. The licensing agreement allows the producer to ensure good visibility and a good distribution of the recording, something the producer can rarely do himself. The licensing agreement can therefore make the work more efficient due to separation of tasks.

 

2-     The three essential points of the licensing agreement:

 

We have seen that a license requires the producer to yield the rights it holds on a record, in order to facilitate its exploitation and diffusion to the public. To disseminate this record to the public, we can distinguish three points of the of the licensing agreement system that are records exploitation (A), other exploitations modes assigned to the licensee (B), and finally, the promotion of the record (C).

 

A)    Records exploitation:

The records exploitation is the operation of marketing a record to the public. It is the main purpose of the licensing agreement. The producer must ensure that the licensee is the sole holder of the rights granted, as well as rights to the use of all the elements submitted to the licensee (logo, mark, text, etc.). He must ensure that he has taken all registration fees on his own, and that the conditions of the contract with the performer of records referred to in the licensing agreement match with the licensing agreement. The rights granted by the producer is generally transcribe as follows:

“reproduction rights, including the right to reproduce, to copy, to make, to have made, to post, to publish, to sell, to rent or to lease the right to use, to distribute in the territory of this contract, in the choice of the society of all brands or labels, the records in any proceed known or to be discoverd, and the records covered by these”.

This type of clause is widely present in the majority of licensing agreements. The range of rights granted (reproduction, production, distribution) for records exploitation should be large enough to allow effective operation.

In this process, the fees are not an obligation for the licensee, but they are still often used. By the license, they can be recovered on all fees due to the producer. This fee are non-refundable, but they are often compensated on advances under contract for future recordings.

 

B)     The other exploitation mode:

Other exploitation modes that records exploitation are often requested as a concession by the licensee in order to secure a return on the financial investment of the manufacturing, distribution and promotion of the record. Indeed, sales of CDs are generally the primary purpose of the licensing agreement, but producers often concede secondary uses, such as audiovisual exploitation (video clips, trailer, etc..), or a participation to the compensation of the legal licenses.

There are several justifications for this. This permit the licensee to return on its investment, and on a broader basis than with the only records exploitation of the record, which represents a risk taken by the licensee especially by the advance paid to the producer.

In addition to that, the records exploitation and the promotion actions supported by the licensee are the main causes of the secondary uses thus produced. The different operating modes conceded simply depend on both parties to the contract, which define the depth of their commitment. It must simply well ensure that contracts taken with interpreters have provided exploitation modes granted by the engagement between the licensee and the producer.

Music video is a good example of another mode of operation often conceded. Audiovisual recordings and especially music videos, are traditionally part of the essential tools for sales promotion. It therefore includes the value of such a concession, which lies less in the operation of the clips than in their funding and promotion among broadcasters. There is no sales there, but concession of right to broadcast. In case of diffusion, a fee will be due.

 

C)    Promotion:

Promotion is the main reason of the licensing agreement that exists especially for this particular purpose: to promote records, and make them available to the public as a commercial sale.

Producers often have a network to promote artists and records. When he entrust specialized structure  with promotion of the record, it can often be advantageous to conclude a license called 'light', which exclud the promotion at the expense of the records editor. The royalty rate is thus generally increased by 15 to 20%. In this case, only the records exploitation is generally conceded.

In some cases, the licensee's commitment to an effective and efficient promotion cannot be negotiated precisely because this commitment depends on many factors. Then it can not always be described and specified in the contract. Most of the time, the producer tries to get from the licensee a firm promotional budget commitment, to ensure an effective work with effective means to promote recordings granted.

Even if they are traded, to get firm commitments on promotional budget is not always a key to success for the promotion of records. The best is to focus the attention of a large enough portion of the public, not to remain outside the heart of the market. Precise deployment and intelligent marketing instruments with a permanent adaptation to the reactions of the public will increase the sales many more than just to keep a budget, which doesn’t help to estimate the success or the failure of the recordings.

 

3-     The position of the licensing agreement in the current context:

 

The licensing agreement is part of the chain of marketing music, to make easier the provision of music to the public, finding its place between the producer and the licensee. This model has long existed and it is still in place, but tends to fade gradually. In the present context of the world of music, one can wonder about the real value of this contract. The traditional model of public provision of music creates is changing. Control of the media and distribution of works, which was only for professionals before, turns to be accessible to almost everyone, with the transition to the digital era. The classic pattern is reversing and the roles of the different actors of the chain are mixed.

There are more and more alternative way to market the records to the public appearing. There is currently a breakdown of the music industry as we know, walking towards personalization of the creation, with less through intermediaries.

With fewer intermediaries, and the ability of self-producing, the cost of production and promotion of a musical work is much lower than it was 10 or 20 years earlier.

The benefits of the artist in the economy of the music comes now less by selling physical records (like CD), but more by alternative means, such as concerts, advertising synchronization, merchandising as well as all operations derived from the record.

Nevertheless, the classical system presented above has much been developed in the past years and it created very large and specialized structures, a system where each link of the chain has a very specific role. Thus, between the artist and his musical creation, and the time when this creation is presented to the public on commercial basis, the record can change a lot to adapt it to all these actors and their interests mixed. It is for this reason that many artists are attempted to skip these steps, and decide to self-produce, and/or to distribute themselves in order to have more freedom of choice. In this system that is currently developing and which is supported by smaller structures (small labels, small distributors), alternative means of provision of the record to the public are arising, and the licensing agreement as discussed earlier shows less interest.

Thus we always see more meeting in one hand of several roles: to keep creative control, the labels may be small-scale publishers, record label and producer at the same time.

Another element that makes this self distribution / self-promotion now possible, is the advent of new technologies. One of the cause for questioning the traditional system of distribution, and not least, is due to the restructuring of the commercial offering of records due to internet and downloading.

Many records are now sold without physical media. Work of distribution and dissemination to the public is no longer quite the same. The role of the licensee in this regard is much less important, and the label itself can sometimes manage this task.

We see also considerably growing new intermediaries (such as Idol or Believe) that provide producers, they selected themselves, a fully digital distribution with a whole range of online downloading platforms (such as itunes) or streaming (such as deezer).

These new layout give birth to new ways of distributions, and can even sometimes erase the role of licensee in the chain of the music industry. This is due to this breakdown of the traditional system, that diferent system as the use of free licenses and licenses of Creatives Commons (see previous article (link here)) are born. Sign of the real implementation of this system, SACEM is currently testing a partnership with the Creatives Commons. Famous bands (such as Nine Inch Nails or Radiohead for example) have already been able to use these new uses.
 

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