The Idea Behind The Music Business

Passive and Active Income In Artist’s Revenue Generation

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The ideal situation is where the artist’s production distribution network and the prevailing popularity of the artist’s activities meet. In such a situation, each artist’s activity works effectively as promotion and easily allows the public to make positive purchasing decisions. When the artist give interviews, perform gigs, or otherwise appear in public, the public should have immediate access to the artist’s products’ availability, but also prior information on where to find them. If the artist or management neglects this, the artist cannot take advantage of passive income, at least to its full extent.

When the artist’s distribution network is setup, it takes care of bringing products to dealers – in both physical and electronic forms. It is completely up to the artist’s management how this task is taken care of. Many artists because of the small size of their activities do most of these things themselves, however this is not always ideal. The goal of most artists is to achieve such revenue that they are able to outsource these activities to a record company or some other relevant player, depending wholly on the business area in question. Here we come to what was meant by the prevailing popularity and efficiency of the distribution network. The more familiar, the more popular, or the more promising the artist is, the greater the likelihood of cooperation with the artist. Here we come to what the previous chapter meant when describing footwork. It is the main task of artists to make their activities interesting – it’s about pop music.

Passive income in this context doesn’t mean that the goal is to be a state in which the money should come without doing anything. Not at all – it is the complete opposite. Work has to be done, but in advance. Music business earning logic has been arranged so that it possible to enjoy passive results. The clearest manifestation is found in music publishing. Song-writers get remuneration for the use of their songs whenever their music is publicly performed, or music recorded to a phonogram – as it is simply expressed. Copyright collecting societies and collective management organizations monitor the use of copyrighted music and collects royalties from their use. These organizations pass on royalties to artists, provided the artists have joined the organization as clients or members. Copyright collecting societies, for example, grant licenses to radio stations or TV-stations when they play music in their programs. They also grant mechanical reproduction licenses when music is recorded on a phonogram. In this way it is perfectly possible that after writing a song an author such a piece of music can enjoy the copyright revenue only by joining such an organization. After that moment, he or she may no longer need to do anything, as the organization takes care of the monitoring of use and distributing royalties from users to authors. This is the passive income referred to in this book. The money doesn’t come from nothing but requires some prior work.

Here we come to the need of external help and the justification of its remuneration. In order to make passive income, an artist usually delegates powers of action to those who make the production available to the public. It is also about strategic know-how and channeling it to the artist. Many record companies and music publishers are able to get more revenue to an artist, even though they take a part of the revenue. The question here is the price that an artist should sensibly accept – as well as the content of the decision-making power that they relinquish in connection with this release.

In this case this means that no one can find a song unless they know of its existence. Music producers and artists don’t go looking for music they want to use from massive registers of copyright organizations. To this end, the area has its own actor – music publishers. On a professional scale, their job is to do the footwork on behalf of the song-writers they represent. In this context, we do not take a stand in the legitimacy of music publishing. No – we want to demonstrate passive income and the meaning of its accumulation. If the author and music publisher have a music publishing agreement, the publisher will participate in the ownership of the catalog that the agreement covers. Generally, the publisher gets the other half of the artist’s catalog insofar as it is associated with the publishing rights. At this point, it is good to point out that 50/50 is not the only method of calculation used. There are also other arrangement types.

When it comes to rehashing old songs, we find ourselves at the heart of the idea of passive income. There is the option for a previously released piece to generate additional revenue for its rights-holders. For such songs, the footwork has already been done and authors are in the ‘public domain’. On the other hand, for new and previously unreleased material, footwork is required almost without exception. For song-writers that are already in the public domain the task is easier.

If authors themselves intend to find performers for their songs, this footwork becomes their responsibility, in which the existence of the songs and their elements are brought to the attention of potential artists and producers. If authors want someone else to do it, they will likely have to convince music publishers of the excellence of their songs. In a nut shell, in order to enjoy passive results, you must first succeed in footwork.

Passive income occurs also in record sales. Royalties received by an artist can be classified as passive income. When the artist has recorded the music and made it available to the public, the artist no longer needs to do anything. The operation is over. The popularity of the album determines the amount of revenue. If the artist succeeds in the promotion and gains popularity, this is also reflected in the resulting income. At this stage it is good to point out that communicating music to the public via radio and television or online is also subject to copyright remuneration, not just album sales. Both an artist and the financial producer of a phonogram are entitled to earnings in the public performance of their recordings. Just as in the case of song-writers and music publishers, artists with recorded performances and their producers also have their own copyright collecting societies. Such compensation is also classified as passive income.

It is possible for an artist to become involved in passive income through other contexts than recording or music publishing. For example when their merchandise is sold on the internet by authorized dealers, or their music is associated with film or other moving images. Passive income therefore concerns all activities that no longer require the artist’s physical presence.

On the other hand, live performances are another income avenue for an artist, requiring a full show. Active income in contrast to passive, requires physical presence and real-time performances by the artist to earn income. It should also be noted that passive income does not exclude income from active sources. Consequently an artist, acting as a performer of their own music, can not only receive compensation for the actual performance itself, but also through copyright remuneration for performing the music publicly. If an artist performs music created by others, then the authors of the musical piece will acquire passive income from the public performance of their songs – and the performer will obtain direct premiums for the show. 

Passive income has a meaningful connection to the artist’s business plan. The artist must be able to organize their activities to take into account and exploit the prevailing popularity and physical presence of the artist. Otherwise there is a risk the artist will be promoting in vain, although at the beginning of a career, when an artist is still making a name for themselves, this is not always possible.

Passive income explained in more detail in this book

Transferred Rights And Contract Types

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Here is the article on the transferred rights and contract types that I promised. During this holiday, I had just enough time to finish the text. This article continues in the next section with passive income and how the different contract types and transfer of rights are economically linked to it.

The artist has often no choice but to transfer some of the rights that are originally belonged to them in the pursuit of their business goals. In the implementation and organization of their business, the artist management (whether or not outsourced) is a responsible player in relation to granting the rights, or licensing of them. If the artist is not thinking to handle everything themselves, is the artist most likely to deal at least with the record companies, music publishers and booking agencies.

For the sake of clarity, the artists also work effectively in other relevant business areas, such as new media (ringtones etc.), sponsorship, and merchandising. However, in these business areas, there is no such solid linkage or great influence on the core business of the artist that it would require a great attention in this article.

This article is about assigning, granting or transferring the rights which term it then wants to use. The essential aspect of this action is its impact on the artist’s private life, decision-making power and economic conditions. Each transfer of rights restricts the artist’s position to some extent. The artist, though, should receive a financial compensation from certain admission. The transfer of rights is an important trading instrument for implementing the artist’s business and career plans. What they are searching for these interest groups is often capital, infrastructure and strategic know-how.

The artist management’s mission is to create and develop the artist’s business so that it serves the needs and the goals of the artist. The artist’s merchandise for all this is the attraction of one’s own pre-essence, the performances both live and a recording, and of course the music behind the performances. All of these activities are associated with the copyright dimension. This means that the factors of production require the artist’s consent to allow the manufacture of products. It is a completely an articulate matter, in which all the music business areas the artist has activities and aspirations.

Because the success of the artist cannot be predicted very well, it must be careful when it comes to assignment of rights. The content, strength, or the scope of these granted rights is of great importance in assessing the motives and commitment of each interest group or a partner that the artist would like to have. To counterbalance the transfer of rights, it would be good to have a margin, something in return. The transfer of rights, thus, must never be free of charge. The artist’s business plan and current popularity is the source that tells you what rights are relevant and which should be excluded. The main rule could be that no rights should be granted for any kind of void action, just as an option without the implementers.

The rights to be transferred are either fixed term, indefinite or permanent. The most intense right relates to music publishing, whose value as merchandise is superfluous to cover up. The right of the publisher is identical to that of the author (song-writer) – the copyright will continue to protect the compositions at least for seventy years beyond the life of the author. The publisher’s right is not an original as the author’s, but a derivative. It is generated by the correctly signed music publishing contract. This agreement transfers to the music publisher significant rights – originally belonged to the authors themselves. The contract does not restrict the artist, therefore, only for the duration, but also in fact. In order to be justified, the artist has to in some way make sure that the publisher makes its own contribution to the fact that the value of the relevant catalog increases as substantively as in the case of income streams. Otherwise the music publishing agreement is difficult to justify. The music publishing agreement entitles the publisher to as much as 50 percent of the copyright-related revenue of the songs. It should also be noted that the termination of the music publishing contract does not end the rights of the publisher to those songs that have been included as a part of the contract during the term of the agreement. Even if the active part of the parties’ agreement is terminated, the relevant rights of the publisher will remain in force.

A similar permanent right is also associated with the recording agreements. In these contexts, however, the right is far more limited and does not restrict the artist’s freedom of action to the same extent. In these contexts, the permanent rights relate to the phonograms and other recorded material that the artist has recorded to the company during the term of the contract. The record company obtains, under the terms of the agreement, and effectively by acting as a financial producer of the phonogram, the status of the producer which entitles the producer`s right to the legitimate period of protection. The record company usually receives the decision-making power over the phonogram as well as the music publisher gets with the music publishing contract.

This, however, affects the artist’s circumstances mainly through the possible non-competition clause of the agreement. In general, the artist is required not to record any songs that the artist has recorded for the company during the validity of the recording contract. The protection period is, according to established practice, five years. So nothing prevents the artist from recording the same tracks as in new versions, as long as five years have elapsed since the end of the contract. Such a ban aims at enabling the company to obtain a motivational exploitation right of the financial investment they have made. In this case, the artist does not have the same financial impact as in the case of the music publishing agreement. The company is required to pay royalty after the term of the contract as defined in the contract. The artist will not be left without compensation during the validity of this restriction. In the music publishing contract, the publisher does not perform anything for the artist, but becomes a part of the copyright revenue generated by the songs of the artist.

In two of the above examples, we are dealing with two fundamental concepts, a song and its performance. These two concepts must never be confused with each other. This is also the point where we get to the topic of this article. The term of the music publishing contract is not a synonymous for the terminology of the recording contract. Yet these two things are closely related.  In case where the music publishing agreement concerns songs, the recording contract is in connection with the performance. The object of protection is therefore different aspects of the same thing. For those artists, who also perform the music they have made, this division is extremely important.

In addition to permanent rights, the artist transfers also fixed-term rights in order to implement their business plan. For example, the booking agreement gives the agency a right to convey performances to the extent specified in the contract. As has already been mentioned, the transfer of rights is often long-term, geographically broad and exclusive. As we can see, the artist has to deal with the contracts in several interconnected business areas at the same time. This uncertain situation will cause a headache while networking of contracts. The artist’s business areas are closely tied together. If some of the sub-areas do not function properly, it has effects on other the areas as well. It is therefore reasonable to have different exits in view of this opportunity. The artist is certainly not happy with the situation where the performances would be and records will sell, but the performances will not be on the calendar for some reason or another. If the situation is that the artist cannot match the current demand or demand is not even attempted to create, the artist will not want to adhere to a contract that, through exclusivity, prevents them from acquiring performances elsewhere. The same applies to other business areas’ contracts. Each agreement should have a future exit, if the parties intensify so that co-operation is no longer possible, or cooperation simply does not work. This is an expression of why each transfer of rights should be conditional, if only possible.

When designing the artist’s business plan, the risk management is extremely important. Where the business plan focuses on the maintenance and improvement of economic activity or earnings, the agreements are more concerned with the possibility that things will not go as planned. Therefore, mixed-type contracts should be avoided. It is not uncommon for the contracts to be negotiated enthusiastic about designing co-operation over the traditional business bargains. Where the artist’s interest groups (record companies, music publishers, booking agencies, external financiers, merchandising holders etc.) have a willingness to participate in the artist’s business in other areas than which is their heartland of competence, the artist may have a need to engage in motivated partners in all relevant areas. In an ideal situation, everything would remain in the hands of a competent, committed and trusted group, and there would be no disagreement between people over time. But this is rarely the case. It requires no more than one key player to change the organization, industry, or retirement and the whole operation gets a whole new direction.

Everything in the midst of the hurry easily forgets what this is all about. Due to the copyright dimension, it is about the transferring the rights of the artist and the consideration paid to the artist for these assignments. Each business area needs to be organized separately, even if the same operators take care of them. Every business area must also considerate as a separate unit. They must not be dependent on each other because the artist does not always grant equal rights to all their business areas or the reciprocal obligations are not at the same level.

Respect for the contract-type boundaries will come out well in the following example. The parties can make a very detailed contribution to the content of their cooperation. In such a situation, the parties will almost certainly have to resort to the basis and structure of a type of the contract that the industry is familiar with. If the agreement with the terms of the agreement resembles a recording contract, it will automatically become an impression of the exclusive right that is usually dealt with in that kind of contract. This makes it easy to imagine that the agreement will in other respects also be exclusive and constitutional. There is nothing wrong with this, if that really is the case. But if the parties have meant something else, it is not worth considering such an agreement. If the agreement refers to music publishing-related activities, it is already in dangerous waters. Even if the copyright is not in principle possible to transfer with the tacit approval, but with the express consent, it is still a risk. Terms of the music publishing agreement in a recording contract are incorrectly used in full code red. Any suggestion of the music publishing should not be conveyed to the impression that the artist, while entering into some agreement, also includes the music publishing rights. This is one more reason why each business are should have a separate agreement and a separate exit, says the business plan between the parties then whatever.

When you grant the rights originally belonging to you, do not grant them more broadly than the relevant business plan requires. Never give up rights unconditionally. If the promised performance of the counter party falls short, you must have a chance to react. With the utmost care you should be with the music publishing contracts, as they are final. Each song that is considered to be a part of the agreement under the music publishing agreement will give the publisher the status of the publisher and generally entitles them to administrate the songs and to receive 50 percent of the copyrighted turnover.

No matter how enthusiastic you are from a new partner, do not mix plans and agreements with each other. The terminology that goes beyond each business areas is to be critically addressed. This avoids imaginations that could infer that the rights would be extended more broadly than the original purpose. The same applies to the options. To be justified, the benefit of the option to the artist should be in some way realistic. If the artist agrees on an option that goes beyond the resources and willingness of the partner, the artist’s career in this regard may be stuck. Indeed, without the consent of the existing option-holder, the artist is unable to progress in these areas with potential other partners if the option is exclusive.

Mixed-type contracts can also pose problems in very good relationships. The management agreement between the parties may work flawlessly, but the prospective cooperation in production precipitates. If the agreement is principally in the exclusive domain, the productive parts of it may also be considered as exclusive. In such an imbalance, the management party hardly hesitates to withdraw from the production side of the plot, but if the disputes for some reason will arise, the contract and its contents will certainly have to interpret. Although some of the examples in this article are far-fetched, it is sensitive to keep contracts apart – even for the own peace of mind. When the unadjusted parts of any cooperation are easily removed, and no such confusion prevents going, it is easier to plan future.

The purpose of this article is not to comment on how the artist should organize their background organization and business. The purpose of this article is to clarify the significance and motives of granting rights. It is also important to understand that they not identical in all areas of activity. The artist’s business plan lives with a changing popularity. A joint business plan and the drawn up agreements should safeguard the position of all the involved so that it is able to focus on the essentials. If the parties have chosen a cooperating model in which, for example, the other party to the contract carries out both the artist management and the actual booking, each task has to be the subject of a different contract. If the management decides at some point to abandon the booking, or booking the management, this part is will be easier to unload and continue on what the remaining cooperation is going to be. If the artist’s record company and the music publisher are the same, then these issues should not be agreed upon in one agreement only. If such a crazy situation has happened, a special attention must be paid to the assignment and the determination of publishing rights. Particular attention must be paid to the ability of artist to change the record company or terminate the agreement. If the publishing rights are tied to the recording agreement between the parties, the publishing part of the agreement should also be terminated to that extent. Consequently, only those artist’s songs that are recorded by the artist during the validity of the contract could then include the publishing right. All new songs from the artist are no longer included in the same catalog. If the artist has entered into a house-writing agreement in connection with the recording contract, extends such a right to any material that the artist has created during the term of the recording contract. Where the publishing right of the previous example is tied to the albums actually recorded by the artist and their content, such a house-writing element makes it a vaguely challenging combination. At the end of the contract, it is difficult to decide which of the songs are covered by the publishing right or whether they are all included at all.

The main rule is that if the rights are to be transferred, they should be granted as narrowly as possible. These rights can always be expanded in the future, if there is a reason to do so. However, the artist is the party who needs proof that there is economic justification for each transfer of rights. The other half of the artist’s freedom is the exits. Although the music industry contracts are often long-lasting and include options, there must always be exits against them. The artist has to get rid of the contracts if the business plans behind them do not correspond to the reality.

transferred rights explained in more detail in this book

The Idea Behind the Music Business

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When we are approaching the music industry as a business, we are dealing with quite an ingenious revenue generation model and logic. The strong role of the copyright and meaning of a ’footwork’ reach a whole different level than in many other branches. This fact easily fades out the true essence of it all what comes to an unacquainted viewer. The idea behind the music business is found beneath the surface. Instead of monitoring by eye, the focus should put more into tactics and strategies behind them – and even more into the core intentions that each operator truly is aiming for. The idea of everything is to get produced material along with immaterial elements into a profitable form for consumers to listen and watch.

People consume products of music for many purposes and reasons. More there is possibilities to enjoy the music – more roaring each prospective action may turn to. Music industry is known of its ability and willingness to drive new technology in to its own systems. Every new invention enables a new way to listen music.

The production of the master tape on the technical side is a one-time expense. This makes it possible for a licensee to produce music into different formats or products for sale. Booking studio, hire of personnel during the session and pre-production is a ’courier service’ with an intention to record a specific amount of performances for the album to be released in future. However, the production cannot be exploited without the relevant copyright assignments.

So the twist comes along with the copyrights and other immaterial property rights. At that point it is good to make a distinction between one-time expenses (cost-items of physical recordings) and recurring expenses (authorization of exploitation) while building a business around it. Compensation for these rights-transferring agreements is the cost-item which entitles the exploitation in a granted territory to the extent that is specified in the agreement. All commercial use of music requires a notification of copyrights in order to be exploited and used.  This claim is usually regarded in royalties and other copyright compensations to the relevant rights-holders against which the right-holders grant all the respective rights and licenses. It is all natural that the existence of copyrights indirectly reduces the income of every manufacturer and operator who wants to exploit the music in itself or the music as in part of their own commercial operations. For the industry that share is an important cash-flow-channel, a reason to produce music.

Footwork, in turn, that non-profitable activity, is something that should not be neglected. Footwork is something that starts all. It is a way to get in. Everyone has heard about connecting and its meaning for career. This is one of the most misunderstood issues in the whole branch. It is – as usually associated – not ’connecting’ at all. Connections are the consequence. They happen as a result while working together for the joint destination. It all starts from the little circle and bubble grows bigger at the same time the operative environment gets larger. There are no short cuts on building your network. Meeting people at the parties and in other similar events is not so meaningful as people often tend to think. Initial meaning for networking is to get know each other via actual work, activity or common business, not only in Person. The ultimate goal for beginners is to be able to demonstrate their abilities in places where decisions are made and where the potential of one’s own talent can be more widely noticed. While working in that stage, it is easier to develop and learn. This is what the word footwork basically means – making itself, the matter and production public. Same applies to business. True connections are always earned in a way that everyone can see that. Usually the release is the moment that fulfills said requirement. Impartial feedback and approval of the audience and industry is what this is all about.

If every accomplished session is taken as an acquired connection, each release is then accounted as an existing resource. Discography or back-catalog is often comparable to money. Same happens with every accomplished and notified business. It is all about the release and results. From that moment it is not possible take that achievement away. After the release also the vital copyrights will be activated and all the potential input can be channeled to its makers in a way how the rights are originally granted, transferred or assigned. It is difficult to engage in sales without the production to the public.

The idea of the music business is to get the immaterial substance into a physical, profitable form. It is important to make a distinction between direct sales and indirect intention. Direct sales occur while money transfers from hand to hand and sales online with the physical downloadable package or streaming. Indirect intentions are the other source of income. It is more of a result of the public play and presentation for commercial purposes. It doesn’t matter if the sales or use happen directly or indirectly. This distinction is made to make it easier to understand the matter. It is the copyrights and its related rights which have an elementary role in pricing. The physical production of the record with the relevant prints is not necessarily a very expensive operation. As the technology is already at the high level, making music available to the public is also cheaper and easier than ever before.

Artist’s total income or turnover is a combination that is collected from the different sources. Availability, the other side of the coin, is dependent on how largely an artist and its production has been distributed all over and made available for the public. The artist receive incomes in royalties from the album and online sales, payments from their live performances and merchandising in their every available forms but also strict money from the advertisers and sponsors who wants to use their name, picture, music, physical presence, likelihood and success identified to the products and brands they represent. The artist can also generate revenue from the new media such as ringtones or synchronizing their music with the movies

Some artists, as we already know, also write the songs they perform as in whole or partly. Because of this they are entitled to receive payments while that material is played public. They are also entitled to obtain copyrighted mechanical fees – if someone wants to record the performances from those songs.

At its most authentic form music industry introduces itself when artist is having a show in front of the audience. Decreasing selling rates are not an indicator of a dying industry. Actually development and reality is heading to a whole other direction, the result is made from a growing number of sources with a less effort than before. Music as a phenomenon breaks customary barriers where ever it is possible. Origin of the song and its performer have no longer same role it used to have. Nowadays there are no requirements to born or move to the United States to become a world-known artist, manager or producer. At the same time when then technology reduces the margins, distribution becomes more easy and cheaper. That progress is a double-edged sword. Some of the artists benefit of this progress and others don’t. The fact is, however, that none of this changes the essence of the music business. Supply and demand goes the same way it has done for last 50 years. There has just become new ways and technologies to consume music. It is all about how the fans and listeners want to hear it. This is the request for which industry have to answer.

Singular songwriters are the production units of this branch. These operators by themselves or jointly bring forth the substance for the performers to record or to present it live. Technically production is provided by the composers, lyricists, arrangers, producers and the engineers. They create the facilities for the performing artists. Their asset gives the form to the substance in which it is possible to enjoy. At its most reduced form that outcome is provided by the performing artist while they are giving live sessions in front of the audience.

When the artists have made themselves known with the footwork in the contexts they have sought and organized their music to the world so that the most of the distribution channels make their music available to the public, we are dealing with the most significant level of artistry – the enjoyment of passive income. Turnover and its magnitude are not relevant here. It is important for the new material to be constantly released without any major effort. What it ultimately generates, depends on the reception of the audience.

to be continued..

idea behind essence of music business
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