Running Your Own Record Label: Part 2

In Part 1's introduction to this series, we explained some of the legal issues which you need to consider when setting up a record label to release your own material. This time, we take a closer look at publishing and royalties.

When starting your own record label to release your own material, you may decide to hand your songwriting rights over to a publisher, to take advantage of their experience and industry connections. Alternatively, you may decide to take control of your own publishing. Both these scenarios are possible under the DIY label model, but however you choose to run your affairs, it is important to know what publishers do, and to understand their place in the music industry.

Last month, we explained the difference between record labels and publishers, and songwriters and artists. This month, the important distinction to grasp is that between publishing rights and recording rights.

Copyright Issues

A recording of a song is copyright material in two ways. Firstly, the song or composition itself is copyright, and that right is owned by the songwriter or writers. Secondly, a particular recording of a song is also copyright. The right in this case is usually owned by the record company that releases it, although as we saw last month, this is not always the case.

Publishers are concerned with the songwriting side, so their relationship is first and foremost with songwriters. It is not uncommon for songwriters to have their compositions published solely for the purpose of having them recorded by other people. In such cases, the writers have nothing directly to do with the record labels and artists who record their songs. Matt Ward is a music publisher based in London (for more on Matt's background, see the box on next page). He provides a practical example of a typical publishing relationship. "There would be no point in a publisher signing Westlife, say, because they don't really write anything themselves; for the most part, they're recording and performing artists. Or consider Britney Spears, and that Swedish production team, who write songs for her. They're the ones who are published, while Britney is signed to the record label as the artist.

"When the artist is the same person as the writer, it becomes harder to recognise the distinction, but just because the songwriter and performer are one person it doesn't mean that the two rights aren't there — legally, they remain distinct." For more on this point, see the 'Publishing Rights & Wrongs' box elsewhere in this article.

The publishing of music originates from a time before mechanical sound recording was invented, when a composer would write their compositions as a score which the publisher would print and distribute as sheet music for the public to buy and play. Although recording and the associated rights to a recording complicate the picture somewhat, a writer still signs their song rights to a publisher in return for the publisher's printing and distribution services. The signed contract describes a writer/publisher royalty split which allows both parties to benefit from the sale and distribution of that published material. Back in the 1960s a 50/50 split was not uncommon, but today a deal of 30/70 or better in favour of the writer is typical. A music lawyer should be able to advise for each individual deal, but ultimately the split is a matter for negotiation between writer and publisher. "You can do different deals with publishers depending on how much you want them to do", explains Matt. "You can agree deals where the publisher gets a low percentage for just looking after and administering your publishing, but then they won't necessarily do much to push or develop the music. Alternatively, you can give them a bigger percentage and expect them to do more in return."

So what exactly does a publisher do 'in return' to warrant a percentage of your potential writing royalties? Matt Ward explains. "A publisher can get the writer more involved in the industry by pointing them towards different record labels, getting them to work with other writers, and putting them together with like-minded instrumentalists or vocalists. In some cases you find the publisher doing publicity inside the industry, and some will put out 12-inch records of their writer's stuff, although that's not very common. Your music will be punted round the industry, and they know how the industry works. Your music will be protected and they will act on your behalf and defend your rights.

"Quite often a publisher will sign artists prior to them having any kind of record deal, just on the merit of what they hear. You used to have a situation years ago where record companies would take on a writer/artist and develop them — the last obvious example of that was Radiohead, where EMI signed them and gave them loads of time and money to develop — but that is happening less and less, so that job is becoming more the role of the publisher.

"Depending on the type of deal you are signing, you can frequently sign as an artist to a record company, but continue to release stuff as a writer under a different name, and in a different style if you want."

The Debt Collectors

So, to briefly sum up so far: publishers can offer expertise, industry clout, and organisational services which could ultimately make signing a publishing deal worthwhile. After all, a percentage of a fortune is better than 100 percent of not very much!

But there is also another aspect of a publisher's (and record label's) job to discuss, one which is probably of most interest to the impoverished writer — the process of gathering royalties. Take a look at the Royalty Flow diagram above, which is a slightly modified version of the diagram featured last month. So far, we've talked about the artist and writers represented in section one of the diagram, and the publisher and label in section two. In the third shaded area are the collection agencies. At the top of the diagram are VPL (Video Performance Limited) and PPL (Phonographic Performance Limited), which, as you can see by the arrows representing royalty flow, collect royalties on behalf of the record company. As such, neither of these agencies are directly related to publishing, so for now we'll keep their explanation brief and return to explain more on the PPL later in this series. In short, the playing of a recording in public venues, on TV and radio or on jukeboxes generates licensing revenue which is collected by the PPL (the VPL provides the equivalent service for video products). The PPL and VPL then pass on the collected royalties to the record company, who, in turn, pay the artist (not the songwriter) according to the percentages agreed in the recording contract.

A diagrammatic representation of royalty flows in the modern music business, including the various royalty-collection agencies.

As you can see from the diagram, the PPL/VPL royalties only relate to the recording: there are still the publishing (ie. songwriter's) royalties to be accounted for — and that's where the MCPS (Mechanical Copyright Protection Society) come in. As we've already seen, in any recording of a given song, the recording is copyright, but so is the song itself, and it's this second right which is usually owned by publishing companies. A record company may own the recordings, but it still has to pay the song publisher for the right to release those songs in recorded form. Rather than each record company seeking out each publisher and working out individual deals on a case-by-case basis, everything is sorted out via the central body of the MCPS, who issue licences to cover the sale of the recorded form of the songs, in exchange for a percentage of the sale price of the record — more on this in a moment.

As a former MCPS employee, Matt Ward is well placed to explain the role of the MCPS in more detail. "In terms of royalties, the MCPS act almost like a publisher's publisher; in fact, the MCPS is owned by the MPA, the Music Publishers' Association. This is also true for all the equivalent companies around the world, like GEMA in Germany, SACEM in France, and the Harry Fox Agency in the US. These agencies form a central body in each country through which all record, media, film, and advertising companies have to obtain a licence in order to use the music. Licensing is slightly different in the US, where if, for example, you are putting together a compilation, not only do you have to license the tracks from the record company, you also have to individually go to the publishers to license each track, which is a towering pain compared with just going through the MCPS!

"If you are starting a record company, you should be aware that you have to license your product through MCPS. If you're releasing your own unpublished songs, the MCPS will waive the percentage they deduct for the publishers. It's important to register anyway, though; they will keep a careful watch of what is happening to your songs for you."

Before a record can be released, the MCPS have to be notified of all the details of the songs on it, and their full publishing details, via a form like this one. On payment of the appropriate fee, the MCPS will issue a licence allowing you to proceed with the record's manufacture.All new labels licensing through the MCPS can expect to placed on a licensing scheme which the MCPS call the AP2 (Audio Products 2) scheme — and an AP2-status record company must pay their fees upfront before the MCPS will issue a licence permitting them to make a record. Under this scheme, the MCPS take 8.5 percent of the official price of a record, known as the Published Price to Dealer (or PPD), and work out the total sum owed to them by multiplying this price by the number of records the record label is manufacturing (known as the record's 'print run'). This 8.5 percent is represented on the royalty flow diagram by the arrow travelling from the Record Company to the MCPS (it should be pointed out that the MCPS also take a small percentage cut from the 8.5 percent as commission, but for simplicity's sake, we'll refer to the percentage as 8.5). In order to issue the licence for the correct amount, the MCPS need to know from the label how many records are going to be released, how much the PPD will be, and who the copyright owner of the material is.

For a small label operating on a low budget, the sums taken by the MCPS for licensing can be a substantial financial consideration. For example, if 1000 CDs are being pressed, and the dealer price is £10, then the considerable sum of £850 has to be paid out before any manufacturing licence is granted.

The MCPS also have an AP1 scheme, which is fairer on the licensee, as they only pay on what is shipped, and the sum is worked out from the shipping price rather than on the highest dealer price. "On AP1, you're allowed to pay royalties quarterly in arrears, but the MCPS have to be sure that the licensing, shipping and ordering systems are properly in place for these companies, so it tends to be the majors or bigger independents that are on this scheme", admits Matt. In a an effort to help those on the AP2 scheme, the MCPS have recently initiated the so-called AP2A agreement, which allows successful applicants a credit period where licensing invoices are due only after 60 days. Also, the AP2A licence is helpfully issued with the invoice, rather than after payment has been made.

As Matt points out, if the label, publisher and songwriter are one and the same, then the MCPS are prepared to waive the 8.5 percent licensing fee, because it would be rather too bureaucratic to take money from the writer/label and then give back to them some time later. Of course, once a publisher is involved, that situation is not an option. David Gedge of The Wedding Present and Cinerama currently runs his own independent label, Scopitones, to release his Cinerama material, and doesn't use a publisher for that very reason, as he explains. "I don't want a publishing deal now, because if I was published, as a label I would have to pay the publisher mechanical royalties through the MCPS. I would get a nice publishing cash advance, but I would be sending X thousand pounds to the MCPS, who would of course take their cut. Then the publisher would take their cut, and after all that, they'd pass it on to the writer — ie. me — so I don't think it's worth it. I go straight to the MCPS, and if I'm releasing an album with 12 unpublished tracks, the MCPS give me an exemption from mechanical royalty payments."

Covering Yourself

The situation described above becomes more complicated if cover versions, samples, remixes and other published writers are involved in the material you plan to release. For a start, if a publisher owns any part of your recording, or anyone involved in the band or writing partnership is published, then the publisher will demand their share, and so that will have to be paid to the MCPS. "Simon Cleave, Cinerama's guitarist and co-writer is published by Complete Music," explains Gedge, "so I don't get away completely scot-free, because I have to pay his share to the MCPS. I have to tell the MCPS what publishing split Simon and I have agreed for the song, which is usually a sixth. Then they send these forms where I fill out all the tracks on the album, including the projected retail price, the names of the writers and their shares. After that, the MCPS will invoice me for the published shares. When I've paid the invoice, I get an MCPS licence which allows me to go to press with the record. They also send additional forms for future pressings."

Paying out cash upfront for the use of copyright song material can be a problem for a small label, even if much of the cash eventually returns through the publisher some time later, as its absence will affect the cashflow of the business. Having to pay 8.5 percent of the sale price may limit the number of CDs a label can afford to release in a run. Consequently, you might wish to think carefully about whether you can afford to release cover versions and tracks that feature copyright material (say in the form of samples) on your label.

As part of a manufacturing licence from the MCPS, an allowance is granted for promotional copies of the recording. The MCPS insist that all copies must be prominently marked with a non-removable notice saying 'Promotional Copy — Not For Sale', and this has to be included on the sleeve, the packaging and on the carrier itself, which means the CD or vinyl record. The people you can send promotional copies to are also limited, although TV, radio, film companies, music publishers, and overseas labels are sanctioned. There are even stipulations relating to the number of promos. For example, 25 percent of the first print run can be promotional copies, and there is a maximum allowance of 400 per format per single and 250 per format per album. In some circumstances, the MCPS allow an unlimited number of promotional copies, but detailed and accurate accounts are required. Fortunately, the MCPS don't expect you to remember all of these complex matters, so they provide a web site at www.mcps.co.uk and offer advice on the phone (+44 (0)20 8664 4400).

Performing Rites

The final collection agency pictured on the royalty flow diagram is the PRS (Performing Right Society). The PRS is different from the MCPS, because they collect royalties from the public 'performances' of songs in clubs, pubs, festivals, shops, via radio broadcast, and in any other public places (although songs used in dramatic performances, such as in the theatre, are not included!). Unlike the MCPS, which is a publisher-owned organisation concerned with the use of songs in recordings, the PRS is the association of composers, lyricists and publishers, and was devised to gather royalties for writers whose works are being played and performed. Therefore it is necessary for songwriters to join the PRS in order to receive royalties.

The task of collecting from every performance of every writer's work in every place is clearly impossible, so the PRS use a variety of techniques for estimating and distributing royalties, as Matt Ward explains. "The PRS have generic licenses for bars, say, where they charge a yearly fee by working out how long each day a typical bar plays music, what type of music they play, what type of audience there is, and how they are playing the music — that is, whether it's on a jukebox or live. If you see a PRS notice on a pub door, that means they have paid for a PRS licence. All places where music is performed publicly should be paying PRS that money. The PRS have inspectors going round targeting venues — they will even go into clubs to get track listings from DJs or set lists from live bands to work out where that promoter or bar's licence fee should be going.

"Both the PRS and PPL do use a lot of statistical sampling. The only radio station in the UK that is 100-percent checked by the PRS is BBC Radio One — the rest are statistically sampled to a greater or lesser extent. The bigger stations take lots of samples over the evaluation period, so if your record gets played once or twice it will represent a small percentage of the overall play, and so you won't get much PRS royalty per play. Other stations may just sample one day's airplay, and if your track is one of those played on that day, it will represent a larger percentage of that sample and you'll get a reasonable amount. Overall, it balances out. It's the best method they can achieve, otherwise the cost of administration to check every single play would be huge, and you'd never get any money at all."

Once the PRS have calculated how much performance royalty a song has generated, the royalty is divided according to the terms agreed in the publishing contract, as explained earlier. Some of the writer's share is paid directly from the PRS to the songwriter — this can be as high as 50 percent of the total, depending on the deal the writer and publisher have agreed — and the rest is passed to the publishing company and divided between publisher and writer there. For archaic reasons, the publisher/writer split is usually expressed in 12ths. Matt Ward gives an example. "The PRS usually divide the royalties into 12. Depending on the publishing deal, if the percentage split is 75 percent to the writer and 25 percent to the publisher, six 12ths will go directly from the PRS to the writer and six 12ths to the publisher, where it will be split again, giving a further three 12ths to the writer and three to the publisher. If more publishers and/or writers are involved, the sums are divided by greater multiples of 12 to allow the correct splits."

What Have Publishers Ever Done For Us?

Toby Marks, the man behind ambient/dance project Banco De Gaia and owner of Disco Gecko records, on which he now releases all of his own material, describes some of his experiences with publishers, and explains how they have been an aid to his development as an artist and as a label.

"My break came in 1991 or 1992, when Beyond Records used some of my tracks on the Ambient Dub compilation. At that point, I didn't know anything about the business side of music at all. I remember talking to this guy who had had some tracks on an album before, and asking him what the PRS was. He tried to explain the concept of the MCPS and PRS, and mechanical and recording royalties, but it didn't make much sense to me; there were too many acronyms! It took a while to become clear, but one of the first things I did was join the PRS and MCPS, because it was quite apparent that I should do that if I wanted to receive credit for being the songwriter on anything that was going to be released commercially.

"So I just phoned the PRS and MCPS and said 'I've written some tunes that are on a CD — what should I do?' They were very helpful, and both organisations took me through it step by step; they sent me the forms I needed to fill in, and let me ask them questions on how to fill them in!

Toby Marks of Banco De Gaia.

"For my first four albums until 1997, there was no need for me to have a publishing deal. I was registered with the PRS and MCPS, so publishing money from the UK and Europe was being collected, and reasonably efficiently. But then it became apparent that trying to collect money from the States was going to be difficult because, whereas it probably ought to be collected and passed on to the MCPS in the UK, not having someone overseeing that and making sure it was done meant that it probably wasn't! There are a couple of private collection agencies, like Harry Fox, who effectively do the same thing as the MCPS do here, but they're not an industry organisation as such. That was the bit I couldn't do, so it seemed a good idea to get a publisher. Nowadays my publishing goes through a company called Notting Hill. They are based in the UK, but they know all the publishers in the States, and they know who to talk to if publishing royalties haven't been collected. How they do it, I have no idea, but it gets done!"

"In my case, there is not much danger of somebody doing covers of my stuff, as I don't write three-minute pop songs, but certainly the one thing the publishers have done since I've had them is get stuff onto TV commercials or push stuff for use on compilations. There were opportunities I was missing, because I wasn't in a position to pursue them. A good publisher will be constantly trying to get Celine Dion to cover your songs, or to get you onto the soundtrack of the next Steven Spielberg movie, or get you the theme tune for the World Cup. There are all these avenues which I didn't know how to pursue myself, partly because I was too busy doing everything else!

"A publisher will also make it easier for the the people who might want to use your music, by sending them example CDs of your material which they can use. But it's how they categorise your music and what other stuff they put on the CD that can make it useful in that context. Take, for example, musical directors for ad agencies. They might work on half a dozen different campaigns each month, so if the publishing companies have sent them compilation CDs of music they can use that has been catalogued as, say, Music For Sports Volume 10, and they have an ad coming up centred on football, then they won't have to wade through hundreds of CDs looking for a suitable track, your music might get used, and you'll be paid!

"There have been a couple of times when I've got things happening in that way. The first was in 1994, when UCI Cinemas approached my record label at the time and said they wanted to use one of my pieces of music for a trailer. They specifically came looking for it, but a lot of the time companies will just use what is being pushed at them by publishers or an agent. The other time was when an advertising agency in London were working on a stand for Ford at the Brussels motor show — a very big, expensive, walk-through exhibition stand. The ad agency guy who was coordinating the music to play on the stand had heard my stuff, and they commissioned me to write something original for them. I'm sure there are millions of ways of structuring a deal for something like that, but I went for a one-off fee, and Ford got all the copyright. A company like Ford doesn't want the hassle of having to think about ownership percentages later — say if they want to transfer the stand to the Paris motor show. And unless you are doing particularly well, the kind of money a corporation like that can offer for a one-off fee is going to be very attractive!

"Now I have a publishing deal and run my own label, I have to pay the royalties on anything my label manufactures straight to the MCPS. They then pay my publisher, who gives 75 percent of that back to me as the artist! Because my label exists to release my own material, not other people's, I'm currently trying to work out with Notting Hill if I can miss out the MCPS and save myself 8.5 percent. I know that Notting Hill will collect it from the MCPS, I know how much I gave the MCPS as a record label and therefore I know how much Notting Hill will give back to me. The way it works now, the money just goes round in a big circle. What's more, it takes six months and the MCPS take a cut! So I'd rather just pay the 25 percent straight to Notting Hill and be done with it. I see no reason why I can't do that."

Your Licences Please

If you do decide to run your own publishing affairs, you may be approached by other labels wanting to license your songs. Another scenario is that you might want to license your music to another label for use in foreign markets. Either way you will need to agree on a licensing deal. "If another label wants to use your stuff," explains Matt Ward, "they will send to you a so-called 'Heads Of Agreement' contract, which basically says, in legal language, 'we want to use this particular track on this compilation, it has this many tracks in total and we'd like to offer you this much advance and this royalty rate.' You then get into things like packaging deductions, whereby they take a percentage off for marketing. You would take that agreement and make any comments you have on it, look through the various points and check whether they are trying to license it exclusively or non-exclusively. If it is a compilation, then it should be a non-exclusive licence so they are just taking it for one use on that particular compilation. They should also state somewhere the term of use, be it five or 10 years, or the full life of copyright. During the time of the term of the agreement they will be able to re-press the compilation without further permission.

"The royalty rate for compilation use normally hovers between 10 and 25 percent depending on type of compilation, packaging, territory and size of advance. You make your comments, they come back to you, you sign the agreement and they'd then have to provide you with royalty statements every June and December to show you how many sales they've had. They work out a pro-rata percentage based on the dealer price, and offset it against your advance. Once your advance has been recouped, they will start paying royalties."

If you set up your own label and you are not using publishers, you will also need to consider how you are going to distribute your royalties — both publishing and recording — within your band, or between you and any collaborators or co-writers. Those of you who read part one of this series will remember the example of The Wedding Present's share agreement, as explained by David Gedge, where the recording royalties were split four ways between the four band members, while the publishing (ie. song) royalties were split into equal thirds for lyrics, music and arrangement. Matt explains the best practice. "If you own the label but you've written with someone else who is not published, you should be paying yourself and this other person a publishing royalty based upon sales, as well as any artist recording royalties. You can use the MCPS's 8.5-percent model, or you use your own. With the DIY approach, where the writer and label are the same person or people, it can be a nominal amount, but it is something you should still keep in mind.

"It's all a question of best practice, and how much time you've got. You may decide to make random payments to you as a band based on whatever money you get in. How exact you are depends what kind of relationship you've got with the other people. One thing I would always advise is to try and get something sorted out right at the beginning while you're still friends — draw up a contract and get it checked by a lawyer. That may seem silly, but it becomes extremely relevant if you become successful. As long as you organise that at the beginning, it will save you much hassle later on."

In Part 3, we'll begin to look at some real-life examples of self-run record labels to see how they marry the oft-conflicting disciplines of business management and artistic freedom.