Nowadays, it is quite easy for artists to distribute their music commercially via the internet. There are a number of providers who specialise in online distribution for artists and small labels. If one does business with them, a so-called online distribution contract is concluded.
2.) Subject matter of the online distribution contract
The artist transfers the rights for the digital exploitation of his music to his contractual partner. As a rule, the contractual partner will not have his or her own online portal, so that it is exclusively a matter of re-licensing the content. He must therefore ensure that the artist’s music is available on the usual download platforms such as iTunes or Amazon. But streaming services such as Spotify or Napster are also catered for.
In the case of a digital release, it is important to note that it usually takes a few weeks after delivery/upload until the song is available in the online stores. The price at which the song is then offered there is usually beyond the artist’s control.
Some online distributors also offer free promotion tools, such as an artist’s own page as part of the distribution presence. This may certainly be helpful. However, the fact is that good online promotion is labour-intensive and that in turn costs money. One should therefore not overestimate the free tools and not make the decision for distribution solely dependent on them.
4.) Rejection of recordings
Some distributors reserve the right not to release certain recordings, especially recordings that are badly mixed, mastered or amateurishly interpreted or where there are unresolved legal issues. Legally, there is no objection to this in principle, but the wording is usually very vague and open, so that there is considerable room for interpretation. If differences of opinion do arise later, one should try to resolve them amicably. This is because in the case of court proceedings, proving that recordings “correspond to the artistic standard of comparable recordings” is only possible with considerable effort (e.g. expert opinion). Quite apart from the question of whether the costs of legal proceedings are worthwhile at all here or whether it is not more sensible to dissolve the distribution agreement by mutual agreement and look for another distributor …
If the artist supplies artwork (e.g. photos, graphics or texts) in addition to the contractual recordings, he/she grants the distributor the rights necessary for exploitation accordingly. This would be, for example, the illustration of the album cover on iTunes, Spotify etc.
6.) Transfer of rights
In principle, the artist should first check whether he still owns his online rights at all. If there is already a tape transfer agreement with a label for the recordings, it is quite likely that the label also owns the online rights to them. This is true even if only a CD release has been discussed, as the non-physical rights are usually transferred in the transfer agreement. In distribution contracts, too, one should therefore pay close attention to whether the online rights are included. As a rule, the distributor will immediately supply the download and streaming platforms if he has the necessary rights. After all, the effort and costs here are rather low. Consequently, the artist will usually already know whether he still owns the corresponding rights on the basis of releases on iTunes or Spotify.
Most distribution contracts have a rather short catalogue of rights, listing only the absolutely necessary rights. However, there are also copies of contracts with very open or very detailed formulations. These therefore allow exploitations that one had not even thought of before (e.g. use of the recordings in PC games). Actually, this has no place in a normal online distribution contract and should therefore better be deleted or explicitly excluded.
All rights are granted to the company “transferable”, which means that the label can transfer the rights to third parties. This provision is absolutely necessary, as the distributor itself must have the right to allow its contractual partners such as iTunes or Spotiry to make the exploitations. If the rights were not transferable, the recordings could therefore not be offered for download / streaming by third party providers on the internet.
The online distributor wants the rights to be as exclusive as possible. This means that the artist cannot commission any other contractual partner with the digital exploitation of his or her content. This is to avoid identical songs being available several times from different providers, for example, on iTunes. Otherwise, the online stores would be even more confusing and artificially inflated. Of course, the distributor also wants to be the only one to earn from digital exploitation. But it is a fact that in the early days of the download age, online stores were annoyed when a title was already available in identical form.
Especially when it comes to the issue of exclusivity, care should be taken again to agree on appropriate exceptions if you as an artist want to upload your songs to Facebook, Soundcloud, MySpace, etc. This also applies if this is done exclusively. This also applies if this is done exclusively for self-promotion and without commercial sale. Exclusivity makes no distinction here and applies without exception in favour of distribution. However, forward-looking contracts usually already provide for such exceptions.
8.) Rights guarantee
The artist guarantees that he is the owner of all rights and that he can transfer them to the distributor. He assumes full liability for this and indemnifies the distributor against claims by third parties resulting from a breach of this guarantee. In practice, it is rather rare that someone feels that his or her rights have been infringed by a recording and takes action against it. Nevertheless, the distributor understandably wants to protect itself against this.
Therefore, in the event of an infringement, it is often agreed that the distributor may directly fulfil third-party claims and offset them against the artist’s income. Of course, this is hard for the artist if someone should make unjustified claims against the distributor. It should therefore be added that offsetting is only possible with legally established claims. In practice, this means that first of all there are court proceedings and possibly several instances have to be gone through until there is a legally binding judgement. On the other hand, in this constellation the distributor might have to bear the lawyer’s fees himself, which he is probably only willing to do to a limited extent …
Especially in the field of so-called “artist deals” there are numerous variants which cannot be fully illustrated here. Only a few variants should be mentioned as examples. In variant A, for example, the artist receives 100% of the proceeds which the distributor receives from the various online portals. In return, however, provision fees are charged per song or per album. In variant B, the artist receives only a part of the proceeds, but pays lower provision fees. In variant C, the artist also receives only part of the proceeds, but pays no processing fee at all. In any case, you should read each offer carefully so that there are no unpleasant surprises later.
It is customary to issue a statement of account, e.g. quarterly, within 30 days. Some distributors also require a written invoice from the artist before they actually pay out the money. This means that the artist first receives the distributor’s invoice and then has to send his own invoice to the distributor with the settlement amount. Most contracts also stipulate that a certain minimum amount (e.g. 20.00 euros) must be reached from the settlement before payouts are made.
It is customary for the online distributor to have the right to offset any outstanding amounts from the artist against his income. If the artist has not yet paid the provision fee for several albums, the distributor can simply offset the proceeds from the sales.
In the distribution contract there should definitely be a so-called audit clause. According to this clause, the artist can inspect the distributor’s accounting documents and have them audited. In most cases, only a tax advisor, lawyer or auditor may carry out this audit. The reason for this is that these persons are bound by law to secrecy. This is because the accounting documents represent sensitive information of the distributor that should not be made public.
In practice, an audit hardly ever occurs. This is because it is often sufficient to merely hint at this possibility to the contractual partner in order to obtain a more transparent settlement. Also, the costs of an audit (e.g. for lawyer and auditor) should not be underestimated, so that these have to be put in relation to a possible (additional) income. This is again very difficult, since the potential (additional) income is only known after the conclusion of the procedure. For this reason, quite a few shy away from an audit with an uncertain outcome and the danger that in the end the costs will exceed the additional revenue.
It is still common practice that the artist is reimbursed for the costs of this audit by the distributor if the difference exceeds a certain margin (e.g. deviation of more than 5% to the disadvantage of the artist). The possibility of an audit is often limited in time (e.g. to the last two years preceding the audit), which is acceptable. It is not acceptable if the possibility of an audit is made dependent on the existence of a valid reason. After all, how is the artist supposed to know exactly that the accounting was wrong? The proof will then only come from the later audit.
12.) Contract period / evaluation period
Most online distribution contracts have a minimum contract period (e.g. 12 months). In some cases, the contract term is extended if it is not terminated before expiry. If you conclude the distribution contract exclusively via the Internet, you also have a right of withdrawal as a consumer. This means that the contract can be cancelled within 14 days without giving reasons (in some cases the cancellation period is one month). The right of withdrawal expires earlier, however, if the contractual partner has already begun to perform the service. If you have already uploaded your songs to the server of the online distributor, the provision of the server service will already constitute the execution of the contract.
Some contracts stipulate that the artist may only publish and commercially distribute digitally unreleased recordings exclusively via his contractual partner during the term of the contract. According to this, the artist could not go and release album A via distributor X and album B via distributor Y. He would therefore have to release album B via distributor Y as well. He would therefore also have to have album B distributed by distributor X. However, there are also not so strict contracts that allow a release through other online distributors. The only important thing is to make sure that the different albums also contain different songs / recordings, which is actually the rule.
Again, the exploitation period has to be distinguished from the contract period. During this period, the distributor has the exclusive right to exploit the recordings. In some distribution contracts, the exploitation period is a flat 24 months, even after the end of the contract. This is justified by the fact that some contractual partners distribute late. Strictly speaking, however, these are distributions for past exploitations, so that a right of exploitation at the time of the distribution is not necessary at all. If, for example, the artist receives a distribution on 1.12. for the period 1.01.-30.06., it is normally sufficient if the right of exploitation existed from 1.01. to 30.06. The right of exploitation for the period from 1.01. to 30.06. is not necessary. A longer evaluation period is only necessary in the case that the contractual partners of the distribution react late to the termination notice. In this case, however, it should be sufficient if the evaluation period exceeds the contract period by a maximum of 6 months.
If you have any questions about the distribution contract or other issues, I will be happy to advise you. It is not necessary for you to come to my office for this. You can send me your concerns in advance by e-mail (also with attachments). I will then make you a non-binding offer for a mandate and, if necessary, contact you by telephone. A mandate only comes into effect when the mandate is issued in writing.