M.E.L.O.N.: Agreeing to License Part One: Free to Roll With The Changes

by Mark A. Pearson, Esq.

The following is the first in a series of articles that will try and explain some of the pros and cons of entering into a licensing agreement in today’s entertainment industry.

As the various business models of the entertainment industry continue to reinvent themselves almost on a daily basis, one prevailing trend is the growing use of licensing. More entertainment product is now self-produced by artists than ever before. The “Studio System” and “Major Label” business models are quickly becoming obsolete. It’s beyond the scope of this article to make any grand sweeping speculation as to why the industry models are changing. Are these changes the result of the economy, backlash against the ‘old systems’, or technology changes? The answer probably lies somewhere in the murky gray area known as “a combination of all of the above”. The point is that change is here, and change means an influx in the use of licensing throughout the entrainment industry as the shift continues toward independent production.

Take the music industry, for example. Under the old model, record labels hired talent evaluators to find artists, signed those artists to a recording contract, paid for the artist to record an album, created and distributed the album, and then profited off the sale of the album. The label owned the copyright to master recordings that made up the album, and shared in the copyright of the song publishing with the songwriter. The artist made money off of royalties paid by the label (including their advance) based on sales of the album, and on royalties paid to the songwriter by a performing rights organization (ASCAP/BMI) for use of the song.

Today, the notion of a record label signing an artist and developing that artist from scratch is virtually a foreign concept. Instead, the trend is for artists to do all the legwork themselves and self-record their masters, or for the artist to work with small labels and split the costs associated with recording the masters. It’s easy enough for an artist to self-record an album these days, and there are plenty of articles here on M.E.L.O.N. with information on how to self-record, as well as answer why self-recording might be both creatively and financially advantageous for new and established acts (see Music Biz: Income Streams in the Recording Industry ; Music Biz: Funding for Your Demo Deal). Recording being the easy part, the tough job is getting the masters out to the public: Distribution. This is where licensing comes into play.

The trend we see here at BEAT-LAW is for new artists to license their masters to a small independent record label, either after they’ve self-recorded or in connection with the independent label’s efforts to help them record. The independent label then sets up digital and physical distribution outlets, helps with marketing and promotion, and books gigs for the artist. If the artist generates buzz, or the independent label has a strong niche, then perhaps the masters might be re-licensed to a major label at some point.

How does the artist get paid? The artist gets paid a licensing fee by the label in exchange for the right to distribute the masters. The licensing fee may include upfront money, royalties, advances, etc. An artist has more control now, too. Contrary to the old system, the artist now owns the copyright to the masters. They can license the rights to their masters for less than, say, eternity. The advantage is simple; the artist can renegotiate the licensing fee after a few years and isn’t locked into a long-term deal that is economically or creatively disadvantageous. The artist also controls the type of license being offered, exclusive or non-exclusive. By example, the artist grants a license only for physical distribution to an independent label, while holding on to the rights to license the masters for use in movies, TV or commercials (synchronization rights), or for any other use or other form of distribution. (For more on the different types of licenses see the M.E.L.O.N. article: Music Law: Licenses vs. Assignments)

This pattern of licensing is not exclusive to the recording industry. I’m reminded that one of BEAT-LAW’s clients is a film production company, which just finished negotiating an agreement to license the rights to their independent film to a direct-to-video distributor. This illustrates the trend in the motion picture industry to produce privately financed, independent films (generated without studio funding) specifically with licensing in mind. These independent films are shopped at film festivals, or to direct to video distributors. Any number of reasons might lead a filmmaker down the independent path including creative control, money, and studio-system roadblocks, to name a few. Ultimately, if the filmmaker finds an outlet, different licensing agreements would be generated to cover the rights a distributor wanted to exploit: theatrical release, DVD, internet distribution, film clips, etc.

This same independent-minded trend toward licensing can be found in book publishing, the internet, photography and all other areas of the entertainment industry.

Now that we’ve covered the basics on why licensing has become such an important part of the general landscape of today’s entertainment industry, our next challenge will be unlocking some of the secrets to understanding the fundamental terms of these types of agreements. Over the next few months we’ll be getting technical, looking at the language used to craft licensing agreements, and explaining why certain clauses and provisions are important. See you next month.

Next month: Don’t Just Throw It On The Boilerplate: Indemnification Clauses.