Licensing Agreements in the Music Business

Last year we had a brief look at the various contracts musicians can encounter during their career, summarising the main ones in our post: ‘The Most Important Contracts in the Music Industry.' Some of the points covered included: band contracts, transfer of rights, contracts with collection societies, publishing contracts (see also: Music Publishing), record deals (For bands and individual artists), and distribution contracts. In the following text, we’d like to take a closer look at licensing agreements, also known as record deals.

Duplication Licence

If you own the rights to your recordings, you will be in charge of any decisions about the duplication, promotion, sales and distribution of your music. If another party (usually a label) owns the rights, then they will be in charge of this area. The rights holder obtains a “licence for the duplication of recordings”.

The principle is simple: after you've created digital recordings of your music (these used to be done on tape, hence the former name: “tape transfer agreement”), you have effectively captured a protected performance.  As you can read in our blog, the copyright protection sign (P) is used in this case, standing for “phonogram”.

“When music is released, there are essentially two parties who can claim protection and compensation: 1. The owner of the Sound Recording (usually a label) and 2. The owner of the Composition (i.e the authors and publishers.)

We'd like to give you more details on the (mechanical) duplication rights mentioned above, as we are mainly talking about your recordings in this instance. Technically, you are the owner of these rights. If you decide to work with a record label, then you usually have to transfer these rights to the label. The way in which you do this and the conditions that you agree upon are negotiable. These conditions also tend to change quite a bit over time, and many practices which were once considered to be standard have just been abandoned or adapted since digital duplication started.

The contents of a music licensing agreement.

A standard licensing agreement (also known as a “record contract”) adheres to a set of established rules, which are confirmed in writing. These rules will refer to: the product itself, the production scale, the territories in which the record will be released, the length of the contract, how exclusive the agreement will be, how licensing shares will be distributed (via 'royalties') including possible advance payments, sub-licensing rights, synchronisation rights, merchandising rights, artist data rights such as pictures or biographical material, and the type of release (i.e the format).

As we’ve already mentioned, the conditions of any agreement are decided by specific negotiations for each case. There are, however, consistent parameters in the music business which form a standard protocol, and are always adhered to. We've compiled a few key words and and tips below. You also need to be aware of the potential stumbling blocks which have created disastrous situations for some musicians.

1.  Clearly establish who the partners of the agreement are. (e.g in a band: who is liable, or represents the band? Is it an individual, or all band members?)
2. Make sure you declare what the object of the agreement is, i.e. the recordings. Include the project name, title, and any other versions/mixes/remixes if necessary.
3. Format: In what format are you allowing the recordings to be duplicated and released? E.g in a physical format like CDs etc. / or a digital format such as Mp3s, streams, etc.
4. Contract length / Copyright enforcement period: anything longer than 10 years is clearly excessive, and would be unusual. The industry norm is at least 3 years for physical releases, with a 6 month buyout period.
5. Options: Watch out! The length of the contract can be changed as a result of these variations which are possible in many contracts.
6. Define the territories covered by the agreement: Try to avoid transferring all international rights to a single company. It is better and more efficient to make individual agreements with partners in their respective territories. This still applies in the digital age: promotion is still the ‘raison d’etre’ of local labels. 
7. Transferral of rights: Which rights are transferred? What are you allowed to do with the recordings, and what is forbidden? In what format do these rules apply?
8. Promotion and Synchronisation: How and in what format is the licensed music allowed to be used for advertising (free samples, synchronisation rights, etc.)
9. Other rights: make sure you determine what is being planned for other forms of copyright and royalty collection, for example what is your plan and agreement regarding “YouTube Monetisation”?
10. Royalty payments: What percentage of the profits is taken, and what is the licensing royalty rate based upon? Are royalties based upon the PPD (Published Price to Dealer, i.e. the 'wholesale' price), or do they depend on the net income of the label? Is there much variation between royalty payments for different formats, e.g. physical copies or digital releases, or third party licenses such as compilations? There is a lot of variation, but royalty rates should be based on a PPD of at least 12%, or 50% in the case of sub-licensing. A fair label will pay 50% of digital profits to its artists.
11. Advance payments: This is an extremely tempting offer, but not always helpful – just like ‘credit’ of any kind. It pays to be careful about accepting an advance, as your licensing profits may never match it –this often leads to an automatic extension of your contract!
12. Billing: This is the process of deciding how, when, and how regularly you will be paid. The usual industry billing periods are around the 30th June and the 31st December of each year, plus quarterly payments.
13. Bookkeeping: 'Auditing Rights' allow artists to employ a recognised accountant who organises your bookkeeping in co-operation with your label.
14. Guarantee: This is where you state that you are (among other things) the rights holder for the licensed material in question, and that no third parties are being violated.
15. Visual rights and biographical material: your label is effectively covering its back with this agreement, meaning that they may use artist pictures and information (with some limitation) to promote the licensed release.

Other licensing agreements and examples

In our future posts we will take a look at more (licensing) agreements and contracts, and try to explain them to you. If you have any specific wishes or suggestions, please feel free to share them with us at any time. You can reach us on our social media pages, or by email.

Tip: Lots of collection societies and other organisations offer their members templates for the various contracts and agreements necessary, which can be extremely helpful. Some societies also offer their members legal advice over the telephone.