Peter Wells is the SVP of Operations and Customer Advocate at TuneCore . Peter began as a classical pianist, English literature teacher, senior technical writer at Cisco and director of label relations at eMusic, where he built a deep knowledge of the music business.

Part II of What Every Musician Should Know about Digital Distribution.

If you want your music up for sale in iTunes, Rhapsody, Napster, AmazonMP3, eMusic, Amie Street, Zune, BestBuy.com or any of the stores that have emerged as “big guns,” you either have to build a direct relationship with each one of them, or go with a digital distributor. Most people can’t do it on their own: as I wrote in Part I, stores simply won’t set up a deal with you, as a matter of policy, unless you’re big enough (around 200 releases or with some top-tier material already proven to generate considerable revenue, so as to attract the stores’ attentions). If you’re that big, you have your own legal staff, have been in this business a while and probably don’t need any advice from me. 

So if you are a small label or individual artist, you’re going to have to go with a digital distributor. How do you pick one? 

Aggregators

The phrase “digital distribution” can confuse: after all, aren’t CDs digital media, and haven’t they been distributed for decades? The companies that sprang up over the last few years to deliver digital music over the Internet to stores that sold downloads or streams call themselves “aggregators.” They aggregate music and materials from lots of individuals and small labels and deliver them in regular packages (weekly, daily, nightly, however they batched them together). As an individual musician or small label, you’d negotiate a deal with the aggregator to deliver the music and data and collect sales figures and earnings on your behalf. The aggregator already had the infrastructure to deliver your content to the stores, so you had to work out some way of getting your music to the aggregator (mail a disk, send the masters FedEx, etc.). Then, when the stores report sales of your music and send money, the aggregator passes it on to you. For all this service, you would pay them something. 

Aggregators are in a pretty good position: since the “big gun” stores won’t do deals with individuals or small labels but will work with giant aggregators, they’re in the driver’s seat. They were “gatekeepers,” since you can’t get your music for sale in the big stores without them. Furthermore, aggregators were born into a very well established music business that has more than a hundred years of experience with distribution. There was ample opportunity to set up deals and terms that resembled traditional physical distribution. 

So if you go with an aggregator, you’ll probably enter into a deal with them that looks a lot like the deals traditional physical distributors used: you pay an ingestion fee of some kind, are responsible for delivering your product to the aggregator somehow at your own expense, and then the aggregator takes a percentage of your sales, for however long you’re in the stores “through them.” This model is standard in the industry now, and just about everywhere you go, you’ll find some variation on it. I’ve seen percentages as high as 30% and even 50% and ingestion fees that added up to well over $100 per release. That’s a hefty cut, but hey, how else are you going to get your music into the stores to sell so you can make anything at all? 

TIP #1: Check the Percentage

When you choose a digital distributor, ask: 

• What percentage are they going to keep?
• Is there a cap, or do they take that percentage forever?
• Will that percentage ever go up?
• What are they doing to justify the percentage?
  

The last point is key: What are they doing to earn that percentage? Remember, this isn’t traditional physical distribution, this is digital. They only need to send the stores your music and data ONCE. They don’t have to have a warehouse to store it, only a hard drive (and trust me, storage is pretty cheap!). They don’t need trucks to ship it, though they do need bandwidth, ONCE, to send it along. They don’t need to package it in cling wrap or load it on pallets, but they do have to format the data to the stores’ specifications (again, ONCE). They don’t have to keep a staff of salespersons wandering from store to store to make sure your music is on the shelves as promised, it can be checked automatically, instantly. They don’t have to deal with insurance for your product (a leaky roof in their warehouse could destroy your stock of CDs, but in the digital world there’s no stock). About the only thing that isn’t changed is delivering money and sales data back to you: that’s the same for all distribution (more on this later). 

So why are they taking a percentage? Because they can: because they are gatekeepers and you’ve no choice but to use them. There is one other reason, and it’s the most important: do they MARKET or PROMOTE your music? That’s where most aggregators say they work for you, and the reason they deserve a percentage. 

In Part III: More about how digital distributors and aggregators market and promote you…or not!

Having worked for both venture backed technology companies and record labels I often have friends from one industry attempt to relate to the other by saying something along the lines of “record labels are just like venture capitalists”. It is true both venture firms and record companies invest their time and money into a third party with the intent of making a (large) return on their investment. However, in my experience there are more differences in their traditional approaches to investing than similarities.

Venture capitalists typically understand how important it is for the employees at their investment to have cash to pay their rent and eat. One of the secrets taught in business school is: No payroll = No employees = No company = Lost investment. The traditional record label agreement dictates the artist or band doesn’t get paid any royalties from sales until after the record label has been paid back (or “recouped” in music industry language) from their initial investment in its entirety plus any and all other new release related expenses. Since the advance most non superstar artists receive for a new record is often times just enough to cover the recording costs and they won’t receive royalties from sales for some time (if ever) it’s not uncommon for the lack of income to cause a new band to break up before they have a chance to develop to their potential. It’s doubtful even Google would exist today if their investors demanded to immediately “recoup” their investment and keep every cent earned from ad sales instead of making sure the company had cash to pay their employees and other expenses during their early days.

Venture capitalists don’t demand ownership of the intellectual property the employees of their investments create. With the traditional record label agreement the record label retains ownership of the master recordings the artist or band creates in the studio.

Venture capitalists understand there is more that goes into a successful investment than just a sales and marketing strategy. They are involved with management, product development, legal, staffing in addition to sales & marketing at their portfolio companies. Record labels spend almost all their resources and money singularly focused on their artist’s sales and marketing results and very little on the other aspects of their business. Even the 360° degree deals record labels are now pursuing are really just ways to extend the labels involvement into other sales and marketing related areas of their artists such as licensing, touring and merchandise.

Venture capital firms usually invest in promising new companies along with other venture firms, each firm taking a minority ownership position. Having multiple investors helps spread the risk around and allows for collaboration on making the investment successful. Record labels have traditionally not worked with or collaborated with other labels (outside of their ownership group) on developing new artists.

Venture capitalists are far from perfect and certainly don’t always have the owners or employees of the companies they have invested in best interest at heart when making decisions. But the approach they take gives their investments a much better shot a long-term success than a traditional record label deal.

Some artists, like some startup companies, do need an investor and team of professionals to help them succeed. Hopefully as the music industry continues its ongoing transformation new and more equitable models for investing in artists will emerge and Patrons & Champions will give more of them the chance to build long-term, sustainable careers.

Peter Wells is the SVP of Operations and Customer Advocate at TuneCore. Peter began as a classical pianist, English literature teacher, senior technical writer at Cisco and director of label relations at eMusic, where he built a deep knowledge of the music business.

Part I: Distribution and Doing It Yourself 

You can sell your music yourself right to your fans, on CDs you mail out of your home, from the trunk of your car, from a knapsack or on a collapsible table at your concerts or on a street corner. Direct selling has some real advantages—piracy is practically impossible, and as long as you track your inventory well, theft and even damage can be kept to a minimum. You keep all the money, other than your expenses. You can even decide who gets to be your customer. 

But if you want help selling, if you want other people to sell or even give away your music for you, you have to get the music into their hands. That’s distribution: getting your product into the hands of other people who sell it for you. It costs, because there’s no way people are going to do the work of selling your music unless you pay them somehow, and it costs to get the music into their hands. How are you going to decide who should sell your music for you and under what deal terms? How do you get them the music, how will it be stored, how quickly and effectively can stock be replenished? How will you track the process, audit them to make sure they aren’t making mistakes or skimming? You’ll need to communicate with them about errors and suggest how you want your music sold. There’s a lot to keep track of when distributing, which is why musicians and labels traditionally hired experts, distributors, and paid them (often with a percentage) for their full-time efforts. 

The digital music revolution changed many things: you don’t have to make CDs or vinyl or cassettes any more; you only have to make one unit and then you can duplicate it instantly, infinitely; you don’t have to store copies or even make them before you sell them; you don’t have to ship anything physical, and the cost of  “shipping” the music is negligible per copy; there’s no such thing as damage, and if something goes wrong, replacement costs almost nothing extra. Even “returns” can be dispensed with, in some cases. But it’s still distribution, and the core problems remain: who do you get to sell your music and under what deal terms? How do you get them the music, how do you track the process? Once again, it’s time to call in the experts, the distributors who specialize in this new digital world, the digital distributor. 

A word about doing it yourself

Right now, millions of people are their own digital vendors, selling their music off their Websites, using PayPal or accepting checks in the mail and using file transfers to get the music to their fans case-by-case. That works if you have a few fans, but if you have hundreds, thousands or more, it gets expensive: your Website might not be able to handle the traffic, downloading and bandwidth costs could wipe out profits, as might the costs of credit card processing, etc. Taxes and Internet vending laws can keep you up nights, too. 

But by 2008, a few key stores have emerged as the “big guns” of online music retail, and they’re the only ones attracting customers in huge numbers and generating the sales revenue. So if you want to be your own digital distributor, you need to find some way to get your music into iTunes, eMusic, Rhapsody, Napster, Beatport, AmazonMP3 and, in the case of more specialized music, a few key genre-specific online stores that attract fans of certain types of music. 

Many of these stores will not work with individual artists or even small labels. They just won’t do it, as a matter of policy. Remember, every time a store sets up with a distributor, there has to be a contract, there has to be auditing tools, a relationship must be in place, the deal terms. The stores have enormous businesses to run, they have to be able to count on the music coming on time, in the proper format, with all the legal bases covered. When it comes time to pay royalties, the stores have to issue accounting statements and checks. iTunes, for instance, would have to employ a staff of hundreds or even thousands to set up and manage deals with individual bands and artists. Even labels with less than 100 releases might be too small to warrant that kind of commitment. The legal exposure alone could cripple iTunes. So they are very, very picky about doing deals with labels directly: they prefer distributors. It’s pretty much impossible to get into iTunes on your own. 

So even though in this day of incredibly cheap and available options for creating your music, for recording it, for mixing it, mastering it, producing it and even marketing and promoting it, the one thing you can’t do on your own is distribute it, not to the top digital music retailers in the world. You’re going to need a digital distributor for help. 

Coming up in Part II: What to Look For in a Digital Distributor

John Doe is the founder of the seminal Los Angeles punk group X, a solo artist and actor. John answers questions from our community members in the WWJDD? blog. Photo by Autumn de Wilde.

A Question from Christina in Half Moon Bay, California

Hello John,

I have been writingabout music for a long time, which also means I read, hear and watch tons about music. As an observer, it seems to me that so many in the media miss good opportunities to learn more about the art of and the person they are interviewing; mostly because they just don't do their research. Like a great photograph, the right question and an honest answer can tell a lot about a person without compromising their privacy. You have been interviewed a lot and appear to give answers that are honest and not canned, even when the questions are just shallow or without thought - you have the ability to shift a bad question into something intelligent. So for those of us who write about music and get the chance to interview artists, what is it really that we should be asking in order to bring out the best, not put so much burden on the artist, and tell the interesting story?

Christina

WWJDD?

Hey Christina,

  What's increasingly common is that the artist has to come up w/ "a story" to tell.  "Why this record or tour is worth me writing about?"  When there weren't thousands of records every release date, the writers or publicists used to have time to come up w/ the story or at least a direction. Telling the story behind the songs can very easily compromise your private life, especially if you're somewhat confessional songwriter.  Intuition is always the best guide for the interviewee as to how much you want to reveal. Even so, sometimes you can get tricked into saying too much. That's why many musicians & actors can be guarded during the process.
  But to answer yr question more directly; research, experience & general knowledge is obvious w/in the first two minutes.  When there's little or none, it makes yr heart sink the way a bad beginning to a first date can make you look at yr watch w/in the first ten minutes (sigh). If a writer doesn't have the time or interest, my advice is to pass it on to someone who does.  If you need the money, do a little research & PLEASE avoid general questions.  Like any good writing, the more specific, the better.  Find a couple of elements that you can indentify w/ & ask about that.  Find a few lyrics that you like. Suggest some influences that you think you hear.  Pretty obvious stuff really.  But the best ones have all that & turn into a conversation.  Lastly, it's also precarious for the interviewer to talk too much about their experience w/ the band. "Back when I was 14 I saw you guys . . ."  OK I'll stop now.
hope this helps
and as always thanks for writing,
JD
 

If you have questions for John Doe about music, the music business or life feel free to email them to wwjdd@knowthemusicbiz.com.

For more information on John Doe check out theejohndoe.com or YepRoc.com .

SoundExchange collects royalties from satellite, cable and online radio stations on behalf or recording artists and record labels in the United States. Each time a song is played on stations from XM, Sirius, Pandora, Last.fm and the like Soundexchange collects royalties that are supposed to be paid out directly to recording artists and their record label (regardless of an artist’s “recoupment” balance with their label).

Unlike  PRO Royalties collected from terrestrial radio and paid out based on "estimates" royalties collect by SoundExchange are collected and paid on actual plays. Satellite, cable and internet radio continue to grow at a rapid pace and these royalties are an important way artists can actually get paid for their work.

However, if a recording artist fails to register with SoundExchange they forfeit the royalties due them after three years. According to estimates there are currently over 7,000 artists owed royalties who have not yet registered at SoundExchange and are at risk of forfeiting monies owned them.

P2PNet and Nashville entertainment attorney Fred Willhelms have formed  "Project Unfound Artist" to help find artists that are due royalties but not registered at SoundExchange. This project utilizes a crowd sourcing approach to identifying and notifying artists on the SoundExchange unregistered artist list. Check out Project Unfound Artist to learn how you can help get an artist paid.

If you are an artist please register at SoundExchange today!