Running Your Own Record Label: Part 3

On The Record

Industry Talk

Published November 2002

This series has already looked at the legalities of song ownership and how to make money from song publishing — but, as the head of your own label, you also make money from record sales. Like publishing income, however, it's not straightforward. We explain the basics...

It may seem an obvious question, but how do people go about making money in the music business? This series has already mentioned some of the most important ways: broadly speaking, songwriters make money from selling their songs, artists make money from performing the songs live and in recorded form, and record companies make money from selling those recordings.

Of course, if you found a record company to provide an outlet for your own material — which is what this series is designed to help you do — you'll be an artist, songwriter, and record label rolled into one person, and need to know something about how to arrange your business so that money from these three sources reaches you properly. In the last part of this series, we looked at songwriting royalties, the world of music publishing, and how the royalties reach the songwriter via royalty-collection agencies such as the MCPS and PRS, and publishing companies. This month, it's time to consider record company income.

Income From Sales & Airplay

Just as a publisher is concerned with the sale of songs (whether recorded or not) a record label is concerned primarily with the sale of recordings, whether in the form of a tangible product, such as a vinyl record, CD or DVD, or, increasingly these days, as a digital file downloadable via the Internet. Usually, the record company owns the legal rights to these recordings (although the rights are sometimes licensed for the purposes of release), so the sales generate income for the company, which is in turn used to pay the artists and writers, the distributors involved in the sales of the recordings, and (if all goes well) used to make the company a profit!

However, the playing of the record also generates revenue in the form of royalties for the record company and its recording artists and performers. In the same way that the PRS collect publishing royalties for the publishers and writers (as explained last month), a body called PPL (Phonographic Performance Limited) collects royalties from the public playing of a recording, the most obvious example of this being the play of a record on a radio station. As a label, there are several way to ensure the money from sales and performance is collected efficiently, and these include the accurate coding of the songs by way of ISRCs — which we'll look at more closely in a moment — and of the package with barcodes (see the 'Bring On The Barcodes' box later in this article). The coding of your recordings helps the accurate calculations of sales, allowing you to work out future production runs more precisely, and it's also a necessity for registering in the official charts. But before we discuss those subjects fully, a closer look at PPL's role is essential.

If you join PPL, you'll be sent a wealth of information, including the release forms to register the compositions your label will be releasing. As explained elsewhere in this article, these are shortly due to be superseded by a means of on-line electronic registration.

As discussed last month, a label will be paying 8.5 percent of any recording's 'Published Price to Dealer' (or PPD) to the MCPS if any published copyright material has been used in their recordings. But while it is the MCPS' job to take money from labels, it is the PPL who collect royalty money on behalf of the labels and recording artists when a record is played on the radio.

After broadcasting became established in the 1920s, and radio began to play recorded music, record companies concluded that they should be entitled to some form of royalty in return for the use of their recordings in broadcast transmissions. In 1934, a test case established that in addition to the author's or songwriter's copyright, copyright also existed in the sound recording. A body had to be set up to administer the licensing of that right, and this eventually led to PPL's formation. Since those early days, sound recording rights have been refined and redefined through various copyright acts so that now royalties are collected by PPL from all forms of broadcast and performance. The exception to this is music usage on the Internet, which, being a new and fast developing medium, still isn't adequately licensed (although as we will hear later, work is being done to provide licensing for independent labels).

Broadly speaking, PPL operate in a similar way to the PRS (see last month's issue), and they collect from a similarly varied bunch of music broadcasting and performing businesses. The principal difference between the two is that the PRS's area of responsibility is song rights, while PPL are concerned with the rights relating to recordings. Like the PRS, PPL issue licences to those wishing to use recordings, and also gather information from record companies, performers, and users like radio stations and jukebox suppliers, to work out how those licence fees should be distributed. They then decide who is owed how much of what.

Historically, annual PPL payments were split so that 67.5 percent went to members (the record labels), 20 percent directly to so-called 'featured' artists (usually the main band on any given recording) and 12.5 percent to the Musicians Union for distribution to so-called 'non-featured' performers (usually any session musicians whose perfomances are used in the recording). Since the end of 1996, new EEC legislation (known as the Rental Directive) has split the PPL royalty income 50/50 between members and performers on a track-by-track basis, so as to ensure that at least half the total PPL revenue is always available to performers.

Bring On The Barcodes

We've mentioned royalty-collection systems a fair bit in this series so far, but just as important for a DIY label, if not more so, is an accurate system for logging the sale or distribution of the records themselves. The now-familiar barcode is the system used to track the progress of the physical record. In the UK, the right to use barcodes is licensed through a company called the e-centre (www.e-centre.org.uk). Those wanting to use barcodes simply pay a one-off joining fee and then an annual subscription for the right to print codes. Both fee and subscription are the same amount and relate to company turnover. Companies with a turnover of 0 to 0.5 million pay £85, although the maximum is only £280 for turnovers of 50 million to one billion!

Toby Marks explains the importance of having a code on your CD or record. "Whether you think its worth paying £85 to get a barcode or not is your personal choice; there is nothing to stop you producing CDs, not putting the barcode on them and selling them via your own web site. However, although a couple of local shops might take them, BMG, Pinnacle or any of the major record distributors will not take that product. Also, no retail chain will take your product without proper barcoding. These days, they don't even look for titles on the front to see whether it is Maya, the second CD by Banco De Gaia, because everything is recognisable by that number and barcode. Without those codes you don't exist as far as a retailer or distributor is concerned.

"I imagine every step in the chain uses barcode information differently. For example, I give the information to Disco Gecko's manufacturers so they can stick it on the artwork. When the finished CDs are sent to the distributor, the barcode is put on the outside of each individual box, so the distributor's warehouse will know what is inside the box. Meanwhile, the distributor's sales department will also be handed the barcode, and they'll assign a price to it, so that for them, that barcode will be associated with a certain retail price."

The e-centre provide an on-line explanation of the barcode system, and the pros and cons of choosing either of the two commonly used barcode formats (known as UPC and EAN), but if you want to find out more on the subject, surf to the Universal Product Code (UPC) and EAN Article Numbering Code (EAN) page at: http://www.adams1.com/upccode.html. The basic point to remember is that in the UK most users have EAN-type codes, but in North America the UPC format is more common. However, although EAN equipment can still scan UPC codes, UPC equipment currently won't recognise EAN ones!

The first digits of any UK barcode are assigned by the e-centre, followed by a set of numbers chosen by the record company, which are specific to each record release. After that, a single digit indicates the version of the track and the final one checks the code.

You may just hand your codes to the person designing your packaging, but if you intend to produce your own artwork, there are many software packages available which can generate barcodes for printing. For Quark Xpress users there is an extension called Azalea, while a company called Taltech market several Microsoft-compatible barcoding products. To create a complete barcode, you key in the appropriate code numbers and select the type of code you require, and your barcoding package will then generate the familiar series of black and white stripes. There is a fine line between printing successful barcodes and ones that won't scan correctly, so you should pay careful attention to printing tolerances and guidelines. The relative benefits of using bitmaps, fonts and metafiles for generating barcodes are explained at: www.taltech.com/TALtech_web/resources/.

If your releases lack a barcode, you will almost certainly deny yourself mainstream commercial success, as without a code, there is currently no system to track sales for chart purposes. The Official UK Chart Company currently sub-contract the job of managing the UK audio and video chart to market research specialists Millward Brown, who provide anyone wishing to register their release with the appropriate forms and guidance. For each release, complete details have to be sent to Millward Brown together with one copy of the release in all formats. Rules at the moment require that all release copies and information should arrive at least two weeks before the release date. On the plus side, there is no fee for registering. Record sales information from barcode scanning is sent directly to the Millward Brown computer for chart compilation, so both registration and coding have to be in place before charting can occur.

In short, barcodes are pretty important for a record company. Toby Marks explains what effect a bad batch can have. "Barcodes can be a nightmare; if you don't get them printed just right they won't work properly. My second album, Last Train To Lhasa had a problem like that. It sold really well, and we charted at 31 in the national chart in the first week, just 230 copies short of the Top 30. The problem was that there were over 2500 sales that hadn't scanned properly in the shops, so they didn't show in the chart. It's a small point, but for a lot of people, especially shops, a Top 30 album or Top 30-selling artist says a lot more to them than Top 40, and they instantly put you in a different category.

"I'm actually thinking of not bothering to barcode my next releases, because I know that my tracks are not going to get good chart positions, and it is not particularly important for me to be registered at number 496, or whatever it might turn out to be."

Keeping Track

In order to license effectively, PPL require record labels to submit full recording details including notes on who has contributed what to each recording. Aware of the amount of administration the processing of recording data causes for both record labels and themselves, PPL have recently launched a project designed to make the process more efficient, known as CatCo. Developed from an existing system used by the Record Industry Association of America (RIAA), CatCo is an ever-growing on-line computer database containing all the necessary data relating to a recording. Record companies can complete the release forms relating to their recordings on line, and the information stored can then be accessed by PPL, the MCPS and other interested parties. PPL hope that everyone will eventually start using the system, which should make their administration more efficient and, in theory, should lead to more accurate royalty distribution. The intention is that the database will also replace the record release forms which have to be submitted to the MCPS for publishing purposes (as explained last month).

Screenshots from the on-line CatCo database, showing the on-line versions of the PPL registration forms for tracks on an album, performers involved, their status ('performing' or 'non-performing'), and so on.AIM, a separate industry organisation for independent record labels (of whom more in a moment), have developed their own software, called aimlabeldata, which allows labels to easily interface with the CatCo database, and which is free to their members. The software, which runs on both Mac and PC, acts as a front-end interface to CatCo, and allows a label to fill in its relevant forms for eventual use by the PPL and MCPS. The forms are emailed directly into the CatCo system so that no paperwork is generated along the way. CatCo's own interface operates similarly, but does not currently allow the data to be stored at the record company, whereas aimlabeldata can additionally act as the label's own track database. As you can see from the screenshots shown here, it's all pretty straightforward.

Apart from the collation of recording data, PPL also face the considerable task of monitoring who is broadcasting a record and how often. To help, PPL issue to record labels what are known as ISRCs (International Standard Recording Codes) which act as a unique and permanent identifier for every track recording. Armed with the appropriate ISRC-reading equipment, a radio DJ playing the CD is able to read the codes and log each play of each individual track so that accurate payments to PPL can be made.

IRSCs were developed by the International Organisation for Standardisation (ISO) to be used on an international basis, so although PPL are a UK-based organisation, ISRCs are still administered by all the other equivalent bodies in foreign countries. In practice, each ISRC is added to a recording in much the same way as track ID information is encoded onto a CD during mastering; in fact, any mastering software package worth its salt should provide a facility for adding ISRCs as well as track IDs. What's more, any label intending to join PPL will be sent all the necessary ISRC documentation together with their application pack. Everything you'll ever want to know on the subject of ISRCs (and probably more besides!) is also available on the Internet at the following address: www.ifpi.org/ISRC/ISRC_handbook.html, but the basic idea can be summarised as follows. The codes all start with 'ISRC' as an identifier, followed by a two-character country code (GB for Great Britain). There then follows a three-character registrant code to identify the producer of the recording, a two-digit year reference, and finally, a five-digit designation code to be assigned sequentially track by track. Musician and record label-owner David Gedge gives a practical example. "I joined PPL when I started my record label Scopitones, and they gave me the first bit, so I think all my codes start GB and then DGM for me. The next bit is the year, and the rest is the number you assign to the tracks, like 00001, then 00002 and so on — so it is logical. You then register your codes with PPL when you submit the forms."

Although the benefits of having ISRCs are easy to see, a small label which has to balance many different jobs has to decide if the administration is justified by the potential benefits. Toby Marks of Banco De Gaia (and owner of his own Disco Gecko label) is philosophical about the necessity of the codes for a small label. "In practice, there are only a few radio stations around the world who have automated playlisting systems. As far as I know, most small stations are still filling out playlists by hand, so in that respect, I can't see IRSCs making a huge difference for somebody at my level. There might be a little bit of revenue coming in from radio and TV which I wouldn't have got otherwise, but personally, I don't see it as being hugely significant. Fortunately, it isn't a huge hassle to do it, so I reckon that if you are going to manufacture CDs you may as well. Then, if a track gets licensed for, say, a large Ministry Of Sound compilation, and ends up selling 500,000 copies worldwide, you're more likely to see the money. Mind you, for a small label, ISRCs are a good example of one of the little chores that you might not think of at first!"

Other Industry Organisations

Most people reading this series will be musicians and producers hoping to set up a label to release their own records. As such, it may be worth joining organisations other than AIM and the BPI mentioned in the main text. BACS (the British Academy of Composers and Songwriters) is one which is relevant to anyone composing or writing. Their services include free web listings, legal and business advice, networking opportunities, and information on dealing with the PRS and MCPS. They also do the initial selection for the Song For Europe competition and hold regular face-to-face members' demo-judging sessions. Various discounts, insurance aids and travel deals are also available to memers. Membership ranges from annual student rates of £18 to Professional rates of £94 including VAT.

It is worth joining the MU (Musicians Union) who have been helping to protect the rights of performers for over 100 years. The MU offer legal and financial advice to members as well as services like training, insurance deals, directories and news magazines. The Union also ensure that PPL revenue is distributed to its members where appropriate. Membership ranges from £33 to £220 depending on your age and earnings.

The MPG (Music Producers' Guild) represent many of the producers who are regularly interviewed in SOS, as well as engineers, mixers, remixers, programmers, students and trainees. Benefits to members include education, business seminars, access to financial and legal advice — and the opportunity to sit on the SOS Business End panel! The MPG are currently campaigning to bring about a situation where producers become entitled to a share of PPL revenue, as described by Chairman Andy East in SOS's June Sounding Off column.

Formed in 1992, the MMF (Music Managers Forum) is aimed at anyone who represents an act or band. They offer pertinent legal advice as well as a range of other services like training courses and trade discounts. The MMF also publish an excellent manual called The MMF Guide To Professional Music Management (pictured below) which provides a detailed guide to many aspects of the music business in addition to pure management issues.

And no industry would be complete without its own business paper, for which the music industry has the long-established Music Week. The weekly magazine contains various chart and new-release listings, as well as industry news, current affairs and business statistics — all of which should make vital reading for a owner of a record label.

Aiming Correctly

The revenue-collection agencies we've mentioned so far, such as the PRS, MCPS, and PPL are an integral part of the day-to-day running of the UK music industry, but there are also many other non-essential associations, societies, guilds and unions, who can offer vital support, advice and information networks to the various sectors of the industry. Many are non-profit-making, and were set up by key industry figures interested in developing mutual support networks. Of course, profit-making or not, membership fees still have to exist to pay for the running of the organisations, so if you aren't selective about which ones you join, you could find that you've spent hundreds of pounds on fees before you've even found the cash for your first single pressing! Consequently, there has to be some process of selection to identify the organisations which are of most potential benefit to the label you set up.

As the head of your own record company, the organisations which represent labels will obviously be important. Perhaps the most widely known label-oriented industry body in the UK is the BPI (British Phonographic Industry) which was launched in 1972 to represent just a few record labels; these days, around 250 small and large labels form the body of its membership. The BPI offer a range of services to members, such as the provision of free legal advice and a variety of seminars and training programs, but they also work on behalf of the industry as a whole, providing industry data, carrying out general promotion, and helping to create legislation and technology to fight piracy. The annual membership fees start at £88 including VAT.

Perhaps more appropriate to the archetypal DIY label are the aforementioned AIM (Association Of Independent Music), an organisation set up in 1998 for the mutual benefit of independent labels. As such, AIM is a non-profit-making association, providing services for a membership of nearly 700 labels. To distinguish itself as an independent label-only body, membership is only available if no major label has a stake of 51 percent or more in the business. Distributors like Pinnacle are also eligible for membership under the same ownership percentage rule. On the AIM board are representatives from many big independent labels, including Mushroom, Cooking Vinyl, Ministry Of Sound and NinjaTune.

Screenshots from AIM's software alternative front-end to the CatCo database, which also allows users to store the information they enter locally before uploading to CatCo.Labels can join AIM by paying a one-off fee of £117.50; after that, their annual subscription is set at nine percent of their PPL income for that year. The policy is due to be revised at the end of 2002 such that BPI members wishing to join AIM will still pay the £117, but will be exempt from paying the PPL subscription.

AIM's many initiatives provide support to fledgling labels as well as the more established ones. Like the BPI, they offer an on-line legal and business affairs advice service at their www.musicindie.org site, and there are a variety of projects such as mentoring schemes, seminars, workshops and drop-in surgeries. Perhaps of most interest for the people thinking of starting a label is the work AIM are doing to ensure that new labels have a chance to get a foothold in the global marketplace. As briefly mentioned at the start of this month's article, there are many new ways for a label to release recordings emerging via the Internet. These include Internet radio (webcasting), interactive radio (which allows listeners a choice of what they wish to hear), and also services for downloading audio tracks.

At the moment, PPL have no mandate to negotiate licensing for music usage on the Internet on behalf of record labels. Realising that there are Internet businesses out there who want to make use of music on independent labels (and are ready to pay for a licence to do so), AIM set about creating some sort of licensing structure on behalf of its members. AIM have also set up a new company, Musicindie, to deal with all new media issues and licensing.

As things now stand, two main types of music usage have been identified for licensing. The first is classified as 'non-track-level' use, which is where music or specific genres of music may be chosen for listening, but the listener has no access to individual tracks — the web equivalent of selecting a radio station. The second category is called 'track-level' usage. This covers anything which can be downloaded and, say, burned to CD on a track-by-track basis — the web equivalent of buying a single from a record shop. Musicindie's proposal is to have more general licences for web broadcasts, much like those for terrestrial radio, and these will be issued by AIM on behalf of its members. In addition to these general licences, AIM are intending to have individually negotiated licences for track-level purchases. 'Non-track-level' licences will be applied to all members as standard unless a label decides, for some reason, to opt out.

'Track-level' usage differs; effectively, any web media company offering music for download will pay the label for its music directly, in much the same way as a label is paid by a distributor from sales of physical CDs or records. Recently, AIM started a trial with several participating web-based music media companies in order to establish some figures for typical web usage of music, the idea being that, based on that data, licensing can be developed which will accurately reflect music usage. Readers in the US may have to wait longer for an equivalent licensing standard, but it is likely that AIM's research results will also benefit sister organisations there in determining how to license new media.

One initiative being licensed by AIM has resulted in the development of Virtual Music Stores (VMSs), which have already started to appear in UK shops like WH Smiths, Tesco Extra and Sainsbury's. VMSs are small CD-burning booths which allow the public to create their own compilation CDs. Users select a track listing of their choice, and the requested songs are beamed as digital files via satellite to the booth, where they are burnt to CD-R. Arrangements are being made to make sure these purchases will be registered with the UK Charts. AIM have also struck a similar licensing deal with DJ Power Europe, a service enabling listeners to compile and burn their own CDs in kiosks based in clubs, record stores, bookshops and video stores. The kiosks, which are already in use in Holland, will allow UK labels to potentially distribute their records internationally in Europe under AIM's collective licensing.

AIM's stated intention is to license music use to as many forms of new media as possible, and clearly, these kinds of initiatives are good news for small labels who don't have the staff or time to license their products individually.

Part 4

So far, this series has taken a somewhat theoretical look at what the prospective founder of a DIY label needs to consider, in terms of legal procedure, publishing agreements and royalty collection/payment. Next month, in Part 4, we'll be taking a closer look at Toby Marks' Disco Gecko and David Gedge's Scopitones record companies to obtain some real-life examples of how small labels are run in practice...