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The rise of the 'all rights' deal

February 2006 - Media, Entertainment & Sport. Legal Developments by Harbottle & Lewis LLP.

More articles by this firm.

It is hard to escape the changes that have taken place in the music industry over the last 20 years or so, both in terms of how music can be delivered to consumers (for example on-line and via digital means), and also in terms of the availability and diversity of the music itself.

This briefing explores how these changes have affected the legal relationships between the music makers and the businesses – namely the record companies – that seek to profit from them. The huge amount of musical material in the market place has a twofold effect on the record companies that are risking (sometimes significant) investment in the material in question. First, they are not prepared to invest as much in an unproven act as they may have been in the past, as the likelihood of a quick return has diminished. Secondly, they are trying to secure further means beyond their usual remit by which to benefit from their investment. In some cases this can be justified by the amount of input they are putting into a project (not just in the monetary sense), but in other instances this clearly isn’t the case, and it is in these situations that performers must be wary not to give away their rights too easily.

Traditional agreement
The rights that exist in music are primarily:

  • the copyright in the master recording of a song (as sung by a particular artist on a particular day), which is called the ‘master right’; and
  • the copyright in the underlying music and lyrics of a song, which is called the ‘publishing right’.

Usually an artist who writes and records their own songs would be signed to a record company for an exclusive recording agreement in respect of their master rights, and to a publisher for an exclusive publishing agreement in respect of their publishing rights. The publisher and the record company would normally be separate legal entities, and if a third party wished to exploit a recording by that artist they would have to get both the record company’s and the publisher’s consent for such exploitation. In fact, every time the record company makes a copy of the master recording, it has to pay the publisher a fee in respect of its use of the publishing rights.

This article will concentrate more on recording agreements as it is the record companies that traditionally take the larger risks when developing, marketing and funding artists and must therefore be more creative in terms of how they attempt to recoup their investment.

Traditional income streams
A record company will pay a lump sum of money (the amount of which will, to an extent, be determined by the size and stature of the record company, but more often by how ‘hot’ the artist is) to own the master rights in any recordings made by an artist during the term of the agreement. The record company will then be able to market and exploit those recordings (the cost of which is borne by the record label) and keep the income from such exploitation (it will pay a small royalty to the artist which usually works out at about £1 per album). This income must initially recoup any money that has already been advanced to the artist on signing.

There will also be other streams of income from the exploitation of the master rights in those recordings such as from their use alongside visual images (whether in respect of a music video featuring the artist, or a licence to a third party to use the recording in a television programme, television advertisement or feature film). Record companies are also entitled to a share of the income from the public performance of master recordings, such as when songs are played on the radio, in shops, at gyms and over the phone when you are put on hold.

Although these income streams are still all relevant, new income streams have been created. Companies are demanding fees in respect of their master rights for the downloading of music via the Internet or on mobile phones. Under the new Copyright Directive, performance income is now payable for all forms of ‘communicating to the public’, so music played on-line or over a mobile handset will also include a performance element. However, while these new income streams have become available due to advances in technology, they all relate back to the master rights themselves. The difference between a traditional recording agreement and an ‘all rights’ deal (see box) is that, in the case of the latter, the income streams are not just in relation to the recordings themselves, but go wider in terms of looking at the artist as a ‘brand’ with other marketable elements.

The Two Scenarios
Today, if an act is hoping to find a record deal and a third party becomes interested, they will usually end up with two types of offer open to them:

Traditional agreements
Whereby a record label signs an artist for their exclusive recording services (usually throughout the world), for a set period of time, and has the right to exploit those recordings by any means.

‘All rights’ deals
Where the act signs a recording, publishing and management deal (or just a recording and publishing deal, but with a right to participate in ancillary income) with either the same person or entity (or perhaps separate legal entities, but which are controlled by the same person). These deals are usually only offered by smaller independent companies or individuals.

‘Manufactured’ bands
In the 80s and 90s, with the advent of music videos, it became very clear that television and visual media would be hugely important to both the music industry and its products, which sparked a revolution in the industry. Acts could be marketed not only (some might say not even) on the strength of their talent as musicians or performers, but also on their looks, and as a result merchandising and endorsements became extremely important and lucrative to the acts themselves.

The people behind the scenes in the music industry (such as the Simon Fullers and Simon Cowells of the world) began to realise that a package could be created. They could actually come up with the concept of a band (such as ‘Spice Girls’ or ‘S Club 7’) and create them as a brand with not only musical careers and all the income streams that flow from that, but also further income streams which would not normally be covered by a recording agreement (such as television, sponsorship, merchandising and touring income).

All these forms of ancillary income are related to an artist’s musical career, but would usually be considered as separate from the traditional recording or publishing income and go straight to the acts themselves (albeit subject to a management commission). However, the extent to which an artist does well on tour, how many concert tickets they sell, how much merchandising people want to buy in relation to them and how much people want them to endorse their products is related to the success of their records and the initial promotion and marketing their record company spend on them. Although this is obviously the case in relation to all recording artists, in the case of manufactured bands, where they have very little creative input into their marketing, the argument becomes heightened.

These manufactured bands would be created as a brand on the basis that the whole is greater than the sum of its parts (ie the band, at least initially, is bigger as a group then as a collection of the individuals within it, and it is the whole package that people are buying into). On this basis, the parties ‘manufacturing’ the band would say that they should be entitled to a share of any income flowing from the ‘brand’, as they have created and styled it. In most cases they will find the right songs for them, they will manage and advise them and they will organise all forms of touring, sponsorship and merchandising. A right to participate in those income streams is more akin to a management commission, but to an extent they are acting as manager by taking creative control of the act in this way. The fact that the same person acts as the record company and as the manager may cause other issues, such as a conflict of interest, which will be discussed further below.

However, despite that potential conflict, the fact that the creator receives a management-style commission for their work as well as recording (and maybe publishing) income may be justified in the situations described above when that individual really has created a ‘brand’ from scratch and moulded the entire concept of the act. More difficulties arise in situations where the band hasn’t been created by the individual who is seeking to participate in all their income streams. This is the kind of deal we are seeing more and more of today and it is exactly this kind of deal performers should be wary of.

‘All rights’ deals
There are many artists and bands around at the moment who are desperate to break into the music industry, but just don’t know how. As explained above, record companies are far less willing to throw huge sums of money at unproven acts, and are generally trying to find good release-quality material that requires minimum additional expenditure and that they can make a maximum return out of. That doesn’t mean to say that the big deals aren’t out there, but they are much more the exception than the rule. In most cases, unless an act really is something extraordinary, the record companies won’t want to commit to huge sums upfront before they get some form of guarantee of a return.

However, the fact that record companies are less willing to spend huge amounts on signing an act has meant that independent labels have been competing with the majors on a slightly more level playing field, since there is likely to be less of a gap between what they can offer in terms of an upfront advance. This is also why the market, especially in the past few years, has been filling up with numerous small independent companies and individuals who have realised that they can (albeit subject to the risk of a small upfront investment) fill, as well as profit from, the gap in the market between the number of bands out there trying to make it and the number of established record companies willing to sign them.

Majors Getting Greedy?
The question we now have to ask is whether, in time, major record companies will realise that if artists are willing to sign ‘all rights’ deals and give away their ancillary rights to people who want to invest in them, then why shouldn’t they cash in on this fact, especially as in most cases the record label pays the lion’s share of the costs relating to the general marketing and promotion of the artist in question.

In the case of high-profile acts, this argument is perhaps somewhat irrelevant, as out of the exploitation of recordings alone (albeit via various media) the company is bound to recoup all its costs and more.

However, in the case of newer artists with no proven track record, it can be seen as the ideal way to recoup their initial outlay, although it can also lead to the record company in question being remunerated way beyond what it would traditionally be entitled to.

If they end up taking this route, then artists and their legal advisers will have to be particularly careful to ensure that the artist does not end up at a disadvantage in comparison to how they would fare under a traditional record deal.

Despite the above, most bands are still in a ‘catch 22’ situation. They have good material, which they hope will sell well, but they can’t afford the money it takes to produce a good quality demo. Even if they did, there is very little chance of getting signed just by sending a demo into a record company where it will, in all likelihood, just end up in the bin. The ideal way for them to get noticed is for their music to be heard, ideally by trying to do a small release themselves. However, unless they have lots of experience and money behind them, this will be difficult to achieve without the help of a third party – who will not be willing to do this for free. At this point, a number of third parties have offered bands a bit of a lifeline to the extent that they will put up the money and time to arrange for a good quality single, album or EP to be created and then either try to release it themselves or help in marketing it and raising the profile of the band with a view to getting a larger independent or a major interested.

The problem with these ‘all rights’ deals is that they usually entail the act in question signing over all their rights to the third party in return for this lifeline. They are often required to assign all their rights in their recordings for at least three (and sometimes up to five) albums and in the compositions embodied on those albums to the extent that they have been written by the act. In addition to this, they are often either signed to a management deal with the person behind the entities in question, or there will be a mechanism by which they can participate in some of the ancillary income streams mentioned above within the recording and/or publishing agreements (ie merchandising, sponsorship, endorsements, income from live TV appearances and income from non-music-related sources, such as biographies or acting).

Conflicts of interest
There is also an obvious potential for a conflict of interest with such deals, especially where the third party in question is the record label, publisher and manager, particularly as the manager has a duty to act in the best interest of the artist, and what is best for the record company is not always what is best for the artist.

The potential for conflict aside, these deals can seem fair, especially as the way the income streams flowing from them are divided between the third-party investor and the act. In most cases, they work on a simple profit split, usually 50:50 in the case of records, 70:30 (in the act’s favour) in the case of the compositions, and approximately 80:20 (in the act’s favour) in the case of most forms of ancillary income. The profit split mechanism means there is a huge incentive to keep the costs down and for the project to make money, as neither party will get paid until the costs have been recouped.

However, the situation is somewhat less favourable to the artist when the third party is merely looking for a means by which to license the act on to a larger independent label or a major. Having made a significant investment into an act and created a release-quality product for them, most of these third parties will, instead of trying to release it themselves, look for a deal for the product, as if they were merely the manager of the band. In the event that they do secure some form of record and/or publishing deal for the product, the deal will be between them and the larger company. The act will then be required to sign inducement letters giving them privity of contract with the larger entities themselves.

From there on in, the income and investment will flow from the larger entity, but due to the profit split scenario the smaller third party entity will still be entitled to take part in that income stream for between three to five albums worth of material, with very little financial risk themselves and effectively halving the royalty the band would otherwise receive from the larger third party had they contracted with them direct.

One could argue that without the involvement of the third party in the first place a deal with a larger record company would never have been entered into. The fact that the third party also spent significant amounts of money initially also means that they should at least be entitled to recover this expenditure. However, lawyers acting for the band in this situation should request that the profit splits increase in the band’s favour on an album-by-album basis if a licence agreement with a record company is entered into, and also, potentially, that the right to participate in ancillary income is reduced (or even disposed of) if the artist signs an agreement with an independent manager.

Conclusion
The fact that there are these two different models of record deals out there for bands is by no means a bad thing. It means that bands who might never have been noticed may well have a shot at being picked up and brought to the attention of the public.

The problems arise when the parties in question take more rights than they should, in theory, be entitled to. If a band is lucky enough to be offered a recording agreement, they must be careful to see whether it is the traditional style agreement or an ‘all rights’ deal. If it is the former then they should still seek expert legal advice on those terms to ensure they are fair. If it is the latter then they should see it for the ‘spring-board’ into the industry that it can be, but also ensure that they are especially cautious before handing over their ancillary rights. If they must, then they should make sure these rights are only assigned on the basis of the artist maintaining some form of approval or creative control and that the deal improves as it progresses.

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