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The Rise of the Independent Music Label

Many artists, producers, songwriters, managers, studio owners and engineers now set up their own independent music label (or “micro-label”). These produce master sound recordings and deliver them to the public via digital download or mail order through their own websites. Prior to establishing a micro-label, certain legal and business considerations should be kept in mind.

A significant reason for the rise in micro-labels is the disenchantment felt by some artists with the major labels, which may be perceived as conservative and slow to catch up with musical preferences. Generally, the majors have been signing fewer artists over recent years. The high cost and risk of investment into artists (approximately only one or two artists out of ten will result in a profit for the majors) means that the majors are mainly interested in finding artists who already have created a “buzz” for themselves, and who can also appeal to the masses.

The music of many independent artists focuses on a niche market and may not necessarily cater to the masses. Scoring a major record deal may be difficult.

Another reason for the increase in micro-labels has to do with technological advancements, which have eroded the barriers to entry into the sound recording and music distribution business. With the availability of low cost, high quality replication equipment, artists can now produce commercially satisfactory recordings at a cost that is not prohibitive, and distribute such music via the Internet.

Changes in consumer behavior in the marketplace also have had a significant impact. In-store CD sales have been decreasing over recent years, while online music sales have been increasing. Many independent labels are using the Internet to promote and sell their music and business.

Prior to establishing an independent label, key business issues that should be analyzed include:

• the business revenue model that will support the label’s activities;
• whether the label is set up for only one artist or more than one;
• how the label will promote and distribute music (i.e. via traditional means, or by using the Internet, or both); and
• whether the label will also be acting as a publisher.

It should be noted that a micro-label that wishes to also act as a publisher will assume additional responsibilities, which may or may not be easy to manage. These include administering the rights in and to the compositions by registering copyrights, issuing licenses, collecting money from the performance rights organizations and paying other writers or co-publishers.

Some common steps in establishing an independent label include incorporating the business for liability protection purposes; drafting contracts to ensure that all music rights are properly secured; registering copyrights; advising on branding and merchandising issues; drafting the appropriate distribution, licence and any other agreements as may be necessary; and advising on the legal implications of marketing and selling music via traditional means and online.

For example, marketing and distributing music online, whether via digital downloading or mail order through a website, raises a number of legal concerns. When the label uses the Internet, it must recognize that sales could potentially occur in any number of different countries. This raises the issue of whether the label is now conducting business in that other jurisdiction, where different consumer protection laws, tax laws and treaties and other regulatory requirements may apply.

Micro-labels signing artists must ensure that their lawyers properly tailor agreements to reflect the resources and abilities of the label. The following are a few issues to consider:

• a typical artist recording agreement should provide for a release commitment in a specific territory by a particular time;
• micro-labels should consider that their limited resources may require greater flexibility with respect to releasing an album;
• the promotion commitment should be specifically tailored so that the label can meet the stated expectations, since such clauses often cause the breakdown of recording agreements;
• the terms of the royalty section must be carefully drafted, since a complicated royalty structure may not be administratively feasible for the micro-label, especially if the micro-label is a one or two-person operation;
• a typical recording agreement may also include a holdback clause allowing for 25 per cent or more of royalties payable to the artist to remain in a reserve account, in anticipation that some CDs will be returned from stores. However, if the main vehicle of distribution is digital downloads, this provision should be revised by adjusting the holdback amount to reflect the nature of online business.

With independent labels on the rise, their specific needs must be addressed, especially if they wish to sign artists and distribute music online.

This article was written by Jindra Rajwans, a business and entertainment lawyer based in Toronto, Canada. The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

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