New models are emerging that eliminate the need to press CDs, deal with e-tailers, hunt down money, hand over exclusive rights to masters, or give up a large cut of profits just for the luxury of having your songs on iTunes. In terms of both Physical Media and Digital Distribution, today’s options will make producers, and artists re-think their entire career plan.
Physical media is being re-shaped by a concept that has been around for years in the book publishing world: “on-demand printing.” The term says it all. Instead of printing hundreds to thousands of units that then sit in your garage, you can have the exact amount of units printed after you sell them, at which point they’re sent directly to the buyer.
Several companies have offered this type of service for musicians, but for reasons of cost and convenience, it hasn’t been met with great enthusiasm. “Truth is, today most artists are doing their on-demand burning themselves,” says Tony van Veen, an executive to Discmakers, one of the country’s leading CD manufacturers for indie artists. But pressing CDs on your home computer not only means inferior quality to mass-produced product; there is still the matter of selling them, fulfilling the orders, tracking the sales, and getting paid. A lot of those headaches were handled by the likes of Amazon or CD Baby, but that may soon be changing.
Meet Jeff Price and his small company TuneCore, out of Brooklyn, New York. Price is the co-founder of SpinART Records, a hip New York indie label that actually turned a profit in the 1990s with acts like the Pixies. In 2004, Jeff looked at the landscape of independent music distribution and saw two huge flaws:
n Artists and small labels need to go to too many places to fill out their distribution team and most importantly. . . .
n They were assigning very important back-end rights to their music exclusively, and paying high percentages, just for the privilege of getting their music on iTunes or not having to deal with fulfillment.
CD Baby is the leading fulfillment company in independent music, being responsible for about 25% of the titles available in the independent music market. Using them as a comparison, we see that the e-tailer charges an average of 30% for fulfillment of physical product ($4 a unit), along with outside expenses that bring the unit cost up to over $6.
- Cost of CD: $1.50 (assuming an order between 500–1000 units)
- Shipping to CD Baby: $1 per unit (five unit minimum)
- CD Baby’s fulfillment fee: $4
- Total cost per unit: $6.50.
On top of this, CD Baby’s startup fees of $35 plus $20 for a bar code (which is a “sub-code,” not an actual, entire UPC code) put the client into a scenario where they have to sell about 10–15 units of a particular title just to break even. Think that will be easy to do? Here are some statistics to consider.
Neilson SoundScan — the leading company that tracks retail CD sales — reported in 2004 that out of the 4000+ CD Baby titles they tracked, only about 700 titles registered more than 12 units sold on the popular service that year. CD Baby claims about 70,000 clients, which means about only 1% of their clients are in the black. When you add the cost of printing the physical media, the losses become even more extreme.
In companies like TuneCore, a client sends only one CD (the master) and they can even email it to save on postage. TuneCore sends it to their strategic partner, Digital Catalog Service (DCS), a company with several major label accounts. They oversee the on-demand producing of the CD — in full glass-master quality — and print the artwork using a professional offset process that ends up costing the client about $6 a unit. They ship it, collect the money, and the client can withdraw their profits at will from their TuneCore account. They take no fees for warehousing or shipping, so this strategy makes it virtually impossible for a new artist/label to lose money.
How does the old guard feel about this new solution? CD Baby and their main competitor, The Orchard, have not announced plans to partner up with any on-demand pressing services. However, DiscMakers Executive VP, Tony van Veen, who has enjoyed a very comfortable place in the existing model, says they are stepping up their on-demand services. “It’s a small but growing part of the landscape. In fact, DiscMakers already offers a short-run duplication service where you can order CDs in quantities as low as one disc.” Cost is about $4 per unit, a price that compares well to newcomer TuneCore.
On the digital distribution side of the fence, the main “aggregators” for indie artists thus far have been CD Baby, The Orchard, IRIS, AWAL, and DRA (apologies to any I left out). All offer to get your music on iTunes and other download services, like Rhapsody, Napster, e-Music and others. But not all their contracts are created equal. Many have confusing clauses with terms like “underlying compositions” to describe the type of rights that an artist must convey in order to utilize their service. This has some industry lawyers nervous about what actual role the aggregator assumes.
Many also have “payment thresholds” that seem reasonable at first, until you do the math. A “threshold” in this context is a financial goalpost that a client has to reach in order to trigger a cashout. In some cases it can be as high as $200 a month, and this is after the aggregator takes their 15% vig. That nets out to about 336 downloads per month before you get paid — not 200 downloads, as you might initially assume if you are thinking in terms of about $1 a sale. (Example: For a 99¢ download on iTunes, about 29¢ goes to Apple, leaving about 70¢ that is passed on to the aggregator. Then the aggregator takes its 15%, leaving 59.5¢. Divide that into $200, and the result is about 336 downloads.)
Jeff’s premise with TuneCore is that digital distribution should be a “flat fee,” pay-as-earned service — not one that keeps a hand in the artist/label’s pocket for months or years at a time, or creates difficult thresholds in order to qualify for payment. “You walk into FedEx and ask them to deliver a package to iTunes. FedEx charges you $15 and that’s it,” says Price, “They do not say ‘OK, that will be 20% of the revenue for the next three years.’”
A good point. In TuneCore’s contract for digital distribution, there is no payment threshold, no exclusive rights granted, and no grab is made for back end rights either. They take 0% of revenue and, best of all, you can fire them at will, leaving the client free to make deals with larger major labels should the situation arise.
So how do they make money? TuneCore charges 99¢ per song as a one-time fee, and 99¢ as another one-time delivery fee of the entire album to iTunes and any other digital store of the client’s choosing. So, a 10-song album delivered to iTunes US and Rhapsody, for example, would be $10.89, and each store after that would be another 99¢. An annual storage and maintenance fee of about $8 an album is then applied, resulting in a total of about $18 to get set up on two stores. Compared to the leading competitors with almost double the setup fees and back end rakes of 9% to 30%, the TuneCore model seems highly competitive.
Then there is the matter of how long you are locked in to some aggregators. Most insist on commitments that last from six months to three years. Not only is this a lifetime in a recording artist’s emerging years, it’s a lifetime in the world of digital technology. New formats are opening up every month: satellite radio, internet radio, podcasting, streaming into restaurants and arenas. Although some companies advertise “non-exclusive” deals, giving the impression that you can have several aggregators who specialize in different areas, they are hoping you ignore an important point: Many legitimate labels won’t sign an artist if that artist has already given away the rights to distribute their music on any mass scale, even if they are “non-exclusive” rights.
To ease your apprehension about all this, some offer “30 day opt-out” clauses. This also sounds appealing until you look carefully at the reality: Since the advent of digital distribution, many people have tried “opting out” of old deals in favor of newer, better ones only to find that months later, there are multiple copies of their same masters on download services, each paying different royalty rates.
Reality: In general, “30 day opt-outs” are fallacies. No company can really get you out of the entire digital network with 30 days notice once you are loaded into iTunes, Napster, etc. and I suspect that you’ll see mention of this feature start to fade away from legitimate aggregators’ advertising, as it can not really be fulfilled reasonably.
So to whom does the future belong? Will we start to see those who take back-end rights fall behind in market share? Are we at a tipping point where granting rights in exchange for an opportunity seems like “old think?” I for one am keeping a close eye out for a reverse bidding war between the old bosses and all-in-one companies that espouse a more liberating philosophy.
[Editor’s Note: More information on the companies mentioned in this article and their practices can be found on the author’s award-winning website, www.MosesAvalon.com.]