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M&A private equity & banking and finance law blog |Banking law firm Crefovi

London private equity and banking law firm Crefovi is delighted to bring you this M&A private equity & banking and finance law blog, to provide you with forward-thinking and insightful information on the financial and corporate issues for the creative industries

London law firm for the creative industries Crefovi advises, in particular, the fashion and luxury goods sectors, the entertainment, music and film sectors, the art world & high tech market.

We support our clients out of London, Paris and globally, in finding the best solutions to their various legal issues relating to banking and finance law, either on contentious or non-contentious matters. We also advise our clients on private equity and private equity financing matters, capital markets issuances and mergers and acquisitions.

Crefovi has experience representing either the lenders and financiers, or the borrowers and invested businesses (which are all in the creative industries).

Annabelle Gauberti, founding partner of London entertainment and media law firm for the creative industries Crefovi, is also the president of the International association of lawyers for creative industries (ialci). This association is instrumental in providing very high quality seminars, webinars & brainstorming sessions on legal & business issues to which the creative industries are confronted.

 


Copyright in the digital era: how the creative industries can cash in

Crefovi : 14/06/2017 8:00 am : Antitrust & competition, Articles, Copyright litigation, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Media coverage, Music law, News, Private equity & private equity finance, Technology transactions

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Why authors, songwriters, composers, music publishers, movie producers, scriptwriters as well as digital service providers have everything to win in finding a consensus on copyright in the digital era 

Copyright in the digital era, crefovi, Back in July 2015, I wrote a detailed article on neighbouring rights in the digital era and how the music industry may cash in on this exponentially expanding source of income.

Two years down the line, and further to attending the 2017 Cannes Film Festival and Midem, I am convinced that the dominance of digital distribution channels, and streaming in particular, is accelerating in the creative industries. 

Focus 2017, the report on world film market trends published by the Marché du Film at the 2017 Cannes Film Festival, notes that, while films available on transactional Video On Demand (TVOD, such as iTunes) and subscription VOD (SVOD, such as Netflix or Amazon Prime) are on the rise, there are still barriers to release on VOD in Europe. The main obstacle being the perception that the level of revenues from VOD exploitation is still low, with 80% of revenues generated by 20% of films as well as high marketing costs. Another hurdle to full scale development of VOD services is the legal protectionism that some countries, such as France with its “cultural exception”, put in place to limit the disruptions that any blatant financial and commercial success of digital service providers would trigger, towards local theatres, national exhibitors, locally-made film productions and the local public.

Be that as it may, such obstacles will not pass the test of time and will be swept away by the cheer force of consumers’ demands and expectations, driven by a more tailored, user-friendly and personalised approach to consuming audio or video content, at any point in time, in any geographical location and on any device. 

Already, the music sector, which has always been the creative industry the most quickly affected and disrupted by the digital revolution, is much more attuned to the potentialities of streaming and adapting its own business model in order to monetise such digital revolution for the benefit of all stakeholders involved. For example, the largest digital music service provider, Spotify, confirmed that it had over 140 million active users worldwide, in June 2017, up from the 100 million figure that was declared a year ago.

At Midem 2017, much talk was made about transparency, fair remuneration, the value gap, to sensibilise Midem attendees and the music business in general, to the needs of including copyright owners in this digital success story. Indeed, how can such supply chain of great audio content work, if copyright owners (i.e. publishers, songwriters, composers) feel disanfranchised and left out of the commercial and financial boon represented by streaming? They will just refuse to keep their songs on digital services providers’ platforms, such as Spotify, Apple Music and Deezer, if they do not get well compensated for such use, potentially crippling the expansion of audio digital distribution channels in the process.

As I had promised I would do, in my earlier article on neighbouring rights, I now turn my attention to how deals are done with digital service providers, in the streaming arena, in relation to the licensing aspects of copyright, in particular performance rights for right owners in the musical composition (as opposed to the sound recording). Here, we focus only on copyright and the situation of right owners in songs and musical compositions – typically, songwriters, composers, music publishers – in films – typically, scriptwriters, film producers – and in books – typically, authors and press publishers.

1. Getting to grips with copyright in the digital era

Copyright was consecrated by law, step by step, in order to ensure that people who  create, author and/or produce original content or work (such as authors, writers, composers, songwriters and artists) have exclusive rights for its use and distribution.

Copyright came about with the invention of the printing press and was established first in Britain, as a reaction to printers’ monopolies at the beginning of the 18th century. The English parliament was concerned about the unregulated copying of books and passed the Licensing of the Press Act 1662, which established a register of licensed books and required a copy to be deposited with the Stationers’ Company, thus continuing the licensing of material that had long been in effect.

Copyright has grown from a legal concept regulating copying rights in the publishing of books and maps to one with a significant effect on nearly every modern industry, covering such items as songs, films, photographs, art works, architectural works, software, etc.

Such exclusive rights granted to content creators are usually for a limited time (in most jurisdictions, the author’s life plus 70 years after the death of the author) and may be limited by exceptions to copyright law, such as fair use in the USA and fair dealing in the UK and Canada. Also, copyright protects only the original expression of ideas, no the ideas themselves, which is referred to as the “idea-expression dichotomy”.

Copyright frequently includes reproduction, control over derivative works, distribution, public performance, transfer of these rights to others, and moral rights, such as attribution.

Copyrights are considered territorial rights, which means that they do not extend beyond the territory of a specific jurisdiction. However, the geographical scope of copyright has been extended thanks to international copyright agreements, such as the 1886 Berne Convention for the protection of literary and artistic works. The Berne Convention introduced the concept that a copyright exists the moment the work is “fixed”, rather than requiring any registration: under the Berne Convention, copyrights for creative works do not have to be asserted, declared or registered, as they are automatically in force at creation. The Berne Convention also enforces a requirement that countries recognise copyrights held by the citizens of all other parties to the convention. Therefore, foreign authors are treated in the same way than domestic authors, in any country signed onto the Berne Convention. The regulations of the Berne Convention are incorporated into the World Trade Organisation’s TRIPS agreement (1995), thus giving the Berne Convention effectively near-global application. These multilateral treaties have been ratified by nearly all countries, and international organisations such as the European Union (“EU“) or World Trade Organisation require their member-states to comply with them.

Since works protected by copyright are consumed more and more online, on digital channels (VOD for video content and streaming and downloads for audio content), a new challenge has arisen to ensure that copyright owners can monetise the exploitation of their works online.

At the EU level, a whole legal framework has been put in place, in order to protect copyright within the 28 member-states and in the digital world. For example, the directive on the harmonisation of certain aspects of copyright in the information society (2001/29/EC) strives to adapt legislation on copyright to reflect technological developments, while the directive 2006/115/EC harmonises the provisions relating to rental and lending rights of works subject to copyright. However, it is mainly the directive 2014/26/EU on collective management of copyright (the “CRM directive“) that reshaped the EU legal framework towards more efficiency in monetising copyright in the digital era.

2. Collecting societies, music copyright and the CRM directive: a step in the right direction for EU right owners

A copyright collecting society, also called copyright collective, copyright collecting agency or licensing agency, is a body created by copyright law or private agreement which engages in collective rights management. Collecting societies have the authority to license works protected by copyright and collect royalties as part of compulsory licensing or individual licenses negotiated on behalf of their respective members. Collecting societies collect royalty payments from users of copyrighted works and distribute royalties back to copyright owners.

Collecting societies are organisations handling the outsourcing function of right management. Copyright owners transfer to collecting societies rights to:

  • grant non-exclusive licenses;
  • collect royalties on their behalf;
  • distribute such collected royalties back to them;
  • enter into reciprocal arrangements with other collecting societies around the world and
  • enforce their rights.

To understand the role of collective rights management societies, we first need to talk about performing rights. Performing rights represent the greatest source of continuing royalty income. Throughout the world, writers and publishers receive in the area of USD6 billion in royalties each year, from performance rights. The performing right is a right of copyright which applies to the payment of licence fees by music users, when those users perform the copyrighted musical compositions of writers and publishers. This right recognises that a writer’s creation is a property right and that its use requires permission as well as compensation. For example, performances can be songs heard on the radio, underscores in a TV series or music performed live or on tape at a show, an amusement park, a sporting event, a major concert venue, a jazz club or a symphonic concert hall. Performances can be music on hold on a telephone or music channels on an airplane, or digital service providers such as Spotify and Apple Music.

Collecting societies also negotiate license fees for public performance and reproduction and act as lobbying interests groups. They grant blanket licences (i.e. they grant rights on behalf of multiple rights holders in a single blanket licence for a single payment), which grant the right to perform their catalogue for a period of time.

Music users (those that pay the license fees) include the major TV networks, radio stations, pay cable services, digital service providers, websites, concert halls, the hotel industry, nightclubs, bars, theme parks, etc.

Copyright holders will join a collecting society as members and instruct it to license rights on their behalf. The collecting society charges a fee for the licence, from which it deducts an administrative charge before distributing the remainder in royalties. Collecting societies are typically not for profit organisations and are owned and controlled by their members, the right holders.

Most countries in the world have only one collective music rights management society (SACEM in France, SIAE in Italy, PRS in the UK) but the USA have decided to have three organisations, in order to avoid monopolistic and anti-competitive behaviour. Therefore, ASCAP competes with BMI and SESAC, with 96% of the licence fees in performance rights being generated by either ASCAP or BMI in the USA.

For many years, collective rights management societies had a quiet life, apart in the USA where ASCAP, BMI and SESAC fiercely compete with each other, in order to get the best catalogues and music hits in their respective roster.

However, around 2008, quite a few European collective rights management societies were facing serious performance issues, compounded by a highly protective attitude towards other European societies, and an inability to cope with the changes in the way music is getting increasingly distributed online, on the internet.

On 16 July 2008, the European Commission adopted a decision (the “CISAC decision“) prohibiting 24 European collecting societies from restricting competition as regards to the conditions for the management and licensing of authors’ public performance for musical works. The collecting societies were found to have restricted the services they offered to authors and commercial users outside their domestic territory. While the CISAC decision made it easier for authors to select which collecting societies would manage their public performance rights (for example, an Italian author would become able to license his rights to PRS in the UK or SACEM in France), it was deemed to not be enough in order to force European collective rights management societies to make the necessary changes to open themselves up to the market.

Therefore, European institutions stepped up their game and, further to a proposal for a directive on collective rights management and multi-territorial licensing of rights in musical works for online uses, published on 11 July 2012, the EU adopted the CRM directive, the directive 2014/26/EU on collective rights management and multi-territorial licensing of rights in musical works for online uses.

Consequently, in the EU, the conduct of collecting societies is now governed by national regulations which implemented the CRM directive in the 28 member-states by the transposition date of 10 April 2016. Further to the entry into force of the CRM directive on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online use in the internal market, fairer competition – as well as sound collaboration – have at last arisen between all EU-based collecting societies.

The CRM directive aims to fulfil the following objectives:

  • modernise and improve governance, financial management and transparency of the EU collecting societies, in particular ensuring that right holders have more say in the decision making process and receive royalty payments that are accurate and on time;
  • promote a level playing field for multi-territorial licensing of online music and
  • help create innovative and dynamic licensing structures that encourage the development of legitimate online music services.

EU collecting societies that grant multi-territorial licenses are now required to have “sufficient capacity” to process efficiently and in a transparent manner the data needed to administer multi-territorial licenses. “Sufficient capacity” includes at least capacity to invoice users, collect rights revenue and distribute amounts to rights holders. Also, EU collecting societies must, in response to a “duly justified” request from service providers, rights holders or other societies, provide up-to-date information regarding their online repertoire. Both these requirements are challenges to many EU collecting societies, as timely and accurate invoicing has never been a strong feature of collective licensing in Europe.

For digital service providers that wish to allow users to access easily a vast library of online content, the ability to obtain multi-territorial licenses is the critical factor in enabling service of a pan-European user-base. At a time where digital service providers are not only squeezed by labels, but pressured by authors and publishers to increase royalties, it is not yet clear whether the national transposition regulations of the CRM directive will go far enough to protect digital service providers’ interests.

At least, EU collecting societies are now embarking themselves into pan-European licensing collaborations such as ICE (an online music rights licensing and processing hub formed by three of the EU largest collection societies, PRS (UK), STIM (Sweden) and GEMA (Germany)) and Armonia (another online music rights licensing and processing hub formed by SACEM (France), SGAE (Spain), SIAE (Italy), SACEM Luxembourg,  SABAM (Belgium), SUISA (Switzerland), AKM (Austria), SPA (Portugal), Artisjus (Hungary)) which both received clearance from the European Commission to enable faster and simplified rights negotiations for digital service providers operating in the EU. In May 2016, ICE signed its first license deal in the digital market place, partnering with Google Play Music.

3. The master stroke: copyright and the EU digital single market

In July 2014, ahead of his European Commission presidency, Jean-Claude Juncker published his political guidelines for a new Europe. Central to his agenda was a connected Digital Single Market (“DSM“), which triggered proposed EU legislation aimed at making the most out of digital technologies, and at the removal of restrictions to free movement of digital goods and services. Among the reforms, were changes to telecoms regulations (the end of mobile phone roaming charges), data protection (approval of the General Data Protection Regulation, which we will comment on in a future article) and EU copyright laws.

The EU copyright reforms, in particular, are highly ambitious with a series of key proposals announced by the European Commission in September 2016:

  • a EU regulation facilitating broadcasters by requiring only country of origin clearance for ancillary online services (for example, simulcasts, music, e-books, games or catch-up services) which are available across the EU, which was adopted on 8 June 2017;
  • a EU directive and a EU regulation to implement the Marrakesh Treaty: the former providing a mandatory exception to facilitate access to published copyrighted works for people who are blind, visually impaired or print disabled, and the latter permitting the cross-border exchange of copies between the EU and other countries that are party to the Treaty and
  • a proposal for a EU directive on copyright in the DSM (the “DSM proposal“).

The key provisions of the DSM proposal include:

  • providing rights of fair remuneration in contracts for authors and perfomers;
  • creation of an ancillary right for press publishers;
  • obligation on online service providers (social networks, platforms, etc) to take measures to prevent infringement;
  • new mandatory exceptions to infringement;
  • facilitating the use of out-of-commerce works by cultural heritage institutions.

The DSM proposal aims at reducing the differences between national copyright regimes and allowing for wider online access to copyrighted works by users across the EU. It recognises that, despite the fact that digital technologies should facilitate cross-border access to works, obstacles remain, in particular for uses and works where clearance of rights is complex.

As regards audiovisual works, the DSM proposal sets out, despite the growing importance of VOD platforms, EU audiovisual works only constitute one third of works available to consumers on those platforms! Again, this lack of availability partly derives from a complex clearance process. The DSM proposal therefore provides for measures aiming at facilitating the licensing and clearance of rights process, to ultimately facilitate consumers’ cross-border access to copyright-protected content.

In particular, the DSM proposal provides for fair remuneration in contracts of authors and performers, in its articles 14 to 16. Since authors and performers often have a weak bargaining position when licensing their rights, the DSM proposal sets out a “transparency obligation” whereby member-states will be required to ensure that authors and performers shall have the right to information about the exploitation of their works. The obligation may be adjusted where they are disproportionate or disapplied where the contribution of the author is not significant. The provisions go on to provide a “contract adjustment mechanism” so that authors and performers can request additional remuneration from the party with whom they contracted when the remuneration originally agreed is disproportionately low to the subsequent revenues and benefits derived from exploitation of the works or performances. Member-states are also required to provide a voluntary, alternative dispute resolution mechanism. The EU parliament proposes two small amendments: recognising rights to equitable remuneration, and providing authors and performers with the option to appoint representatives for seeking contract adjustments on their behalf.

Another reform set out in article 11 of the DSM proposal, aiming at efficiently monetising copyright in the digital era, is the ancillary right for press publishers. The European commission has said the proposed right aims to address the difficulties faced by press publishers in licensing their publications online: the problem comes from recouping their investment as against those who reproduce their content online for free. Article 11 of the DSM proposal strives to fight this problem by requiring member-states to provide “publishers of press publications” with rights to control the “reproduction” and “making available to the public” rights that are available to authors. This ancillary right is intended to last for twenty years from January 1 in the year following the press publication. A “press publication” is defined as a “fixation of a collection” of journalistic literary works. Similar laws have been introduced in Germany and Spain and it has been reported that these have led to delisting of press publications on news sites, resulting in reduced traffic to publishers’ own sites.

The European Commission proposes to address the so-called “value gap” between licensed streaming services, which pay for the content they host, and intermediaries, such as social media networks (Facebook) and online platforms (YouTube), which host infringing content. The e-commerce EU directive provides a “safe harbour” defence to these intermediaries, with a notice and take-down regime. However, rather than make amendments to the e-commerce EU directive, article 13 of the DSM proposal sets out that “information society service providers that store and provide to the public access to large amounts of works uploaded by their users shall, in co-operation with right holders, take measures to ensure the functioning of agreements concluded with right holders for the use of their works or to prevent the availability on their services of works identified by rightholders through the cooperation with service providers“. The European Commission suggests that such measures may include the use of content-recognition technologies. This article 13 seems at odds with the e-commerce EU directive, its safe harbour provisions and the assurance of no obligation to monitor information transmitted or stored. Therefore, we can expect to see further discussion between the European commission and the EU parliament on how to properly address the “value gap”. One thing that is for sure is that music copyright owners, publishers in particular, are particularly irritated by existing safe harbour laws in place in the EU and the USA and want intermediaries to become fully accountable for the damage that infringement on their platforms causes to copyright owners.

Another notable reform brought by the DSM proposal is the improvement of licensing practices and wider access to content. The European commission puts forward measures to facilitate the digitisation and licensing of out of commerce works. These are works that are not available to the public through customary channels of commerce and which are often held by cultural heritage institutions. The purpose of these provisions is to provide wider access to these materials and to guarantee the cross-border effect of licensing agreements. 

Let’s watch the space, as far as the DSM proposal is concerned, but it definitely constitutes a step in the right direction, in order to improve the monetisation of works protected by copyright in the EU single digital market. 

4. Technological solutions to better monetisation of copyright in the digital era: a work in progress

Midem 2017 was a whirlwind of fancy technical propositions to tackle transparency, as well as efficient and accurate ways of paying royalties to copyright owners in the digital era. 

The creation of a global database of musical copyrights and works was, yet again, envisaged, despite the fact that the Global Repertoire Database (“GRD“) was a resounding failure in 2014 due to a lack of appropriate coordination between, and funding from, various stakeholders such as Universal, EMI Music Publishing, tech companies such as Apple, Nokia and Amazon and collecting societies such as PRS (UK), STIM (Sweden) and SACEM (France).

Other technical suggestions envisaged were the use of sophisticated rights administration and management software solutions such as Counterpoint, the standardisation of data such as streamlining ISWC codes, the improvement of metadata provided to digital service providers by music publishers and labels, and using blockchain to structure a new database, with streamlined ISWC codes and accelerate payment of royalties through smart contracts and bitcoins. 

It seems to me that all these technical solutions, in particular the creation of a copyrights’ database and the implementation of clear ISWC codes and sets of metadata will only be implementable when their installation is coordinated by pan-European and mandatory regulations enforceable in the 28 member-states of the EU. 

 

To conclude, while the interests of copyright owners are increasingly being looked after, thanks to both legal and technical processes and tools more adapted to the fluid changes triggered by new means of consumption of copyrighted works in the digital era, it still feels like it is a “touch-and-go” approach that is put in place here. Although both copyright owners and digital service providers have everything to win in increasing transparency and prompt collection of digital royalties, while substantially reducing the value gap which greatly benefits intermediaries protected by safe harbour, I am under the impression that they do not really communicate efficiently together and do not think that their interests are aligned.

 

Annabelle Gauberti, founding partner of music law firm Crefovi, which specialises in advising the creative industries, out of Paris and London. Having worked with creative clients for more than fifteen years, Annabelle is an avid believer in the importance and value of looking forward, and planning ahead, to thrive in the current music industry and its new paradigm. The work undertaken by her regularly includes advising songwriters and composers on publishing deals; producers and performers on record deals and all of the latter on streaming deals and sync transactions; as well as intellectual property registration and protection, intellectual property and commercial litigation, negotiating merchandise deals and partnerships between brands and bands.

 

 
 


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Film finance | How to finance your film production?

Crefovi : 26/06/2016 8:00 am : Articles, Banking & finance, Capital markets, Copyright litigation, Emerging companies, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Media coverage, Music law, News, Private equity & private equity finance, Tax

While at the Cannes Film Festival in May 2016, we could not help noticing that one of the hottest topics discussed by all film professionals in attendance was film finance, or lack thereof. Also, Crefovi film clients regularly ask for our input on this touchy subject. How does one finance film productions nowadays? What are the best strategies to get your film funded and produced, in this day and age? 

film finance, how to finance your film, crefovi,

Well, here is the lowdown: it’s not easy. You will have to work hard and in an efficient and professional manner to secure the trust and hard-won cash of all those stakeholders who can finance your film project or, at least, allow you to save money while producing your film.

 

  1. What do you need film financing for exactly?

The cost items for a film project are vast, both in numbers and sizes, and can be divided according to the various stages of film making, as follows.

1.1. The idea

All films start with a moment of inspiration. Good ideas and story concepts are the foundation of any solid film project. Screenwriters usually have the initial idea or story but producers, who are in charge of raising money for a film project, frequently come up with ideas as well.

Ideas for films can be original or adapted from plays, novels or real-life events, which make up approximatively half of all Hollywood films.

Ideas cannot be protected by copyright – or any other intellectual property right for that matter – because copyright subsists only in the tangible expression of ideas. In America, this is referred to as the idea/expression dichotomy.

Therefore, film makers must take all adequate measures to protect their ideas and stories, by only divulging them after having taken some prior protective measures (such as having the recipient of the information relating to the idea sign a non-disclosure and confidentiality agreement) and/or by even subscribing to producer errors and omissions insurance and multimedia risk insurance which cover legal liability and defence for the film production company against lawsuits alleging unauthorised uses, plagiarism or copying of titles, formats, ideas, characters, plots, as well as unfair competition or breach of privacy or contract.

1.2. Development finance

The next stage in the development of a film project is to turn a rough idea or story into a final script ready for production.

Development money is the financial sum that you need to invest in your idea, until it is in a form suitable for presenting to investors and capable of attracting production financing. Development money is used, for example, to pay the writer, while the script is being written or re-written, as well as the producer’s travel expenses to film markets to arrange pre-sales financing from investors, as well as location scouting and camera tests. It also covers the cost of administration and overheads until the film is officially in pre-production.

Producers typically pitch to secure the money for the development of the script, or, if they can afford it, put up development money themselves.

Indeed, development finance is the most expensive and financiers who put up development money typically expect a 50% bonus plus 5% from the producer’s fees. Bonus payment is usually scheduled to be paid on the first day of principal photography (i.e. the shoot or production), along with the 5% of the producer’s profits as the film starts to recoup.

1.3. Script development

Once development finance is secured, and once a story idea is firmly in place, the negotiation process between the screenwriter and the producer (or production company or film studio) begins.

The writer hires an agent who represents him and plays a critical role in ensuring that the writer’s interests are represented in the negotiation process. The agent also ensures that the writer is paid appropriately in accordance with what the writer’s intellectual property rights may be worth in the future.

The producer has an alternative, in order to move the film project forward on the script development front: either he can buy the rights to the story idea or the material (a novel or play) from which the script was adapted outright, or he can buy an option of the film rights. The first transaction is an assignment of copyright. Buying an option of the film rights means that the producer owns the right to develop the film but only for a certain amount of time, it is therefore an exclusive licence of copyright.

In either cases, the producer is the only person allowed to develop the film idea into a screenplay. He pays the writer in smaller, agreed-upon instalments throughout this period, and may also agree to pay such writer a significant higher amount for all film rights once shooting begins. After the terms are negotiated, the writer can finally start working on the screenplay.

The scriptwriter then enters into action and, if needed, may first write a screenplay synopsis, also called “concept”. Unlike a “treatment”, which is a narrative of everything that happens in a screenplay, a synopsis includes only the most important or interesting parts of the story. A synopsis is a short summary of the basic elements in your story. It describes the dramatic engine that will drive the story in no more than a few sentences.

If the producer likes the synopsis, then the writer will proceed onto drafting the treatment, which, as mentioned above, is a prose description of the plot, written in present tense, as the film will unfold for the audience, scene by scene. A treatment is a story draft where the writer can hammer out the basis actions and plot structure of the story before going into the complexities of realising fully developed scenes with dialogue, precise actions, and setting descriptions. The treatment is the equivalent of a painter’s sketch that can be worked and reworked before committing to the actual painting. It’s much easier to cut, add, and rearrange scenes in this form, than in a fully detailed screenplay.

The author’s draft is the first complete version of the narrative in proper screenplay format. The emphasis of the author’s draft is on the story, the development of characters, and the conflict, actions, settings and dialogue. The author’s draft goes through a number of rewrites and revisions on its way to becoming a final draft, which is the last version of the author’s draft before being turned into a shooting script. The aim of an author’s draft is to remain streamlined, flexible and “readable”. Therefore, technical information (such as detailed camera angles, performance cues, blocking, or detailed set description) is kept to an absolute minimum. It is important not to attempt to direct the entire film, shot-for-shot, in the author’s draft. The detailed visualisation and interpretation of the screenplay occur during later preproduction and production stages.

Once you have completed your rewrites and arrived at a final draft, you will be ready to take that script into production by transforming it into a shooting script. The shooting script is the version of the screenplay you take into production, meaning the script from which your creative team (cinematographer, production designer, etc.) will work and from which the film will be shot. A shooting script communicates, in specific terms, the director’s visual approach to the film. All the scenes are numbered on a shooting script to facilitate breaking down the script and organising the production of the film. This version also includes specific technical information about the visualisation of the movie, like camera angles, shot sizes, camera moves, etc.

1.4. Packaging

Once the script is completed, the producer sends it to film directors to gauge their interest and find the appropriate director for his film project.

The director and the producer then decide how they want to film the movie and who they will employ to support them in achieving this result.

One common way to make the film project more commercial is to attach well-known stars to the script.

In order to turn the film into a proper business proposition, the producer must know how much the film will actually cost to be made.

Potential investors would want to know how the producer plans to raise the money and how the producer plans to pay them back.

Agents and agencies are the lifeblood of the film business. They structure the deals, they hold the keys to each and every gate and often make or break projects. Having strong relationships in this space, for a film producer, is as important as having a strong story on which to base your project.

Agency packaging refers to the fact that an agency will assist in one/all of the following: talent packaging, financing, sales and international representation. Keep in mind that agencies earn their revenue based on a 10 to 15 percent commission of their client’s fees (not only talent, but also writers, producers, directors, etc) and therefore having an agency package an entire project as opposed to having them simply have a single member of their roster involved, will go a long way.

The underlying principle to remember is that agents are looking at each opportunity as a business transaction: regardless of the project, it still boils down to a decision based on the bottom line. As such, finding the right agency (the big agencies are not always the right fit for smaller projects) and incentivising agents by offering full packaging capacities will yield the best results both financially and strategically.

1.5. Financing

Filmmaking is an expensive business, and the producer must secure enough funding to make the film at the highest possible standards.

To obtain the investment needed to make the film, the producer must travel to, and meet with, potential investors and successfully pitch his project.

The producer’s lawyer will then draw up contracts to seal financing deals between the producer and investors or financiers. Indeed, there are departments of banks that specialise in film finance and offer film production loans.

The producer can also make money from pre-sales, selling the rights to the film before it has even been made. For example, during the Cannes film festival and market 2016, motion picture and television studio STX landed the big prize by plunking down roughly USD50m for international rights to Martin Scorsese’s next film project, “The Irishman”.

1.6. Pre-production

Once the financing is in place, the production company hires the full cast and crew and detailed preparation for the shoot begins.

A distinction is made between above-the-line personnel (such as the director, the screenwriter and the producers) who began their involvement during the film project’s development stage, and the below-the-line “technical” crew involved only with the production stage.

It is worth noting that, in France, most film directors do not only direct but also produce, co-produce and almost always write the screenplays for their films. Therefore, their income is made up of a salary, as director-technician, to which is added a minimum guarantee as director and another minimum guarantee as screenwriter of the film, with or without additional screenwriters.

All heads of department are hired, such as the location manager, director of photography, casting director, script supervisor, gaffer, production sound mixer, production designer, art director, set decorator, construction coordinator, property master, costume designer, key make-up artist, special effects supervisor, stunt coordinator, post-production supervisor, film editor, visual effects producer, sound designer. The shooting script is circulated to all of them as pre-production begins.

The casting director, director and producer begin to identify and cast the actors.

Storyboards are made, out of the final script. They are used as blueprints for the film where every shot is planned in advance by the director and director of photography. They have a sequence of graphic illustrations of shots visualising a video production. Most high budget films will have a very detailed storyboard. Those storyboards can really smooth out the post-production process too, when it is time for editing.

The production designer plans every aspect of how the film will look and hires people to design and build each part.

All other heads of department also go through this planning process and hiring process, for their respective department.

Effect shots are planned in much more detail than normal shots and could potentially take months to design and build.

1.7. The shoot or production

Filmmakers and producers must take a careful approach to green lighting the film project and moving forward with production, by requiring unanimous consent from producers, sales agents and board of directors of the film specially-incorporated company, before proceeding.

Shooting starts and funding is released, which is a key stage in film making.

A large film production can involve hundreds of people, and it is a constant struggle to keep up with the shooting schedule and budget. Film productions are ran with strict precision. Production schedules are typically between 9 to 30 days, and you usually spend 12 to 14 hours on set, shooting from dawn to dusk. If film productions fall behind schedule, financiers and insurers may step in.

A 90 page script produced on a 24 day shooting schedule allows the director proper time on set, while keeping overall costs minimum – averaging under 4 pages per day.

The camera department is responsible for getting all the footage that the director and editor need, to tell the story.

Once lighting and sound are set up, and hair and make up have been checked, the shoot can begin.

Every special effect is carefully constructed and must be filmed with minimum risk of injury to cast and crew.

Production is a very intense and stressful process, especially for the producers and film director.

1.8. Post-production

Post production usually starts during the shoot, as soon as the first “rushes” – raw footage – and sound are available. As the processed footage comes in, the editor turns it into scenes and assembles it together, into a narrative sequence for the film.

The editor will read your script and storyboards, and look at the rushes, and from this information, cut the film according to their opinion of what makes the story better.

There are two ways of doing post-production:

  • the old way, i.e. celluloid film way. Shoot film and edit, or splice film on film editing equipment. There are few filmmakers who edit this way today;
  • the new way is the digital way. You get all your rushes digitised (if shot on film, you will need them telecined, or scanned to a digital format).

The normal schedule for editing a feature is 8 to 10 weeks. During this time, your editor will create different drafts of your film. The first is called the “rough cut”, and last is the “answer print”.

There are two conclusions to an edit, the first when you are happy with the visual images (locking picture) and the second when you are happy with the sound (sound lock).

Once the picture is “locked”, the sound department works on the audio track laying, creating and editing every sound.

Digital effects are added by specialist effects professionals and titles and credits are added.

The final stage of the picture edit is to adjust the colour and establish the final aesthetic of the film.

During that post-production phase, it is also usual to get:

  • a digital cinema package – a hard drive which contains the final copy of your film encoded so it can play in cinemas;
  • a dialogue script, so that foreign territories can dub or subtitle your film, which has the precise time code for each piece of dialogue so the subtitler or dubbing artist knows exactly where to place their dialogue;
  • a campaign image (with titles and credits), which is the first thing a prospective distributor or festival programmer will see of your film and which should let the viewer know exactly what your film is about;
  • a 90 to 120 second trailer that conveys the mood and atmosphere of your film, knowing that programming and distribution decisions will be often be based on the strength of your trailer.

1.9. Sales

While the film is still in post-production, the producer will try to sell it to distributors (if he has not already sold the rights at the financing stage).

Filmmakers and producers must have a pre-sales distribution and market strategy in place, that optimises back end profitability of the film. Targeting major film markets – Cannes, Berlin, Toronto, Sundance, Tribeca, Venice and emerging South by South West – is key to a successful B-to-B marketing strategy, while the same sales agent who packaged the film oversees the final sale.

The film sales world is split up as the domestic market and international market and there are specific sales companies for both specific markets.

Producers tend to work without sales assistance on the domestic deals as it is in the best interest of the producer to form these relationships and close the deal personally, to have an open door for future projects that will need similar distribution.

To help sell the film internationally to distributors, the producer secures the services of a sales agent and markets his film by sending it to film festivals. High profile screenings at top film festivals can be great to generate “clout” for the film.

The trailer is used to show buyers the most marketable aspects of the film.

Distributors are fickle in many senses. The business has changed (think of the recent growth of video on demand streaming services) and international versus domestic deals are becoming challenging. Indeed, being a distributor is still a risky business: if the film is a success, distributors only earn their commissions; while if it is a failure, they loose their minimum guarantees, prints and advertising expenses (P&A). This is why the best way to be a successful distributor, nowadays, is to be also the producer, or at least co-producer because you then earn money on the much higher residuals and international rights, compared to domestic theatrical rights only.

Finding the right distributor takes time. Example of boutique distributors are HBO, IFC, Magnolia, Focus Features or Miramax for broadcast, VOD and content streaming. The search process of the most appropriate distributor for your film project,will give you practice pitching it, as well as the ability to review many different sellers to gauge style, ability and creative fit.

Just as the agencies are self-motivated, so too are sales agents (international film brokers) and distributors (buyers and exhibitors) motivated by the bottom line economics of the deal. Yes, there are buyers and sellers who specialise in content-focused for the art-house driven markets, but they are becoming fewer and fewer.

1.10. Marketing

As the finishing touches are being made to the film, the distributors plan their marketing strategy to “sell” the movie to the public.

Knowing the audience is essential and the marketing team runs test screenings to see how the film is received.

Press kits, posters and other advertising materials are published, and the film is advertised and promoted. A b-roll clip may be released to the press, based on raw footage shot for a “making of” documentary, which may include making-of clips as well as on-set interviews.

1.11. Expedition

Cinema expedition, also called theatrical release, is still the primary channel for films to reach their audiences.

Indeed, box office success equals financial success.

Film distributors usually release a film with a launch party, a red-carpet premiere, press releases, interviews with the press, press preview screenings, and film festival screenings.

Most films are also promoted with their own special website separate from those of the production company or distributor.

For major films, key personnel are often contractually required to participate in promotional tours in which they appear at premieres and festivals, and sit for interviews with many TV, print and online journalists.

The largest productions may require more than one promotional tour, in order to rejuvenate audience demand at each release window.

1.12. Other windows

A successful run in cinemas makes the film a sought-after product, which can be sold through other more lucrative channels such as DVDs and games.

Since the advent of home video in the early 1980s, most major films have followed a pattern of having several distinct release windows. A film may first be released to a few select cinemas (limited theatrical), or if it tests well enough, may go directly into wide release.

A popular option, to develop the domestic sales potential of a film, is to have a first phase initial release on a limited theatrical platform, paired with a joint digital download release on iTunes and Amazon – sales are driven by major market theatre visits and digital downloads in smaller markets. The second phase release via VOD and pay cablers such as HBO, Showtime and potentially Hulu – sales are then driven by word of mouth built from first phase. This is often followed by a third phase, which pairs Netflix and Amazon Prime streaming with a wide DVD release to drive streaming view and build DVD purchases. Finally, in its fourth phase, the film builds upon steady sales and word of mouth audience reception, to gain network television sales and eventual syndication. In broadcasting parlance, syndication is the licensing of the right to broadcast television programs by multiple TV stations, without going through a broadcast network.

Next, the film is released, normally at different times several weeks (or months) apart, into different market segments like rental, retail, pay-per-view, in-flight entertainment, cable, satellite, or free-to-air broadcast television. Indeed, the film may be released in cinemas or, occasionally, directly to consumer media (DVD, VCD, VHS, Blu-ray) or direct download from a digital media provider. Hospitality sales for hotel channels and in-flight entertainment can bring in millions of additional revenues.

Indeed, today, residuals, or neighbouring rights, as those additional revenues are called, bring in most of the profit for the film, not theatrical rights. Those residuals are collected by collection agents, such as Fintage House and RightBack, which adds transparency to the process of collecting revenues generated by the film.

The distributor rights for the film are usually sold for worldwide distribution.

The distributors and the production company then share profits.

As a film producer, you should “trust the shuffler but cut the deck”, by ensuring that you have an audit clause inserted in the distribution agreement, which will allow you to audit the accounts of the distributor in order to check that all collected revenues, from all sources, are indeed included in the residuals statements that you received from such distributor.

It is worth noting that, in at least 10 countries from the European Union, including France, Germany, Spain, Belgium, distributors of pay-TV services and/or operators of VOD services are required by law to contribute to the funding of production, either through contributions to support funds or by means of direct investments in production. The arrangements are generally complimentary to and extend tax law provisions requiring contributions from exhibitors, broadcasters and video distributors: all distribution activities must contribute to the funding of production.

 

2. How do you finance a film nowadays?

First things first: have you made a business plan? Creating a business plan is almost as important as finding a terrific script. You need to prepare a plan of attack to get the money to shoot your film. Indeed, as a producer or filmmaker, you need to make creating a viable and realistic business plan your first priority. Many filmmakers create an outline business plan first, and then find a script that matches what they think they can raise.

2.1. The studio model

The strategy, here, is to get 3 to 5 films together of a similar genre, and approach investors with a slate of similar films. If one of these films is successful, it will pay off for itself and the other 2 to 4 other film projects on the slate.

While this strategy consisting in hedging your risks by having more than one egg in your basket sounds great, a reality check is necessary: do you really think that you can get more than one project together? You may want to collaborate with some like-minded filmmakers with similar projects.

2.2. Government funding

Many nations now have attractive tax and investment incentives for filmmakers. Individual state and country legislation unable producers to subsidise spent costs for production.

For example, Europe’s MEDIA programme has twenty-odd programmes for media and filmmakers. You need to apply for the funding and lobby decisions makers until you get your soft money.

Many European filmmakers design a business plan around the rules and regulations surrounding the MEDIA money. The same applies for soft money from other countries as well.

Another example is the UK government, which pumps tens of millions of pound sterling into British film every year (using National Lottery funds!). Following the heavily criticised demise of the UK Film Council, UK public money is now distributed by the British Film Institute (BFI). Film London has also put in place a Production Finance Market (PFM), its annual two-day film financing event, run in association with the BFI London Film Festival. PFM encourages new business relationships, between UK filmmakers, producers and investors, attaching international sales companies and securing various forms of investments in companies and film projects.

As soft public money funds are always heavily over-subscribed and lobbied for by competing filmmakers and producers, you should not be over-reliant on getting government funding. In addition, those funds will impose restrictions, that could easily compromise your creative integrity.

2.3. Equity

Hard cash investments made to your film project by a single investor, a group of investors and personal investments from colleagues, friends and family.

Equity investments require that investors own a stake in the film (i.e. the operating structure, special purpose vehicle incorporated for that particular film project). They also must be paid back (typically on  their principal investment plus 20 percent) before profit is seen on the side of the filmmakers and producers.

2.4. Tax finance

It’s all about de-risking your film package.

Through its Enterprise Investment Scheme (EIS) and (Small Enterprise Investment Scheme (SEIS), the UK government has created one of the world’s best environments for de-leveraging the risk of investments made in small businesses up to 98 percent (depending on the investors profile). EIS is designed to support smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

Film projects are qualifying business for EIS and SEIS, however we heard that the European Commission has audited the UK EIS and SEIS schemes and only wants long-term UK small businesses to benefit from such schemes, ruling out special purpose vehicles incorporated for each film project. With a Brexit in the works though, it is likely that EIS and SEIS will still be used to finance UK film projects, in the future.

To get all EIS or SEIS up and running, you need to get a strong business plan together with a budget and schedule. Fill in a few online tax forms and get your UK limited company registered for EIS. If you get stuck, phone a really nice lady in Wales who will make sure your secure the paperwork.

While investing in a film is seen as “sexy” by many private investors, the recent economic downturn, Brexit and the competitiveness of securing EIS and SEIS among filmmakers and producers, make investors shy and cautious. It may be worth speaking to UK film financiers, such as the Fyzz Facility (now merged with Tea Shop), who have a pool of private investors who are ready to invest, via gap funding (as this term is defined below in paragraph 2.6 (Gap financing)), through EIS and SEIS.

In France, Sociétés de financement de l’industrie cinématographique et de l’audiovisuel (SOFICAS) are the equivalent tax-wrappers to EIS and SEIS. They are equity funds financed with tax-related money and are allowed to invest in both films and TV productions, on a selective basis. Their money comes from banks which are allowed to collect, from French tax resident private investors who want to pay less income tax in France. As SOFICAS want their money back, they tend to do mostly gap funding (as this term is defined below at paragraph 2.6), providing producers with the last (and most expensive) money. SOFICAS generally stand behind the distributors in the recoupment order. Only part of the SOFICAS money is invested in independent film productions. Each SOFICA can invest 20 percent of its money in foreign-speaking (qualified) co-productions, as long as the film’s language matches the foreign co-producer’s country’s language. In 2015, SOFICAS invested Euros37m in 112 movies, 11 of which were majority foreign co-productions, mostly from British or Belgian producers. A top manager of SOFICAS for the media and entertainment sector in France, is Back-up Media.

Tax incentives require a producer to hire a certain number of local crew employees, rent from local vendors and run payroll through local services. Tax credits are based on an application process and are often lengthy (12 to 18 months) and difficult (as they may involve a substantial amount of tedious paperwork) to procure.

For example, UK film tax relief ensures that, for film spending GBP20m or less, production companies can claim a cash rebate of up to 25 percent of qualifying expenditure. For films spending more than GBP20m, production companies can claim a cash rebate of up to 20 percent of qualifying expenditure. The UK film tax relief is largely responsible for the recent influx of international blockbuster movies into the UK: “Star Wars: the force awakens” (LucasFilm), “Avengers: age of Ultron” (Marvel Studios) and the latest James Bond film “Spectre” (EON) have all been shot in the UK, mostly out of Pinewood Studios.

In France, the Tax Rebate for International Productions (TRIP) concerns projects wholly or partly made in France and initiated by a non-French film production company. It it selectively granted by the French national centre for cinema, CNC, to a French production services company. TRIP amount up to 30 percent of the qualifying expenditures incurred in France: it can total a maximum of Euros30m per project. The French government refunds the applicant company, which must have its registered office in France. “Thor” (Marvel Studios), “Despicable Me” and “the Minions” (Universal Animation Studios) and “Inception” (Warner Bros) have benefited from TRIP.

For French film productions, the Credit d’impot cinema et audiovisuel (CICA) benefits French producers for expenses incurred in France for the production of films or TV programmes. The CICA tax credit is equal to 20 percent of eligible expenses – increased to 30 percent for films for which the production budget is less than Euros4m.

Certain tax credits are sellable, transferable and even trade-able based on the local legislation. US states such as New Mexico, North Carolina, Georgia, New York and Michigan offer the strongest solutions here.

It is really worth for film producers to organise a “competition” between various countries and territories as well, based on available tax rebates and government funding, before deciding in which country to produce and post-produce a film. Indeed, the UK and France are always in rivalry, Film France CEO Valerie Lepine-Karnik noting that “last year (in 2014), American blockbusters spent more than Euros1.6bn in the UK, which is half a million more than the total amount of money invested in French domestic film production in 2014″.

2.5. Pre sales and co-productions

The strategy, here, is to sell your film cheap up front (pre-sales) and hook up with producers in other countries to secure soft public money in other territories. Indeed, by co-producing, you can take advantage of soft money otherwise not normally accessible to your film production.

Pre-sales agreements are pre-arranged and executed contracts made with distributors before the film is produced. These agreements are based on the strength of the project’s marketability and sales potential in each given territory. A distributor will generate a value for your film project, given the scrip, the attached talent and crew, as well as the marketing approach, and then enable you to take out a bank loan using the pre-sales deal as collateral. Pre-sales can also result in direct payment (at a discounted rate) from the buyer themselves. Pre-sales investments require that the producer pay back the bank its loaned capital before profiting on their respective upside.

Both the UK and France have bilateral co-production treaties in place with certain countries such as:

  • Australia, Canada, China, India, Israel, France, Jamaica, Morocco, New Zealand, Occupied Palestinian Territories and South Africa, for the UK;
  • and Algeria, Argentina, Australia, Austria, Belgium, Bosnia-Herzegovina, Brazil, Bulgaria, Burkina Faso, Cambodia, Cameroon, Canada, Chile, China, Colombia, Croatia, Czech Republic, Denmark, Egypt, Finland, Georgia, Germany, Greece, Guinea, Holland, Hungary, Iceland, India, Israel, Italy, Ivory Coast, South-Korea, Lebanon, Luxemburg, Morocco, Mexico, New Zealand, Poland, Portugal, Palestinian Territories, Romania, Russia, Senegal, Serbia, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Tunisia, Turkey, Ukraine, United Kingdom, Venezuela, for France.

For example, Ken Loach’s films, mainly produced in the UK, benefit from French funds through French production company Why Not since “Looking for Eric” in 2009. “Mr Turner” by Mike Leigh was co-produced by Diaphana.

Moreover, the European Convention on cinematographic co-productions applies for now, in both countries, although this will cease to be the case for the UK after Brexit.

While co-production can work, it can be difficult to set up co-productions and you will now have financial partners in various territories who will probably all want to exercise creative control. Also, you, the producer, will have to share any revenues generated by your film not only with the distributors, but also with your co-producers scattered in various countries.

2.6. Gap financing

With partial equity raised, you are then able to procure a loan from a bank or a private lender on the unsold territories of the film (and additional elements of collateral, such as the intellectual property or corporate guarantees).

Gap financing is only available when other elements have been assembled and there is adequate security for the investor to “bridge” against.

2.7. Product placement

The strategy is to team up with brands and get cash for including their products on set.

For example, Heineken reportedly paid a third of “Skyfall” ‘s USD150mn budget to turn Daniel Craig’s James Bond into a lager drinker!

Not only do you get some of your film funding through product placement, but the product exposure the brand enjoys may have a far greater value than the cost of the product placement and is generally seen to be cheaper than comparative advertising on TV or print.

However, having a product placement in a film means that you will always be under the scrutiny of brand managers, which may hamper the film creative process. Moreover, few independent filmmakers have the polling power of James Bond! Brands will always want to know what the marketing strategy of your film is, before they invest in, or even allow their products to be used.

2.8. Crowdfunding

Crowdfunding (Kickstarter, IndieGoGo, Ulule, Kiss Kiss Bank Bank, etc.) is now a serious contender to raising finance for your film projects. It enables a contributions-based model for capital to be raised without selling equity.

For example, the “Veronica Mars” Movie project and Spike Lee’s latest film project “Da sweet blood of Jesus”, were all financed through Kickstarter in 2013. Spike Lee raised USD1.4m for his horror flick on contemporary vampires, not a negligible amount by any means.

The strategy is that you get some rewards (such as DVDs, t-shirts, sharing dinner with the famous film director) together and offer them to friends, family and fools, as well as to the crowd, hoping to entice them into making a contribution to your film project. The idea, here, is to build a community who adheres to your story.

Even the studio biggies are using crowdfunding nowadays: Charlie Kaufman, an American screenwriter, producer, director famous for writing “Being John Malkovich” and “Eternal sunshine of the spotless mind”, raised over USD400k for his new project Anomalisa.

This is crowding the pitch and makes it even tougher to get enough noise directed your way. Therefore, you need a really good business plan in order to successfully approach crowd funding.

2.9. Deferrals

The strategy is to get everybody to work and be paid later, out of profits if any. Indeed, producers are able to avoid nearly all costs on a project if they are able to negotiate a deferred deal.

Convince everyone that in order to get the film made now, you cannot wait for investment. In exchange, you offer up a percentage of the share of profit, meaning that everyone’s salary could potentially increase depending on the success of the film.

Deferred agreements basically state that crew, cast, vendors, locations and services are all rendered upfront at no cost, until the film generates money upon release.

Deferrals may work but are reliant on the trust the producer has with his team. Often, deferrees are unpaid, even though the film goes on to commercial success. There is also the temptation to overstate the value of the deferment which can lead to bitter arguments if the box office returns do not meet expectations. Moreover, deferred financing is difficult because experienced cast and crew are unwilling to work under these types of structures.

2.10. Self-financed film projects

Self-financed movies mean you do not have to deal with investors. It also does mean that you have to be very careful with the money, which is yours.

For example, Tangerine’s director, Sean Baker, shot his feature film entirely on 2 iPhones and went on to become one of the most hyped film directors in 2015, as Tangerine was reviewed by many critics as one the the best films of 2015. In an interview with Bret Easton Ellis in 2015, 45 years old Sean Baker confessed to still be heavily in debt and reliant on the goodwill and empathy of his parents, to make ends meet.

While getting your film done immediately with your own resources is an enticing prospect and very achievable in today’s digital world, it is worth noting that most of these thousands of self-financed movies fail, mostly due to the fact that their scripts are not good enough. By going the self-financed indie route, filmmakers have side stepped the development cycle and no one has told them that their script sucks.

 

3. How do you make your film project stand out to financiers?

As mentioned in our introduction, it is tough to get films financed in today’s market. Of course, a strong script, a great team with experience and a game plan for success are pre-requisites, but that’s not enough. The key factor to equity investors and debt lenders, is to remove risk, financial exposure and speculation – meaning, when are they going to start earning a return or their money back, and can you guarantee that? The more risk and speculation you remove, by utilising the steps below, the better chance you will have of securing capital in “hard money”.

3.1. Agencies

As mentioned above in paragraph 1.4. (Packaging) above, talent agencies are a difficult nut to crack. They are well-guarded, highly established and protected entities. They are the gatekeepers of taste, talent and possibility – and more than anything they are the lifeblood of the independent producer seeking to put projects together with financing.

Once you have a suitable piece of material, get an agent/agency excited about the project as well. The way forward is approaching the major five talent agencies – William Morris Endeavor, United Talent Agency, Creative Artists Agency, The Gersh Agency and International Creative Management – for the packaging of quality source material – script, paired with proven name talent – actors and directors, under the representation of a successful in-house sales agent.

As with most of the entertainment business, agents think in numbers – how much will my firm/I make from this deal? Incentivize the agency by offering them the ability to package the project – place multiple roles with their roster rather than just one or two roles – which gives them the ability to earn 10 to 15 percent of multiple deals across the board.

Furthermore, offer them the ability to have a first look opportunity for domestic sales representation – again, finding ways to incentivise. By packaging these elements early on, you will be able to bring strong talent to the project and gear up to be more ready to approach equity players.

3.2. Strength of team and experience

A first time producer/director/star is a tough sell for many in the film business. Sales teams are unable to project value (pre-sell), agents are unable to place large name talent (packaging) and financiers are unable to gauge project return on investment (ROI).

Therefore, your best bet is to find a director who has carried a project before, find an agency who is interested in packaging and will keep you/your project in the stratosphere of content that matters and you will be in a great starting position.

The team must bring a wealth of knowledge, experience and relationships to the production phase, in order to properly execute feature film’s full production schedule. All the while, the producers and filmmaker must mindfully nurture the creative necessity, without neglecting the overall commercial nature of the film’s back end.

If you have to utilise unknown talents to make your project, then surround them with experience on all fronts. An unknown star with a strong director, director of photography, producer and writer is a reasonable recipe.

3.3. Soft money options

With your packaged talent signed on, a strong team on board, and a well-developed script, you can now approach “soft money” options, i.e. tax incentives/pre-sales/debt financings.

Tax incentives offer a percentage of the in-state or in-country spend back in rebate form. This means that you can bankroll/cash-flow this piece of financing to offset your investors’ risk.

Pre-sales offer projections of value based on the elements you have brought together. This, in turn, also implies that you can bankroll/cash-flow this piece of financing to offset your investors’ risk.

The same goes for debt options.

As a filmmaker or producer, you need to find ways to cover 50 cent or pence of every euro or pound your investor is putting up before the cameras even turn on.

Shoot in tax incentive rich states, with a strong pre-sold package, and with a great sales team onboard to execute. You can then reduce the level of speculation and guarantee a return of X percent, based on Y investment in a tangible timeline.

3.4. Plan of execution

With these elements onboard, make your investment proposal personable, professional and tailored to your investors specifics. Do not pitch high level equity film financing to first-time entertainment investors. Keep it simple, honest, and remind equity investors that while smoke and mirrors often run throughout the business, you are putting together a basic structure returning X percent on Y investment over Z timeline.

Lastly, look into completion/guarantor insurance guarantees, as a way to assure your equity investors that the project will be completed on time, schedule and budget, and with the elements they have agreed to finance. The liability is now removed via an insurance company and investors’ return is partially guaranteed via tax incentives and additional soft-money.

Pitch smart, often and confidently knowing that you have done your homework and that the investment is well-structured for a return.

Crefovi
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The road less travelled & Brexit legal implications

Crefovi : 25/06/2016 1:08 pm : Antitrust & competition, Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Entertainment & media, Events, Fashion law, gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, insolvency & workouts, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, leisure, Life sciences, Litigation & dispute resolution, Media coverage, Mergers & acquisitions, Music law, News, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids

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On 23 June 2016, during an epic day of flooding in London and South East England, which did not deter a record 72.2 percent of voters to turn out, Little Britain decided to terminate its 43-year membership with the European Union (EU). What are the Brexit legal implications that creative industries need to know about?

Brexit legal implicationsNow, the United Kingdom (UK) – or possibly, only England and Wales if Northern Ireland and Scotland successfully each hold a referendum to stay in the EU in the near future – will join the ranks of the nine other European countries which are not part of the EU, i.e. Norway, Iceland, Liechtenstein, Albania, Switzerland, Turkey, Russia, Macedonia and Montenegro. Of these, two countries, Russia and Turkey, straddle Europe and Asia.

What are the short-term and long-term consequences, from a legal and business standpoint, for the creative industries based in the UK or in commercial relationships with UK creatives?

The two main treaties of the European Union, which are a set of international treaties between the EU member states and which sets out the EU’s constitutional basis, are the Treaty on European Union (TEU, signed in Maastricht in 1992) and the Treaty on the Functioning of the European Union (TFEU, signed in Rome in 1958 to establish the European Economic Community).

The TFEU in particular sets out some important policies which guide the EU, such as:

  • Citizenship of the EU;
  • The internal market;
  • Free movement of people, services and capital;
  • Free movement of goods, including the customs union;
  • Competition;
  • Area of freedom, justice and security, including police and justice co-operation;
  • Economic and monetary policy;
  • EU foreign policy, etc.

How is the ending of those policies, in the UK, going to change and affect UK creative professionals and companies, as well as foreign citizens and companies doing business in the UK?

1. Removal of EU citizenship for UK citizens and of freedom of movement of people coming in and out of the UK

Citizenship of the EU was introduced by the TEU and has been in force since 1993.

EU citizenship is subsidiary to national citizenship and affords rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or a consulate in the country in which they require protection.

By voting out of the EU, Little Britain has made it difficult for EU citizens to come to the UK, as a visa or work permit may be required in the future, depending on the agreement that the UK will strike with the EU. However, it will also be much more difficult for UK citizens to travel to EU member states, for work, studies or leisure.

Probably, the majority of people in the UK who voted out of the EU do not travel much out of the UK, either for work or leisure, so there was definitely a class battle going on there, during that Brexit referendum, as high flyers and Londoners (who have to be quite wealthy to live in such an expensive city) wanted to remain in the EU, while the working class population and English & Welsh regions were firmly on the Leave side. That’s democracy for you: one individual, one vote and the majority of votes always has the upper hand!

If we look at the example set by some of the other nine European states which are not part of the EU, we see that several options are available. Although Norway, Iceland and Liechtenstein are not members of the EU, they have bilateral agreements with the EU that allow their citizens to live and work in EU-member countries without work permits, and vice versa. Switzerland has a similar bilateral agreement, though its agreement is slightly more limited. At the other end of the spectrum, the decision about whether to permit Turkish citizens to live and work within member countries of the EU is left to the individual member nations, and vice versa.

So what’s it going to be like, for the UK?

Time will tell but as we now know that David Cameron, a relatively “mild” member of the conservative party, will step down as the UK prime minister in October 2016, we are under the impression that his leadership will be replaced with an atypical and highly-strung right-wing and nationalistic team, probably led by hard-core conservatives such as Boris Johnson. Mr Johnson not being renowned for his subtlety and impeccable political flair, we think that negotiations for new bilateral agreements between the UK and EU as well as non-EU countries will be a difficult, protracted and ego-tripped process which may take years to finalise.

The UK will try to reduce immigration from the EU, probably with a points-based system such as the one in place in Australia. It means giving priority to high-skilled workers and blocking entry to low-skilled ones. But first, the UK will have to clarify the status of the nearly 2.2 million EU workers living in the UK. The rules for family reunions may get tougher. Also, 2 million UK nationals also live abroad in EU countries – so any British measures targeting EU workers could trigger retaliation against UK nationals abroad.

This, of course, may have an extremely negative impact on the freedom of movement of people, in and out of the UK, which may have a catastrophic impact on trade, human rights and political relationships with other states, for the UK.

Article 50 of the Lisbon Treaty, another treaty from the set of international treaties between the EU member states and which sets out the EU’s constitutional basis, relates to the rules for exit from the EU and provides that:

1. Any Member State may decide to withdraw from the EU in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the EU shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the EU. That agreement shall be negotiated in accordance with Article 218(3) of the TFEU. It shall be concluded on behalf of the EU by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the TFEU.

5. If a State which has withdrawn from the EU asks to rejoin, its request shall be subject to the procedure referred to in Article 49″.

Therefore, the UK nows needs to notify its intention to withdraw from the EU to the European Council. We understand that such notification will be handed over by the new prime minister in the UK, therefore after October 2016.

The UK will have, at the latest, a period of two years from such notification date to negotiate and conclude with the EU an agreement setting out the arrangements for its withdrawal, taking out of the framework for its future relationship with the EU. After this period of two years or, if earlier, the date of entry into force of the withdrawal agreement, the EU Treaties will cease to apply to the UK.

Let’s hope that the new UK government will have the ability and gravitas to strike a withdrawal agreement with the EU, in particular in relation to free movement of people coming in and out of the UK, which will be balanced and ensure fluid and constructive relationships with its fellow neighbours and main import partners.

Companies which have – or plan to have – employees in the UK, or which staff often travels to the UK for business reasons, should monitor the negotiation of the bilateral agreements relating to the freedom of movement of people, between the UK and EU member-states, as well as non-EU countries, very closely, as costs, energy and time to secure visas and work permits could become a significant burden to doing business in and with the UK, in the next two years.

2. Removal of free movement of goods, services and capital?

The EU’s internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU’s 28 member states.

The internal market is intended to be conducive to increased competition, increased specialisation, larger economies of scale, allowing goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources.

It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU wide economy. Half of the trade in goods within the EU is covered by legislation harmonised by the EU.

Clearly, the internal market and its wider repercussions have gone totally over the head of Little Britain, who wiped out 43 years of hard-won progress towards economic integration in 12 hours on 23 June 2016! “Put Britain first”, which was what the mentally ill racist and right-wing extremist shouted when he murdered Jo Cox, a Labour politician and campaigner for the rights of refugees, a week and a half ago, summarises what Little Britain had in mind, when they voted out of the EU.

Having said that, it is possible that the internal market remains in place, between the UK and the EU, as such market has been extended to Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA) and to Switzerland through bilateral treaties.

Indeed, the EEA is the area in which the agreement on the EEA provides for the free movement of persons, goods, services and capital within the internal market of the EU. The EEA was established on 1 January 1994 upon entry into force of the EEA Agreement.

The EEA Agreement specifies that membership is open to member states of either the EU or European Free Trade Association (EFTA). EFTA states, i.e. Iceland, Liechtenstein and Norway, which are party to the EEA Agreement participate in the EU’s internal market. One EFTA state, Switzerland, has not joined the EEA, but has a series of bilateral agreements with the EU which allow it to participate in the internal market. The EEA Agreement in respect of these states, and the EU-Swiss treaties have exceptions, notably on agriculture and fisheries.

2.1. Free movement of goods?

Thanks to the internal market, there is a guarantee to free movement of goods.

If the UK decides, during its withdrawal negotiations with the EU, to become a party to the EEA Agreement, then such freedom of movement of goods will be guaranteed.

If the UK decides, during its withdrawal negotiations with the EU, to put in place a series of bilateral agreements with the EU, then such freedom of movement of goods may be guaranteed.

Otherwise, there will be no freedom of movement of goods, between the UK and the EU, and non-EU countries, which would be an extremely perilous commercial situation for the UK. The EU is also a customs union. This means that member-states have removed customs barriers between themselves and introduced a common customs policy towards other countries. The overall purpose of the duties is “to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the Common Market“.

Article 30 TFEU prohibits EU member-states from levying any duties on goods crossing a border, both goods produced within the EU and those produced outside. Once a good has been imported into the EU from a third country and the appropriate customs duty paid, Article 29 TFEU dictates that it shall then be considered to be in free circulation between the EU member-states.

Neither the purpose of the charge, nor its name in domestic law, is relevant.

Since the Single European Act, there can be no systematic customs controls at the borders of EU member-states. The emphasis is on post-import audit controls and risk analysis. Physical controls of imports and exports now occur at traders’ premises, rather than at the territorial borders.

Again, if the UK becomes a party to the EEA Agreement, or signs appropriate bilateral agreements with the EU and other countries party to the internal market, customs duties will be prohibited between the UK, the EU, the EEA states and Switzerland. Otherwise, customs duties will be re-instated between the UK and all other European countries, including the EU, which would be again a very disadvantageous situation for UK businesses as the cost of trading goods with foreign countries will substantially increase.

The same goes for taxation of goods and products which will be reinstated if the UK does not manage to become a party to the EEA Agreement or to sign appropriate bilateral agreements with the EU.

This is going to become a major headache for the UK’s new leadership: goods exports of the EU, not including the UK, to the rest of the world, including the UK, are about 1,800bn euros; to the UK, about 295bn euros, or a little under 16 percent. So, in 2015, the UK accounted for 16 percent of the EU’s exports, while the US and China accounted for 15 percent and 8 percent respectively.

The UK would, indeed, become the EU’s single largest trading partner for trade in goods. However, this would probably not be the case for trade overall. Including services would probably reduce the UK’s share somewhat (the EU ex UK exports over 600bn euros in services, while the UK imports only about 40-45bn euros in services from the rest of the EU). Moreover, the US will very probably overtake the UK as the EU ex UK’s largest single export market.

What does this tell us about the UK’s bargaining power with the EU after a Brexit?

It certainly confirms that the UK would become one of the EU’s largest export markets, even if not necessarily the largest. But the UK would still be far less important to the EU than they are to the UK – the EU still takes about 45 percent of UK’s exports, down from 55 percent at the turn of the century. And, if you treat the EU as one country, as this analysis does, “exports” become considerably less important overall (intra-EU trade is far more important to almost all EU countries). Indeed, as this Eurostat table shows, only for Ireland and Cyprus does the UK represent more than 10 percent of total (including intra-EU) exports. share of EU country exports top three, brexit legal implications, crefovi So how important will exporting to the UK be to the EU economy after Brexit? EU exports to the UK would represent about 3 percent of EU GDP; not negligible by any means, but equally perhaps not as dramatic as one might think. The EU, and even more so the UK, would certainly have a strong incentive to negotiate a sensible trading arrangement post-Brexit. But no-one should imagine the UK holds all the cards here.

Bearing in mind that the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers), we strongly doubt that currently feisty UK and its dubious future leadership (wasn’t Boris Johnson lambasted for being a womanising buffoon by both the press and members of the public until recently?) are cut from the right cloth to pull off a constructive, seamless and peaceful exit from the EU.

Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should monitor the UK negotiations of the withdrawal agreement with the EU extremely closely and, if need be, relocate their operations to the EU within the next 2 years, should new customs duties and taxation of goods and products become inevitable, due to a lack of successful negotiations with the EU.

The alternative would be to face high prices both inside the UK (as UK retailers and end-consumers will have to pay customs duties and taxes on all imported products) and while exporting from the UK (as buyers of UK manufacturers’ goods will have to pay customs duties and taxes on all exported products). Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. UK services – accounting for eighty percent of the UK economy – would lose their preferential access to the EU single market.

While an inevitably weaker pound sterling may set off some of the financial burden represented by these customs duties and taxes, it may still very much be necessary to relocate operations to another country member of the EU or EEA, to balance out the effect of the Brexit, and its aftermath, for creative businesses which produce goods and products and export the vast majority of their productions.

Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas. Analysts think that the most important consequence of Brexit is “a dent to global GDP prospects and damage to confidence. This is likely to develop on the back of downward asset markets adjustments. Hence, more than ever, the fashion industry will have to work on moderating costs and capital expenditures“.

2.2. Free movement of services and capital?

The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, legislation in the area is not as developed as in other areas.

There are no customs duties and taxation on services therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the potentially disastrous effects of unsuccessful negotiations between the EU and the UK, during the withdrawal period.

Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries. Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member-states of the EU, even those outside the eurozone providing the transactions are carried out in euro. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.

Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.

Should the withdrawal negotiations between the EU and the UK not be successful, in the next two years, it is possible that such transfer costs, as well as some new controls on capital movements, be put in place when creative businesses and professionals want to transfer money across European territories.

It is advisable for creative companies to open business bank accounts, in euros, in strategic EU countries for them, in order to avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU.

To conclude, we think that it is going to be difficult for creative businesses to do fruitful and high growth business in the UK and from the UK for at least the next two years, as UK politicians and bureaucrats now have to not only negotiate their way out of the EU through a withdrawal agreement, but also to negotiate bilateral free trade deals that the EU negotiated on behalf of its 28 member-states with 53 countries, including Canada, Singapore, South Korea. Moreover, it would require highly-skilled, seasoned, non-emotional and consensual UK leadership to pull off successful trade negotiations with the EU and, in view of the populist campaign lead by a now victorious significant majority of conservative politicians in the UK up to Brexit, we think that such exceptional and innovative UK leaders are either not yet identified or not in existence, at this point in time. The pains and travails of the UK economy may last far longer than just two years and, for now, there is no foreseeable light at the end of the tunnel that all this fuss will be worth it, from a business and trade standpoint. Did Little Britain think about all that, when it went out to vote on 23 June 2016? We certainly do not think so.

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Modern methods of monetisation for independent and major record labels: 360 and beyond

Crefovi : 25/02/2016 9:00 am : Articles, Copyright litigation, Entertainment & media, Fashion law, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, News, Private equity & private equity finance, Technology transactions, Trademark litigation

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In the music ecosystem, the record label is the “facilitator” and the “doer” that produces, manufactures, distributes, promotes and markets music tracks and albums

record label, music label, record industry, artist, recording artist, sony, universal, warner

The term “record label” derives from the circular label in the centre of a vinyl record, which prominently displays the manufacturer’s name, along with other information. While the label business model has substantially changed, since the day when the term “record label” was spinned, some things are immune to the passing of time: the corporate structure of a record label is still the same, with a president in charge of the business of the whole company at the top, and various vice presidents in charge of different departments such as:

  • A&R (artists and repertoire) – in charge of discovering new talent, assisting the artist with song selection, choosing the people who will produce the tracks and deciding where the album will be recorded;
  • Art department – in charge of all the artwork that goes along with producing songs (including CD, MP3 and streaming cover art, advertisements and displays at music stores and websites);
  • Artist development or Product development – responsible for planning the careers of the artists who are signed to the record label, by promoting and publicizing the artists over the course of their career;
  • Business Affairs – which deals with the business side of things such as bookkeeping, payroll and general finances;
  • Label liaison – which acts as the liaison, between the label’s distribution company responsible for getting the vinyls, CDs, MP3 files into brick and mortar or online stores or aggregators, and the record company;
  • Legal department – responsible for all the contracts that are made between the record label and the artist, as well as contracts between the record label and other companies, and for managing any litigation or legal issues that may arise for the record label;
  • Marketing department – which creates the overall marketing plan for every album that the record company will release and coordinates the plans of the promotion, sales and publicity departments;
  • New media – in charge of dealing with the newer aspects of the music business, including producing and promoting music videos for the artist, supporting an artist in creating a presence on the internet and dealing with new technologies in which artists can stream music and music videos through the internet (YouTube, Vimeo, etc);
  • Promotion department – which main purpose is to make sure that an artist, and in particular his/her new songs, are being played on the radio and the artist’s videos are being played on MTV or VH1 channels as well as video streaming on demand websites (the latter in coordination with the New media team);
  • Publicity – which is responsible for getting the word out about a new or established artist, by arranging for articles to be written in newspapers, blogs and magazines, by dealing with radio and television coverage of an artist and
  • Sales – which oversees the retail aspect of the record business, working with record store chains and other music stores to get new albums onto retailers’ shelves, in coordination with the efforts of the Promotion and Publicity departments.

As the going got tough, due in part to the rise of music piracy and democratisation of free music online, consolidation of the record label sector occurred: many record companies, now, are huge conglomerates that own a variety of subsidiary record labels. These record corporations are majorly composed of a parent or holding company that owns more than one record label and are, for the most part, located in New York, Los Angeles, London or Nashville. For example, Warner Music Group owns three main labels, Atlantic Records Group, Warner Bros. Records and Parlophone. In turn, Warner Bros. Records owns, among many other record labels, Maverick Records (originally founded in 1992 by Madonna), Sire Records (founded in 1966 by Seymour Stein who went on to sign the Ramones and Talking Heads) and Reprise Records (founded in 1960 by Frank Sinatra to allow “more artistic freedom” for his own recordings).

This ruthless consolidation of the music label industry has now left three major labels in the playing field, since 2012: Universal Music Group, Sony Music Entertainment and Warner Music Group, which control about 60 percent of the world music market and about 65 percent of the United States music market[1].

Record companies that are not under the control or umbrella of the big three are considered to be independent, even if they are large corporations with complex structures. The most successful indie record label of all time is, without contest, A&M Records, founded in 1962 by trumpeter Herb Alpert and record promoter Jerry Moss. Over its 37-year run, A&M signed acts such as The Carpenters, Cat Stevens, The Police, Sting, Bryan Adams, Suzanne Vega and Sheryl Crow. Alpert and Moss sold A&M to Polygram in 1989 with the caveat that they would continue to manage it independently. As Polygram was later bought by Universal Music Group in 1998, A&M died the next year as a label and a brand. Today, some successful independent labels that cut out a market share for themselves are Beggars Group (which released Adele’s albums 19, 21 and 25) in the UK and Because Group in France.

A new paradigm is causing a revolution in the music industry, which record labels are desperately trying to grasp and cash in on. Since independent peer-to-peer file sharing service Napster was invented by Shawn Fanning and Sean Parker in 1998[2], retail consumers have collectively forced and pressurised the music and tech industries into re-thinking the offering of music distribution and music consumption tools. This disruption radically and irrevocably annihilates the traditional cash cow music business model, based on physicals (CDs, mini-discs, vinyls, cassettes, etc.), brick and mortar retail points (Virgin, HMV, etc.) as well as paraphernalia to listen to said physicals (CD and cassette players, HI-FI systems, etc.), to trade it for a much more competitive, virtual, lean, complex and data driven music tech business model based on digital revenues (streaming, downloads, internet radio, etc.), online distribution points (Amazon, iTunes, digital service providers such as Spotify and Deezer, etc.) and online consumption (on tablets, laptops, smart phones, ipods, etc.).

After much whining and denial from the vast majority of stakeholders in the music industry, in particular from music top management and acts who are baby-boomers and who differ in their core values from Generation X and Millennials, in that they prefer to “own” things rather than embrace the exponentially successful “sharing” and “access” economy favoured by their juniors, record labels are putting their act together to survive and adapt to this new paradigm.

In this context, I am offering here a snapshot of the most recent and astute evolutions and strategies engineered by record labels to play their cards right. Meanwhile, tech mega-successful and cash-rich multinational corporations such as Google and Apple watch at bay, already going after record labels in order to cut the middle man between precious and highly sought-after musical content and catalogues, and billions of retail customers who stubbornly refuse to fork in any substantial amount of money to listen to said music material.

 

  1. Record labels and the recording artists: what record deals are on the table today?

Today, more than at any other period historically, a wide range of choices and options is at the disposal of both record labels and talent, to find an agreement on how to make music together, as well as promote, market and distribute it.

1.1. Traditional deal

Recording contracts are legally binding agreements between recording artists and/or bands and a record label, enabling the label to exploit an act’s performance in a sound recording, in return for royalty payments.

Under most exclusive recording and traditional contracts, the recording artist will assign copyright in the sound recordings to the record company. An assignment is an irreversible transfer of ownership for the full life of copyright. In the case of sound recordings, this will be 50 years from release in the UK[3], and 70 years from release in France[4]. So, even once the artist has repaid all recording costs, the label will still own the masters.

In a traditional deal, exploitation is achieved through physical sales, such as CDs, vinyls and cassettes, the public performance and broadcasting of works, the sale of digital products such as downloads and mobile ringtones and streaming of tracks. The contract will define a record to include audio-visual devices as well, so “Dualdisc”, DVD, online videos and other new technologies will be caught by this definition.

The recording contract will usually require the artist to sign to the label exclusively. As this means that the artist can neither record for another label without permission nor leave the contract if unhappy, record labels justify this exclusivity with the “huge” sums of money invested in breaking an act and by claiming that they need this level of control in order to improve the chances of making a profit or cut their losses. This strategy can backfire though, if record labels cannot justify this exclusivity through factual investments in their acts, as illustrated by the very public showdown between British songstress Rita Ora and Jay Z’s label, Roc Nation[5].

Major labels, which are the record companies in the strongest position, and with the strongest inclination to offer traditional deals, will normally sign the act to a worldwide deal. Companies such as Universal and Sony Music Entertainment have offices in all key markets, together with the vast distribution network capable of delivering their latest offerings to a supermarket near you. Split-territory deals are less likely with major record labels, but independent labels may be more willing to agree so such an arrangement.

As far as the term is concerned, it is calculated by reference to an initial fixed period of usually 12 months – when the recording artist will make his first album – followed by further option periods, also usually of 12 months, allowing the labels to extend the contract if they so wish. There will be a minimum commitment within each period, requiring the act to deliver a certain number of tracks, to a releasable standard, with perhaps a total of five or six albums expected under the deal.

Advances are sums of money paid to the recording artist on account of future royalties, in a traditional record label deal. They are paid when the act signs to the label, and again as and when further options are exercised.

If the traditional record agreement is well negotiated by the entertainment lawyer representing the artist, the advances will solely be repaid by the recording act when his record sales generate sufficient royalties to cover them; failing that, the label bears the loss. In a traditional deal, the talent is paid royalties based on record sales. In a typical major-label deal, the artist will earn somewhere between 10 and 25 percent of the record’s dealer price, which may be between GBP6.50 and GBP8.50 a unit. Before they’ll see any money, acts will have to recoup recording costs, advances and usually 50 percent of all video costs. The label will make additional deductions, reducing the real royalty rate still further. Standard deductions include a packaging deduction of 20 to 25 percent on CDs, a reduced royalty rate on foreign sales, budget records and record clubs, a reduced royalty on TV-advertised albums, and often no royalty at all on free goods (records given away to retailers and the media). Overall, an act may only get paid on 90 percent of actual sales, since retailers are able to return records they don’t sell. The record label holds on to a portion of the act’s royalties, usually 10 percent, as a reserve, until all sales are verified. Moreover, the act is expected to pay the producer royalty from their own royalty share: for example, if a producer is paid a 3 percent royalty and the artist 15 percent, then the artist will end up with an actual rate before deductions of 12 percent (the producer, however, will be earning this healthy 3 percent from the first record sold, while the act will only get paid once the deductions and any cash advances have been recouped).

In reality, most “deductions” are artificial and in no way reflect the true cost to the label. Packaging on CDs manufactured in volume is cheap. Similarly, as more records are sold through digital channels, a reserve for breakages and the allocation of free digital goods ceases to make any sense at all, other than boost the label’s profits.

Which means, that today, many acts just refuse flat out to sign what they think is an antiquated and disadvantageous traditional record deal, even with a major, and prefer to either self-release – leveraging social media to target their audience and fans, such as very successful hip hop act Macklemore & Ryan Lewis, whose debut single Thrift Shop peaked at number one on the US Billboard Hot 100 chart in 2014 (the first song since 1994 to reach the top spot without the backing of a major label in the US) – or look at alternative record deals which better match their own expectations, aspirations and sense of fairness.

Reportedly, Macklemore & Ryan Lewis are signed to their own imprint, Macklemore LLC, but have a deal with Warner Bros. Records, which sees the major label take a chunk of their sales in exchange for distribution funding for their debut album, the Heist. Speaking about the deal, Macklemore said at the time “Warner had never done this. That’s the interesting thing about where the music industry is right now: you have major labels that are willing to take unconventional approaches because the old model is crumbling in front of us. They’re open to it[6].

Indeed, if majors want to keep signing successful new or seasoned acts, they need to become more flexible while negotiating record deals. Also majors need to understand that their strength lies in their global, impactful and far-reaching distribution network as well as in the massive economies of scales that they make, as a result of their conglomerate business model, which is structured around dozens, even hundreds, of subsidiary record labels that share promotion, manufacturing, PR, new media, digital media, sales and marketing services together.

1.2. Net profit deal

Speaking of alternative record deals, this is where the indie record net profit deal comes into play.

As mentioned above, an independent label is a record label that is not affiliated in any way with a major and which uses independent distributors and/or digital distribution methods to get their releases into stores, both online and into traditional brick and mortar music retailers.

The net profit deal, proposed by indie labels, had rapidly increased in use, as an alternative to the traditional type of record deals, at the beginning of the 21st century.

To compute the net profits in a net profit deal, the record company deducts off the top its actual out-of-pocket costs for recording, manufacturing, promotion, marketing, etc. Some labels also deduct a so-called “overhead fee” of 10 to 15 percent of the gross record sales income. After the record company deducts all of these expenses and reimburses itself, the label then pays the recording artists whatever percentage of the profits their contract requires (usually 50 percent of net profits).

Though this percentage is obviously much larger than the 10 to 25 percent royalty range mentioned above for traditional record deals, the recording artist in a net profit deal is getting 50 percent of the income from records sold, but only from what is left after all expenses are paid. In traditional record deals, on the other hand, the act starts getting their artist royalties after the label has recouped the recording costs – and any cash advances to the artist – from the talent’s royalties. Major record labels absorb most other costs out of their own pocket – such as duplication, shipping and staff costs – and those costs do not factor into the calculations of what is to be paid to the artist.

In most net profit deals, a label does not have to pay the artist anything (neither hefty advances nor, under many contracts, any mechanical royalties from internet downloads or physical sales) until the label has recouped all costs fronted by it. This is, of course, appealing to labels, particularly in the current music business climate when the foremost concern of indie labels are front-end costs and just trying to survive financially.

This advantage needs to be weighed against the back end – that is, if the record is successful and the costs relatively small in comparison, then the net profit deal will be less profitable for the label than would be the case with a traditional record deal.

Like in a traditional record deal, the default situation in a net profit deal is that the recording agreement sets out that the record label is the copyright owner of the performances recorded during the term of the recording agreement, by way of assignment of copyright. In cases where the artist is able to cause a reversion of ownership of his recorded performances contractually via negotiation (an occurrence that usually happens only with the biggest superstars or in the case of a licensing of preexisting masters agreement), that right is often subject to the record company having recouped all costs paid on behalf of the artist.

Almost all record labels, when entering into a deal with a recording artist, will insist on the right to handle the artist’s product not just in the physical medium, but also will want to have the right to distribute and sell the artist’s recordings in the digital medium through outlets such as iTunes and YouTube, including downloads to computers and over-the-air downloads to mobile devices for both full track downloads, ringtones, ringbacks and other wireless uses. On a traditional label deal, most labels that work on a royalty basis will try to maintain the payment of just a royalty to the artist in the same way that a royalty is paid on a physical sale, but generally without factoring in packaging deductions and free goods, since these elements are irrelevant. Payment of a 15 percent royalty on a 99 cents download (i.e. 15 cents), plus statutory mechanicals, leaves a nice margin for the label, with the digital music service downloader paying the label 70 cents on the download. However, on a net profit deal, the artist will do much better than a royalty deal of 15 percent. On a 50-50 split of net, the artist will see about 25 cents plus mechanicals, whereas with the royalty traditional deal, the artist will see just 15 cents plus mechanicals.

As digital income is the fastest and exponentially growing area in music revenues[7], it is likely that more and more acts will be drawn to the net profit deal option, which ensures a 50-50 split on streaming and download revenues, rather than the traditional record deal option.

Recording artists, such as Eminem and “Weird Al” Yankovic, as well as managers, such as 19 Entertainment founded by music mogul Simon Fuller, have swiftly brought this issue relating to the split of earnings on digital revenues to the attention of the general public, by filing high-profile lawsuits against the three majors[8]. The defendants later settled these lawsuits out-of-court, consenting – under confidential terms – to hike up artists’ share of earnings on digital revenues, but their reputation got tarnished in the process[9].

As there is a clear dichotomy between the labels’ view that royalties for both downloads and streams should be accounted for to the artist as sales, and the point of view of recording artists and their collecting societies which errs on the side of a stream or download being considered as “mechanical reproduction” or as “performance” under a license, it is well worth for labels to make time in order to clarify, and lobby about, the subject matter with the European Union’s Commission and the United States Copyright Office[10]. Indeed, the European Commission currently plans to examine whether action is needed on the definition of the rights of “communication to the public” and of “making available” under copyright law, as well as to assess the role of alternative dispute resolution mechanisms. Both major and indie labels should join forces, in order to lobby the European Commission and other European and US institutions, about that issue of defining what digital revenues are in law, (license or sales or a hybrid of both?) since this single point may seriously impact their future overall revenues, which will increasingly be derived from digital income.

1.3. 360 deal

A 360 deal is a boon for any record label. Mostly favoured by major labels, a 360 deal has two components:

  • the first part of the 360 deal contract relates to record sales and contains basically the same terms than those of a traditional record deal and
  • the second part of the 360 deal contract gives the label a right to receive a percentage of certain other income streams which labels have not historically shared in, such as artist’s touring and merchandising income as well as the artist’s songwriter and music publishing income (if the recording artist is also a songwriter).

The first reported 360 deal was Robbie Williams’ agreement with now-defunct major EMI in 2002[11]. Acts such as the Pussycat Dolls and Paramore have been reported in the media as having been signed to 360 deals and, in 2007, it was confirmed that Madonna had signed a USD120mn 360 deal with concert promotion company Live Nation. It was reported that in exchange for cash and shares, Madonna gave Live Nation distribution rights for 3 future albums as well as rights to promote live concerts, sell merchandise and license her name and image.

While the sell of a 360 deal to an artist may be a tough call, majors and their affiliates justify their offer of the 360 deal by citing significant investments they make in an artist’s career as well as the dramatic decline in income from sales of recorded music. Factually, it is true that income from sales of pre-recorded music reached its peak in 1999 at approximately USD14.5bn. By 2012, that amount had shrunk to only approximately USD7bn – a decline of more than 50 percent, not accounting for inflation.

Under the traditional paradigm, the label would pay the recording artist a small royalty, which was even smaller after all the deductions. Hence, the artist could expect to receive no recording royalty at all, unless his album was a major commercial success. However, the act got to keep everything else: publishing, merchandising, touring, endorsements, etc.

Since recording artists, especially in the USA where the physical market is moribund and where no neighbouring rights are paid on terrestrial broadcast, often generate more money from other activities than record sales and performance, major and indie labels have insisted on taking a piece of the action, by concocting 360 deals. For instance, Lady Gaga’s Monster Ball Tour grossed over USD227mn of touring income, and 50 Cent’s endorsement deal with Vitamin Water turned golden when he accepted shares in the company in exchange for authorizing the use of his professional name in “Formula 50”: when Coca-Cola purchased Vitamin Water’s parent, Glacéau, for USD4.1bn, 50 Cent’s shareholding became worth over USD100mn.

These developments have spurred labels to seek to participate in all the possible revenue streams generated by the artist. Even small labels, known as production companies, get in on the action and insist that new artists sign 360 deals with them, even if they put little or no money into recording and make no promises in regard to marketing or promotion, while getting an assignment of copyright on the master recordings!

There is no standard 360 deal as the terms vary substantially from deal to deal, and from label to label. A lot depends on the track record and negotiating power of the artist, plus how much of an advance is being paid.

A “full” 360 deal allows the label to share in all entertainment industry income, including touring, music publishing, merchandising, product endorsements, book publishing income (if the artist writes a book), songwriter and music publisher income (if the artist is a songwriter), etc.

Usually, the label’s share of those non-record kinds of income is in the range of 10 to 20 percent, but for new artists if can get as high as 50 percent. A typical 360 deal record agreement would set out the following splits, in relation to the label’s take for various streams:

  • 50 percent merchandise;
  • 25 percent touring and live performance;
  • 25 percent “digital products” such as ringtones and sales from the artist’s fan site;
  • 25 percent publishing;
  • 25 percent endorsements;
  • 25 percent of any other income from the entertainment business including appearances on TV and movies, theatre, book publishing, etc.

Today, all major labels and their affiliates usually demand 360 terms, especially when dealing with emerging artists. So the artist may not have much choice, especially if his strategy is to leverage the formidable distribution channels and economies of scales offered by a major, to achieve wide-reaching and fast success.

1.4. Record deal in the EDM world: still the wild west

In 2010, the acronym “EDM” was adopted by the music industry and music press as a buzzword to describe the increasingly commercial electronic dance music, club music or simply dance, scene.

Major EDM acts, called DJs, such as David Guetta, Deadmau5, Calvin Harris, Steve Aoki, Avicci or Skrillex, often make appearances on main stages during the final nights of high profile festivals such as Lollapalooza or Coachella and, in December 2015, EDM was reported to be a USD6.2bn global industry[12]. In a nutshell, EDM is one of the most lucrative genres in the music industry today.

While top DJs can demand GBP50,000 to GBP200,000 per gig – with hardly any overheads -, record deals relating to some of the EDM tracks that these DJs play during those live gigs are either non existent or incredibly pro-label.

For example, in 1996 artist and songwriter CoCo Star (real name Susan Brice) released a track “I need a miracle” under Greenlight Recordings in the US, which became a club hit. It was then re-recorded and release on EMI’s Positiva imprint in the UK a year later. In 1999, a British DJ mashed up Brice’s vocals from the song with German act Fragma’s track Toca Me. The mash-up was released without Brice’s permission on a bootleg white label for which she was never paid. This sparked a buzz in clubs, and Fragma released their own version of the bootleg, Toca’s Miracle, on Tiger Records in Germany and Positiva in the UK in 2000. It went to N.1 in 14 countries worldwide. While Toca’s Miracle has reportedly sold more than 3 million copies, Brice claims she was never paid for any of these remixes[13].

While major labels and large indie labels may take a bit of convincing to enter the underground – and drug-fuelled – EDM sector, there is an untapped opportunity here that they can no longer ignore. The public wants and is prepared to pay for EDM, EDM has grown to become a USD6.2bn to USD6.9bn global industry[14] and it is still an Eldorado largely untapped by reputable labels, meaning that the best talent may want to focus on other “more respectable” musical genres for fear of being “screwed” by bootleg white labels which currently populate the EDM scene.

1.5. Label services deal: à la carte and en vogue

At the other end of the spectrum of a 360 deal, lies the label services deal which is a very palatable alternative to business savvy artists. Indeed, the rise of social media, digital distribution, online platforms and direct-to-consumer technology has empowered artists like never before and brought them closer to fans.

The services model sees the record deal flipped on its head: instead of assigning the copyright on their sound recordings for an upfront advance and the label footing the campaign bill, acts will receive the lion’s share of royalties (often 100 percent) from a release and pay a company for a range of services from an à la carte menu of promotion, distribution, marketing, press and a wide range of other essentials[15].

Interestingly, the services model is not just reserved for artists with enough capital behind them to fund a whole campaign and an already established fanbase likely to ensure a decent return. This services deal is being used by record companies too, as a quick and convenient way to establish an office abroad, push releases into international territories after domestic success, or to simply augment their in-house functionality with new capabilities as and when needed.

Although a relatively new idea in the music industry’s history, the number of companies offering services to both artists and labels has skyrocketed, making the sector fiercely competitive.

PIAS Artist & Label Services, Believe Digital, Republic of Music are some of the most representative label services companies out there, with aggregators, such as the Orchard (now fully owned by the major Sony Music Entertainment), and majors’ owned companies, such as Universal’s Caroline International, Sony RED and Warner’s ADA, very much active in this market.

Even independent rights management groups, such as Kobalt and Fintage House[16], are widening their services offering, adding label services to their roster. Kobalt in particular, plays the transparency card with brio, by setting out on its website the key characteristics of Kobalt’s “new model” contracts, contrasting them against the key terms of a traditional label deal[17]. For example, as explained on Kobalt’s website, while the term of the label services deal is 3 years with Kobalt, a traditional deal will have a term of 7 years (for a license, a rare occurrence) to the life of copyright. While the talent gives up ownership and control over their recordings, in a traditional deal, Kobalt highlights, on its site, that artists retain full ownership and control of their recordings. While a traditional deal provides for semi-annual accounting with minimal detail, says Kobalt, it commits to provide quarterly accounting with line-by-line detail on every type of income. And the last straw: while a traditional record deal will not cater for any pay-through of neighbouring rights income, Kobalt says that it will collect and pay to artists the label share of neighbouring rights income!

What’s not to like? Of course, major acts are totally smitten with Kobalt’s offering and the likes of 50 Cent, Paul McCartney, Boy George, Busta Ryhmes, Maroon 5, Skrillex, Courtney Love, Dr Luke, Max Martin and Foo Fighters have jumped on the bandwagon of Kobalt’s label services deals.

Personally, I am not surprised that it is a private equity-owned company, such as Kobalt[18], that is currently delivering some of the act-friendly record deals to the talent, as far as transparency, fairness and redistribution of neighbouring rights and digital revenues are concerned: Kobalt is not managed by “pure” music people!

If majors want to attract legendary artists, nowadays, they must up their game in terms of transparency, redistribution of digital income, auditing and reporting of revenues[19]. Their old ways may work on new talent, who wants to make a fast buck, but seasoned acts will not go anywhere near a 360 or traditional deal those days – especially since they have the cash to auto-finance their distribution and marketing campaigns through label services companies such as Kobalt. What these acts are interested in, is to keep the rights to their recordings and catalogues and monetize those rights to the fullest, through music publishing, neighbouring rights, performance revenues and mechanicals.

 

  1. Record labels and digital service providers: where the wild things are

As mentioned above, the major beef that artists and their managers have against labels and digital service providers is the lack of transparency, especially as far as digital revenues and neighbouring rights are concerned.

Digital service providers, or “DSPs” are tech companies providing music streaming subscription services. Apple Music, Spotify, Deezer, Tidal, Google-owned YouTube Red are some of the largest DSPs in the music streaming sector[20].

The stakes are getting higher by the minute, with digital revenues – which comprise income from both digital downloads and streaming –growing by 6.9 percent to USD6.9bn in 2014, and now on a par with the physical sector. Indeed, globally, like physical format sales, digital revenues now account for 46 percent of total music industry revenues. In 4 of the world’s top 10 markets, digital channels (streaming and downloads) account for the majority of revenues (i.e. 71 percent of total 2014 industry revenue in the US; 58 percent of total 2014 industry revenue in South Korea; 56 percent of total 2014 industry revenue in Australia and 45 percent of total 2014 industry revenue in the UK).

In particular, streaming is going from strength to strength, with music digital subscription services – including free-to-consumer and paid-for tiers – growing by 39 percent in 2014, while downloading sales predictably declined by 8 percent but remained nonetheless a key revenue stream as they still account for more than half of digital revenues (52 percent). However, streaming subscription revenues offset declining downloading sales to drive overall digital revenues, pushing subscription at the heart of the music industry’s portfolio of businesses, representing 23 percent of the digital market and generating USD1.6bn in trade revenues.

Music industry analyst Mark Mulligan predicts that streaming and subscriptions will grow by 238 percent from the 2013 levels, to reach USD8bn in 2019, with download revenue declining by 39 percent. He concludes that streaming and subscriptions will represent 70 percent of all digital revenue by 2019.

Universal Music Group is capitalising on the growth of streaming with impeccable flair, naming music and media industry executive Jay Frank, who founded the music and marketing analytics companies DigSin and DigMark, to the newly created role of Senior Vice President of Global Streaming Marketing[21]. His role will be to get UMG acts on playlists, in particular through Digster, a company that creates themed playlists featuring mostly MHG recordings.

While this evolution towards more music streaming is very customer-friendly (who does not want to have the option to select and potentially hear millions of tracks, anywhere in the world, on a device no bigger than the size of a jean’s pocket?), new legal and business issues have arisen as a result.

In particular, right owners in the recorded performance of a composition – typically, the record label, the recording artist-performer and non-featured musicians and vocalists – repeatedly ask themselves how they are financially benefiting from this surge in streaming consumption and income. How do they get paid?

Also, more and more DSPs want to know how they can access high-quality musical content and obtain the right to stream the widest music catalogues on their platforms, at a reasonable price. Since scaling up is the key to success for any technology company, DSPs also want to have the right to stream such musical content all over the world.

Finally, as the surge in musical digital consumption and income is becoming factual evidence, certain categories of income streams are developing and taking more of a preponderant role. For example, sound recording performance rights, or “neighbouring rights”, are a growing source of global revenue for recording artists and record labels. While recorded music sales of physical products have declined 66 percent since their high in 1999, revenues from overall neighbouring rights have increased dramatically, reaching Euros2.034bn globally in 2013. Musical rights represent around 90 percent of the royalties collected in relation to neighbouring rights. Audio-visual rights are worth around Euros200mn, benefiting mainly to performers, while the rest of these royalties (around Euros1.834bn) relate to musical neighbouring rights. Where are these musical neighbouring rights going? How are they collected then distributed?

2.1. Streaming equity

As a preliminary remark, it is worth noting that labels, in particular majors, were very prompt in renewing their grip on music distribution: they invested massively in DSPs, whenever the opportunity was arising.

For example, Warner Music Group acquired up to 5 percent of Soundcloud in October 2014[22], and Warner, Universal and Sony have quietly muscled out stakes in the hottest digital streaming services, such as Spotify but also in choose-your-own-adventure music video purveyor Interlude and song-recognition giant Shazam – valued at USD1bn in its latest round.

What have the labels been giving the startup DSPs, aside from legitimacy, to secure these “sweet deals”? All-encompassing access to the artists and their songs. As explained in point 2.3. (Neighbouring rights and digital performance of sound recordings) below, the artists derive some minimal amount of royalties from these new distribution channels, but they were not getting any of the ownership.

Until February 2016 at least, when, during his latest investor conference call, Warner Music’s CEO Stephen Cooper announced that the label will pay its recording artists a portion of any income it earns from equity stakes in services such as Spotify and Soundcloud. With Spotify planning on announcing its IPO during the second quarter of 2016, such commitment on Warner’s end is more than a token gesture, as it owns a 2 to 3 percent stake in Spotify’s shareholding, which will probably be valued at around USD200mn.[23]

This is a very smart PR move indeed from Warner because it means that this major understands that it needs to have all its recording artists on board, as far as streaming services are concerned.

Streaming is where consumer behaviour and affinities are going, but currently Google-owned YouTube is growing quicker than everyone else, while labels need premium and freemium services to make up ground fast. Which is why they cannot afford the Black Keys-Taylor Swift-Adele- Coldplay-Radiohead trickle to turn into a free torrent available at will to fans. They need artists to be as vested as they are into streaming and DSPs.

It remains to be seen whether Sony and Universal will follow suit, as far as sharing streaming equity with their respective acts is concerned.

2.2. Breakage

In May 2015, the Verge revealed details of the contract signed between major label Sony Music Entertainment and DSP Spotify, giving the streaming service a license to utilize Sony’s catalogue[24].

The 42-page licensing agreement was signed in January 2011, written by Sony Music and revealed that Spotify had to pay USD42.5mn in yearly advances to Sony for the two years of the contract. It also detailed the subscriber goals that Spotify had to hit and how streaming rates were calculated. Most interestingly, the contract detailed how Sony used a Most Favoured Nation clause to keep its yearly advances from falling behind those of other music labels, how Spotify could keep up to 15 percent of revenues “off the top” from ad sales made by third parties, and the complex formula that determines how much labels get paid per stream. What the contract between Sony and Spotify did not stipulate was what Sony could and would be doing with the advance money. Did the money go into a pot to be divided between Sony Music’s artists, or did the major keep it to itself?

These revelations sent a shockwave in the music industry, with artists and their managers up in arms because they had already complained that earning on average less than one cent per stream play – between USD0.006 and USD0.0084 according to Spotify Artists[25] – was neither reasonable nor fair. Top talent such as Taylor Swift and Radiohead, in particular, left Spotify with fracas, in 2014 and 2013 respectively, complaining that end-consumers did not pay enough to access their catalogues on Spotify.

But that is just one reason why artists did not get paid much at all per stream, the other reason being breakage: indeed, DSPs, which are always on the lookout for top music catalogues and content to stream to their retail consumers, readily paid hefty “minimum revenue guarantees” to labels, over the past years, to get access to, and be able to license, their music recordings.

For example, French streaming service Deezer, which planned to organize a (later on aborted) IPO from its home city in Paris during the last quarter of 2015, revealed on its “Autorité des Marchés Financiers” registration documents, that it had paid a Euros257mn advance to record companies in instalments over a period of 3 years (2012: Euros57.1mn, 2013: Euros87.4mn and 2014: Euros112.5mn). In 2013, Deezer even had to pay 94 percent of its total revenues to record companies as minimum guarantees (no wonder that IPO went south)! Meanwhile, royalties from subscriptions and ads fell short of this advance payment in 2012, 2013 and 2014 – totally approximately Euros236.4mn. In total, the deficit between the two numbers amounted to Euros20.6mn across the 3-year period (2012: Euros5.4mn; 2013: Euros13.2mn and 2014: Euros2mn). This Euros20.6mn deficit is unallocated “breakage”[26].

Therefore, while the payment of an advance by a DSP to record companies is justified if the streaming platform then generates the same or even more revenues through subscriptions and ads, the system is inherently flawed if the advance ends up exceeding the annual streaming royalty income. When that happens, the label is inevitably left with a lump sum – in this case over Euros20mn – sitting in record company bank accounts, but which cannot be attributed to any specific artists.

One of the three majors, Warner, feeling the heat, was the first to share this breakage with their acts as standard company policy since 2009, even attributing a line to “breakage” on their artists’ royalty statements. Sony has also agreed to share with its talents proceeds from an upcoming sale of its equity in Spotify. Meanwhile, over 700 indie labels have signed up to the Fair Deal Declaration from the Worldwide Independent Network, which pledges to “account to artists a good-faith pro-rata share of revenue and other compensation from digital services[27], and the French ministry of culture issued a voluntary agreement in October 2015 requesting that music industry stakeholders agree to share with artists all income received from online music services and to guarantee them a minimum wage, in return for the digital use of their recordings[28].

These reactions from both private and public stakeholders in the music industry demonstrate that labels, in particular, majors, will not get away with egotistically keeping all advance income paid by DSPs for themselves. Either the labels self-regulate, and redistribute a portion of this extra income to their recordings artists, or European Union regulators – busy bees with their ongoing general overhaul of copyright law in the 28 member-states of the EU – will eventually make it compulsory, in law, for labels to redistribute a portion of the breakage as well as minimum revenue guarantees to their acts.

2.3. Neighbouring rights and digital performance of sound recordings

Neighbouring rights, also called “related rights”, were consecrated in law, step by step, in order to ensure that people who are “auxiliaries” to the creation and/or production of content (artists, performers, music producers, film producers, non-featured musicians and vocalists, etc.) could have more control over their creative endeavours.

There is no single definition of neighbouring rights, which vary much more widely in scope between different countries than authors’ rights or copyright.

However, the rights of performers, phonogram producers and broadcasting organisations are certainly covered by related rights, and are internationally protected by the Rome Convention for the protection of performers, producers of phonograms and broadcasting organisations, signed in 1961. Aside from the Rome Convention, another international treaty addresses the protection of neighbouring rights in the musical sector: the WIPO performances and phonograms treaty (WPPT) signed in 1996.

At the European Union level, three directives have been instrumental in developing a harmonized legal framework relating to neighbouring rights: the directive of 27 September 1993, relating to the coordination of certain rules on author’s rights and neighbouring rights applicable to satellite broadcasting; the directive of 29 October 1993 – replaced by the directive n. 2006/116/EC of 12 December 2006 – on the term of protection of copyright and certain related rights; the directive n. 2001/29/EC of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.

As mentioned above, sound recording performance rights represent the bulk of all neighbouring rights collected worldwide, and they are a growing source of global revenue for recording artists and record labels. For example, in the US, SoundExchange, the organisation responsible for collecting and distributing sound recording performance royalties, distributed USD590mn in 2013, a dramatic increase from the USD3mn the organisation distributed in 2003. In the decade since SoundExchange’s inception, the organisation has generated USD2bn in royalties to artists and record companies.

Out of a total of Euros2.034bn of neighbouring rights collected in 2013, 48.9 percent originate from Europe (Euros1.101bn), 30 percent from North America (Euros681mn), 11.9 percent from South America (Euros268mn) and 8.6 percent from Australasia (Euros192mn)[29].

With a 28 percent share of worldwide royalties, the US is the main market for neighbouring rights, even though the collection of such rights is limited to the public performance of sound recordings on digital medium only (such as online radio like Pandora, satellite broadcasting like Sirius/XM and also online streaming of terrestrial radio transmission like iHeartRadio). Unlike most of the world, the US does not apply sound recordings performance rights to broadcast radio, terrestrial radio and performance of sound recordings in bars, restaurants or other public places.

The market of neighbouring rights is mainly concentrated in 10 countries, which control 82 percent of worldwide royalties, with a strong concentration in Europe. Apart from the US, the United Kingdom (12 percent), France (11 percent), Japan (7 percent), Brazil (7 percent), Germany (7 percent), Argentina (3 percent), the Netherlands (3 percent), Canada (2 percent) and Norway (2 percent), are the top 10 worldwide markets. Outside the US, sound recordings enjoy broader performance rights for broadcast (including terrestrial radio), public performance and so-called communication to the public.

Globally, sound recording performance rights are administered by music licensing companies or collecting societies. These organisations are responsible for negotiating rates and terms with users of sound recordings (e.g. broadcasters, public establishments, digital service providers) collecting royalties and distributing those royalties to performers and sound recording copyright owners, i.e. record labels.

There are around 60 collecting societies around the world focused on sound recording performance royalties. These collecting societies may provide a statutory license to DSPs.

However, neighbouring rights deriving from streaming revenues generated on the DSPs’ platforms are almost always managed directly by the record labels and their representatives. Indeed, it is important to note that statutory licenses do not apply where there is a direct licensing deal between the DSP and the record label. So, for example, the 3 major labels have each directly signed a licensing agreement with each of the DSPs, while other direct deals have been signed between Clear Channel, the owner of digital radio IHeartMedia, and labels such as Glassnote (the label for Mumford and Sons) and Big Machine (Taylor Swift’s label). Independent labels have teamed up to create global digital rights agencies such as Merlin, which offer the attractive option of globally licensing, via a single deal, the world’s most important and commercially successful indie labels to DSPs. Among those that have a license with Merlin, feature Soundcloud, Vevo, Google Play, Deezer, YouTube and Spotify.

In 2014, internet radio Pandora entered its first direct deal with record labels, outside the statutory system, by establishing a partnership with Merlin[30]. Meanwhile, neighbouring rights collection body SoundExchange keeps a tight leash on Pandora, arguing that the USD0.0014 paid by Pandora to record labels for every stream is too low and should be increased to USD0.0025. As a result, in December 2015, the US Copyright Royalty Board increased the basic per-song rates paid by Pandora (and its competitors such as iHeartRadio) to USD0.0017, or slightly more than 20 percent.[31]

While Pandora is now willing to sign direct deals with record labels, as explained above, it does not mean that the cordial relationship is devoid of any strain: the three majors and the RIAA filed several copyright infringement lawsuits against Pandora and its competitors in 2014, for playing pre-February 1972 recordings without making any royalty payments. The labels said both Pandora and competitor SiriusXM took advantage of a copyright loophole, since the master recording for copyright was not created federally, in the US, until 1972. However, the labels claimed that their master recordings are protected by individual state copyright laws and therefore deserve royalty payments.[32] Several court decisions were released since, and the federal courts unanimously found against SiriusXM and Pandora, and for the payment of royalties on play of pre-February 1972 recordings.

Since direct deals are signed between record labels and DSPs, this means that it is down to the parties to organise their licensing contractual agreements as they see fit. These licensing deals between DSPs and labels, which are 3 to 4 years old at best, have so far had almost no impact on the way recording deals signed between label and recording artists, are drafted, as far as digital revenues are concerned.

Indeed, the way the licensing agreement between the DSP and the label is drafted is automatically going to have an impact on the record deal signed between the record label and the recording artist. If a record deal was signed more than 4 years ago, it will most definitely not provide for a clear and transparent redistribution of digital income to the artist, by the label.

As I mentioned in point 1.2. (Net profit deal) above, labels and recording artists are currently fighting hard to establish whether streaming is replacing radio or sales. Currently, labels typically pay artists on either one or the other of those models, and more often on the basis of a stream being a sale. Why are labels most commonly treating streaming as sales (which is rather counter-intuitive since streaming is all about “access” not “ownership”)? Because, as explained in point 1.2. above, the percentage that labels have to pay artists is so much lower, often in the 10 to 15 percent range if the artist is signed on a traditional or 360 record deal, rather than around 50 percent for a license. Music industry experts propose to assimilate streaming to a hybrid between sale and license, with a hybrid rate that sits in the middle. Doing so would double the amount of money more artists make from streaming, instantaneously transforming its revenue impact for many.

It is highly probable that new record deals will be negotiated at length, in particular by major acts, as far as digital revenues are concerned, in the very near future, especially in the aftermath of the breakage “scandal” and the controversy over the sale or license nature of a stream.

 

  1. Record labels and collecting societies: How to collect micro-payments around the world

As mentioned above, there are around 60 collecting societies around the world focused on sound recording performance royalties. These collecting societies may provide a statutory license to public venues, DSPs or radios, etc. from which they later collect neighbouring rights royalties, which are later paid back to record labels, performers and non-featured musicians and singers.

3.1. How are neighbouring rights protected and collected on a territorial-basis?

While it could appear that neighbouring rights are protected and remunerated in a very homogenous way around the world, thanks to the structured international and European legal framework described in point 2.3. (Neighbouring rights and digital performance of sound recordings) above, in fact these related rights and the business practices of collecting societies are very different and vary from territory to territory.

Each of the 60 collecting societies operates in a territory that recognises performances in slightly different ways and has a specific business practice.

For example, the US Copyright act grants owners of sound recordings an exclusive right to “perform the copyrighted work publicly by means of a digital audio transmission“. This right is limited by a statutory license for so-called “non-interactive digital audio transmissions“. Therefore, services which comply with the statutory license may stream sound recordings without permission of the copyright owner, subject only to remitting data and payment to SoundExchange. The US Copyright act specifies how SoundExchange divides and distributes the royalties: 50 percent go to the sound recording copyright owner – i.e. the record label; 45 percent is distributed to the featured recording artist; and 5 percent is sent to an independent administrator which further distributes those royalties to non-featured musicians and vocalists.

In the United Kingdom, the UK copyright, designs and patents act grants sound recording copyright owners exclusive performance rights in their sound recordings. In addition, the UK act gives performers on those sound recordings a right of “equitable remuneration” for a share of the licensing proceeds for uses of the sound recordings. Therefore, when a sound recording is broadcasted in the UK, the performers on those sound recordings have a right against the producer (i.e. the record company) of the recording as to a share of the producer’s revenue from that usage. From a legal standpoint, it is very different from the US statutory license regime where the featured artist’s share is as against the user of the sound recording, not the record company. As mentioned above, the UK is the second largest market for neighbouring rights globally. According to the 2014 financial results of UK collecting society PPL, it collected a total of £187.1mn total license fee income (from broadcast, online, public performance and international revenue sources).

In Germany, the Law on copyright and neighbouring rights similarly grants performers and producers rights to remuneration for the performance of their sound recordings. While this German law grants performers rights of equitable remuneration for the broadcast of communication to the public of their fixed performances (i.e. sound recordings), it grants producers (i.e. record labels) a share of the performer’s proceeds from the licensing of broadcast and communication to the public rights. Therefore, the producers’ revenue from such activity is as against the performer, not the user of the sound recording. This is the exact opposite to the UK regime, and nothing like the US system.

In France, the Intellectual property code also grants sound recording copyright owners exclusive performance rights in their sound recordings, through a statutory license. Like in the US, digital service providers which comply with the statutory license may stream sound recordings without permission of the copyright owners, subject only to remitting data and payment to SCPP (when the record producer is a major), SPPF (when the record producer is an independent label), ADAMI (for performers) and SPEDIDAM (for non-featured musicians and vocalists). The Intellectual property code provides that 50 percent of the royalties go to the sound recording copyright owner (the label), while the other 50 percent go to the performers and non-featured musicians and vocalists.

3.2. How are neighbouring rights protected and collected on a cross-border basis?

One of the recurring questions that artists and labels ask themselves is how they are protected from one territory to the other. Indeed, music is a global business, especially in the digital era: artists successful in one territory often are successful in others.

Worldwide success implies that the sound recordings of artists are going to be performed publicly in other territories than where they reside. How, then, can performers and producers collect sound recording performance royalties in territories where they are not nationals and may not have direct agreements with the relevant societies?

The answers are complex and derive from the application of the provisions set out in the Rome Convention and the WPPT above-mentioned.[33]

Article 2 of the Rome Convention details the level of protection that it grants nationals of contracting states in each others’ territories. In short, contracting states owe nationals of other territories the same level of protection they recognise for their own nationals. This concept of “National Treatment” is key to international copyright treaties and works to ensure that members do not unfairly discriminate against nationals of other contracting states.

Articles 4 and 5 of the Rome Convention specify that sound recordings made by nationals of contracting states, first recorded in contracting states, or first published in contracting states, are eligible for National Treatment. Similarly, a performer’s performance will be granted National Treatment if it was rendered in a contracting state, incorporated in a protected sound recording, or if not recorded, broadcast from a contracting state.

Article 12 of the Rome Convention sets out the equitable remuneration for performers, producers (or both) for secondary uses of their sound recordings (e.g. broadcasting, communication to the public).  The US is not a signatory to the Rome Convention because, in 1961, this country did not recognise sound recordings as copyrightable subject matter (only in 1995 were sound recordings granted a limited digital public performance right in the US). Article 4 of the WPPT sets out the treaty’s national treatment requirements. Contracting parties must grant nationals of other contracting parties the same level of protection they grant to their own nationals. Article 3 of the WPPT imports the qualification criteria for performers and producers from the Rome Convention (articles 4 and 5). Thus, performers and producers who would be entitled to National Treatment under articles 4 and 5 of the Rome Convention are entitled to National Treatment under article 3 of the WPPT, as if all members of the WPPT were Rome Convention members. This ensures that US performers and producers eligibility is analysed in the same way, even though the US is not a Rome Convention signatory. Article 15 of the WPPT details the equitable remuneration right of performers and producers and largely follows the provisions of article 12 of the Rome convention. A contracting party may recognise an equitable remuneration right for secondary uses of sound recordings (e.g. broadcast, communication to the public) for performers, producers or both, or may choose not to recognise such a right at all. Contracting parties may choose to limit their application of article 15 by depositing a notification detailing the scope of its limitation. Such notifications may have implications for the level of national treatment member states owe each other’s nationals under article 4.

Article 4 of the WPPT requires contracting parties to provide full national treatment to each others’ nationals. However, article 4(2) states that contracting parties may limit the scope of national treatment to the extent another contracting party has availed itself of a reservation under article 15. For example, because the US does not recognise a terrestrial broadcast right for its own nationals or those of any other country, most WPPT members choose not to grant terrestrial broadcast rights to US nationals, even though they are recognised for their own nationals. This concept of “like-for-like” treatment is often referred to as “reciprocity” and is distinct from “national treatment”.

When seeking to maximise the amount of royalties one collects for artists and record companies abroad, these concepts of “national treatment” and “reciprocity” are critical to keep in mind. Understanding what qualifies for full national treatment and what qualifies for limited reciprocity can have an impact on the amount of neighbouring rights revenue an artist or label realises.

For example, a US performer recording in Europe would be qualified for performer royalties (or a European performer recording in the US). Eligibility for royalties is often a fact-based, case-by-case analysis focused on the nationality of performers and producers, where recordings took place, and where they were first published. Knowing these important facts is crucial to ensuring that artists and labels receive what they are owed.

Collecting societies play an important role here: not only do they collect fees from users in their own territories and distribute those to their domestic royalty recipients, but they often act on behalf of their member artists and labels to collect undistributed royalties abroad.

In particular, PPL in the UK, and SAMI, in Sweden, have a share of international royalties above 20 percent in their respective total amount of royalties collected. This is explained by the fact that both UK and Swedish music are great exports around the world. Consequently, PPL has identified international income as a growing source of revenue and has set up a very dynamic policy of royalties’ collection abroad, signing dozens of reciprocity agreements with sister collecting societies.

3.3. A la carte: how record labels are cherry picking the services that collecting societies will provide them with

In its latest report on neighbouring rights in the digital era, French collecting society ADAMI highlighted that the worldwide market of neighbouring rights in collective management should grow exponentially in the next few years. However, the report noted that the share of sound recording public performance royalties attributed to digital is still quite low, apart in the US where related rights in collective management only come from digital sources (i.e. streaming and digital radio).

As more and more consumers use streaming – as opposed to music downloads and physical formats -, ADAMI forecasts that the share of sound recording public performance royalties deriving from streaming will become an essential part of the income paid to performers and record labels.

As mentioned in point 2.3. (Neighbouring rights and digital performance of sound recordings) above, most labels elect to negotiate the collection of sound recording public performance rights, neighbouring rights, directly from digital service providers.

For now, most of the sound recording public performance royalties collected by collective management societies originates from equitable remuneration, which is in part linked to advertising revenues of commercial radio and TV.

As highlighted by co-founder of the French top indie label Because Group, Emmanuel de Buretel[34], labels should register directly with foreign collecting societies which manage neighbouring rights in key territories where their sound recordings are played, streamed and used, in order to have quicker and more transparent access to those sound recording public performance royalties. For example, Because Group, which main neighbouring rights collecting society is SPPF, is directly registered with PPL in the UK and SoundExchange in the USA, which are key territories for its acts.

 

  1. Record labels, brands & ad agencies: let’s synch!

Music is an important part of audio-visual projects such as films, television programs, television or internet advertisements, video games and internet websites. So much so, that Universal Music Group recently named some veteran film producers to lead its development and production of film, television and theatrical projects[35].

In order to be able to use an existing musical composition and existing sound recording in an audio-visual project, the producer of the project will need to get a license from the people or entities that own or control the rights to that musical composition and that master sound recording.

This is what is called a synchronisation license, or synchronisation and performing rights license, or master use and synchronisation license or just sync license. Such license gives the right to the producer of the project to synchronise the composition and existing sound recording with, or include them in timed relation to, the images in the audio-visual project.

Such use of compositions and master sound recordings in audio-visual projects is not subject to collective or statutory licensing schemes. Each use is freely negotiated between the parties involved: the owners of the musical composition and master sound recording on the one hand, and the producers of the audio-visual project on the other hand.

As sound recordings are usually owned or controlled by record labels, producers of audio-visual projects often negotiate the master use license with them[36].

4.1. Synch as a viable business model

Master use licenses can be an important source of income and exposure for labels and their recording artists. In an era of shrinking sales of physicals, and still insufficient revenue from downloads and streaming to make up the difference, master use licenses can be welcome and even vital sources of revenue. In particular, unlike sales and neighbouring rights which bring in small amounts of money on a delayed basis, master use licenses often bring in upfront lump sum payments, which can support the labels’ cash flow.

Also, having a placement in a film or television program means that the artist and label can benefit from the promotion and marketing for that project, especially if the artist and label receive prominent written credit within the audio-visual project and in advertisements for the project, and if the sound recording is used in audio-visual ads for the project (such as a film trailer). Such promotion can lead to further physical sales, downloads or streams of the recording. Further, a placement in a successful film or TV show can bolster the credibility of the label and its recording artist, paving the way to obtaining additional master use licenses for that or other sound recordings.

For example, even Adele, who openly said that she will never “sell out” by endorsing consumer goods products, had readily agreed to synch her song Skyfall in James Bond’s movie with the eponymous name in 2012. The song quickly went to the top of the Billboard Hot 100 and it became the first Bond theme to win at the Golden Globes, the Brit Awards and the Academy Awards. It also won the Grammy Award for best song written for visual media.

For bands such as the Rolling Stones, the Beatles and Led Zeppelin, master use licenses of one of their sound recordings into an audio-visual project can reach up to GBP1mn per deal.

Labels are therefore strongly incentivised to have tight links with music supervisors, ad agencies and even music aggregators such as the Orchard, in order to multiply opportunities to place their sound recordings in attractive and cash-rich audio-visual projects.

Labels also need to be reactive and efficient when dealing with sync and master use licensing requests, because brands often contact them at the eleventh hour, sometimes just one or two weeks before the advertising campaign is launched, to negotiate music rights[37].

4.2. The pros and cons of sound-a-like litigation in the synch context

The other side of the coin of the sync business is that many producers of audio-visual projects do not bother to ask for, and negotiate, a sync and master use license with right owners. In this internet-era, and with a proliferation of user-generated TV channels on platforms such as YouTube, right owners are faced with an ever-increasing number of unlicensed uses of commercial music by brands and individuals[38].

Often, the artist and record label discover unlicensed commercials via fans who may stumble across them and share via their social networks or even tweet the artist directly. These uses can be incredibly damaging for an act, in particular those who choose not to have their music used in association with brands.

It is not uncommon for a brand or advertising agency based in a country where there is very little IP protection simply to use a sound recording in their advert without asking. Even in the US or the UK it sometimes happens, mainly due to a mistake or simply a misunderstanding of music copyright and sync rights in particular.

Also, there is an increasing use of “sound-a-like” songs in advertising. This is when a brand records a piece of music with the intention of making it sound very similar to an existing – and often famous – song. Ad agencies and brands may think that they will be able to bypass asking for a license to the record label and other right owners of the copied song that way, but recent litigation has proved them wrong. In 2007, for example, Tom Waits objected to the use of a sound-a-like of one of his songs in an advertisement feature Opel cars and successfully settled the claim.

For a record label, non-authorised use of one of its sound recordings or use of a sound-a-like to one of its sound recordings by a brand or ad agency can be a great opportunity to monetise its rights. While this scenario is not for the faint-of-heart though, since it may involve litigation, it is well worth initiating a frank and constructive dialogue with the infringer, in order to assess whether any license – and licensing royalty – may be agreed upon. Since any license would be granted post use of the copyrighted sound recording, labels usually ask for a higher licensing fee, as a penalty for not proactively seeking a licensed use in the first place[39].

Sometimes these issues cannot be settled out of court, resulting in full-blown litigation which may very well hurt the reputation of the infringing brand, defeating the whole purpose of setting up a marketing campaign in the first place, which is – ultimately – to make more consumers like your brand and its products. Labels and recording artists are in strong positions, here, because if they have valid evidence to demonstrate the copyright infringement of their sound recordings, they can obtain sizable damages allocated by IP-friendly judges, in court judgments, in particular in jurisdictions such as France, the US and the UK.

 

To conclude, it is obvious that labels must reinvent their business models if they are to thrive, in the new paradigm of the music business. While the three majors seem to have the upper hand, at this game of reinvention and first mover’s advantage in tech and streaming services, independent labels can play their cards well by leveraging their existing know-how in proposing innovating label services, monetising their back catalogues through sync and streaming, exploring uncharted EDM waters and maximizing royalties from sound recording public performance by striking advantageous deals with DSPs and collecting societies alike.

 

[1] Independent labels trounce UMG, Sony and Warner in US market share, MusicBusinessWorldwide, 29 July 2015.

[2] Downloaded, 2013 documentary by Alex Winter about Napster and the downloading generation and the impact of filesharing on the internet.

[3] Copyright, Designs and Patents Act 1988, s. 13A.

[4] Article L211-4 French intellectual property code

[5] Rita Ora demands freedom from Roc Nation, citing Jay Z’s new pursuits, Billboard, 17 December 2015.

[6] Macklemore & Ryan Lewis crash radio with “Thrift shop”, Steven Horowitz, Billboard, 8 January 2013.

[7] Neighbouring rights in the digital era: how the music industry can cash in, A. Gauberti, July 2015

[8] What is a music stream? Artists and labels in battle over digital income, The Guardian, Helienne Lindvall, 12 March 2014

[9] Universal settles influential Eminem digital-revenue lawsuit, Spin, Marc Hogan, 31 October 2012.

[10] Big shake-up to music licensing regime embraced by US copyright office, The Hollywood Reporter, Eriq Gardner, 5 February 2015.

[11] Robbie Williams signs GBP80mn deal, The Guardian, Fiachra Gibbons, 3 October 2002.

[12] Billboard’s top 30 EDM power players list revealed: who rules dance music?, Billboard, 6 December 2015

[13] EDM’s shameful secret: dance music singers rarely get paid, The Guardian, Helienne Lindvall,6 August 2013

[14] Electronic music industry now worth close to USD7bn amid slowing growth, Thump, Zel McCarthy, 25 May 2015.

[15] Labelled with love, Music Week, Tom Pakinkis, May 2015.

[16] Fintage House launches “full-service” publishing model – including masters, Music Business Worldwide, Tim Ingham, 7 May 2015.

[17] https://www.kobaltmusic.com/page-services-label-services.php#flexible-contracts

[18] Kobalt raises USD140mn to scale up its digital collection business, Techcrunch, Ingrid Lunden, 4 June 2014.

[19] What will record deals look like in the future?, Music Business Worldwide, Tim Ingham, 19 November 2015.

[20] Neighbouring rights in the digital era: how the music industry can cash in, Crefovi, Annabelle Gauberti, 26 July 2015.

[21] http://www.universalmusic.com/universal-music-group-names-jay-frank-veteran-music-and-media-executive-to-lead-companys-playlist-marketing-strategy/

[22] Revenge of the record labels: how the majors renewed their grip on music, Forbes, 15 April 2015.

[23] Warner will pay artists Spotify IPO money when it sells its shares, Music Business Worldwide, Tim Ingham, 4 February 2016.

[24] This was Sony Music’s contract with Spotify, The Verge, Micah Singleton, 19 May 2015.

[25] http://www.spotifyartists.com/spotify-explained/#how-we-pay-royalties-overview

[26] Breakage is back: how Deezer paid USD23mn in unallocated advances to labels, Music Business Worldwide, Tim Ingham, 25 September 2015.

[27] http://winformusic.org/declarationhomepage/fair-digital-deals-pledge/

[28] France seeks to tackle music’s digital future, provide artists a minimum wage, Billboard, Andrew Flanagan, 10 May 2015.

[29] Neighbouring rights in the digital era: how the music industry can cash in, Crefovi.com, Annabelle Gauberti, 26/07/2015.

[30] Pandora signs first direct deal with Merlin, Billboard, Glenn Peoples, 6 August 2014.

[31] Pandora forced to pay artists millions more – but fares well in crucial rates decision, Musicbusinessworldwide, Tim Ingham, 16 December 2015.

[32] Record labels sue Pandora over Pre-1972 recordings, Ed Christman, Billboard, 17 April 2014.

[33] Neighbouring rights in the digital era: how the music industry can cash in, Crefovi.com, Annabelle Gauberti, 26 July 2015.

[34] In search of your neighbouring rights abroad, MaMa, 14 October 2015.

[35] http://www.universalmusic.com/universal-music-taps-veteran-producers-from-hollywood-and-broadway-to-lead-film-television-and-theatrical-development/

[36] An overview of master use licenses: film and television uses, IAEL book, Licensing of music – from BC to AD, 2014, Bernard Resnick and Priscilla Mattison.

[37] Music rights without fights, 2016, Richard Kirsten.

[38] IP Clinic: they’re playing our song. Sue them!, Managing Intellectual Property, 1 September 2014, Tom Foster, Richard Kirstein, Annabelle Gauberti.

[39] Sync masterclass, MIDEM 2015, Bernard Resnick, Tom Foster, Annabelle Gauberti: http://crefovi.com/articles/law-of-luxury-goods/london-music-law-firm-crefovi-to-speak-at-midem-2015-book-your-place-now/

 

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ialci and Tranoï become official partners for 2016 trade shows worldwide | London fashion and luxury law firm Crefovi

Crefovi : 23/01/2016 8:00 am : Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Events, Fashion law, Fashion lawyers, gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Litigation & dispute resolution, Media coverage, Mergers & acquisitions, News, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids

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ialci, the international association of lawyers for creative industries, and Tranoï, fashion and luxury trade shows’ organiser and platform, partner up on all trade shows for 2016 worldwide

ialci, the international association of lawyers for creative industriestranoï, ialci, crefovi, new york, paris, was founded by Crefovi’s founding partner, Annabelle Gauberti, in 2013. Today, ialci is a dynamic association, which members are currently drafting a book on the law of luxury goods and fashion (to be released in 2016) and which organises several high-profile seminars from the law of luxury goods and fashion series. ialci’s president, Annabelle Gauberti, struck a partnership with fashion and luxury goods platform and trade shows’ organiser, Tranoï. Tranoï is a series of international fashion trade shows as well as an artistic platform with a stern selection of more than 1000 premium designers from all over the world, created for them to meet the most influential fashion ambassadors. As set out on its website, Tranoï is more than trade shows. “It also includes artistic installations, designers exhibitions, catwalk shows, fashion parties and all sorts of events which arouse the dreams and desires inherent to fashion“. It was founded by the Hadida family, renowned for establishing multi-labels concept stores L’Eclaireur. L’Eclaireur founder, Mr Armand Hadida, is its creative director while his son, Mr David Hadida, is its general director.  The objectives of Tranoï are to:

  • Facilitate connections between fashion businesses and the right professionals to support them with their challenges;
  • Present highly curated fashion products, sold by the exhibitors, to the most high-profile and sought after multi-label stores, department stores, online stores in the world;
  • Showcase the French and international innovations that serve the fashion industry.

ialci’s lawyers will attend all trade shows in 2016, worldwide, in order to provide free legal advice, short one-to-one introductory meetings as well as workshops on hot topics pertaining to the law of luxury goods and fashion, to all Tranoï’s exhibitors and visitors. With more than 80% of exhibitors at Tranoï New York and Paris coming from Europe, and most visitors to New York and Paris trade shows coming from the US, Japan, Italy, France, Germany and the UK, Tranoï’s clients will benefit from responsive, international and expert legal advice and services provided by several member lawyers of ialci, qualified under English law, French law, New York law, Brazilian law, Belgium law, Italian law and German law. Already, in September 2015, the lawyers from ialci, including Crefovi’s founding partner Annabelle Gauberti, had a booth at New York trade show at the Tunnel in Chelsea. During that September trade show, ialci lawyers were delighted to have their booth visited by numerous exhibitors and visitors, who asked them many legal questions relating to fashion law and their business affairs and/or were simply curious to know more about ialci. Exhibitors and visitors also attended with great curiosity and interest ialci’s workshops held at Tranoï New York Show, on 19 and 20 September. These 40 minutes’ seminars focused on which types of intellectual property rights are worth protecting for a luxury and fashion brand, as well as tips to negotiate well an agency or distribution agreement in the fashion sector. The presence of ialci on the trade show in New York, in September 2015, was duly noticed and even got press coverage Now that an official partnership has been signed between ialci and Tranoï, ialci will attend and participate to all trade shows worldwide in 2016, as follows:

  • Tranoï New York, from 21 to 23 February 2016, at the Tunnel, Chelsea, in New York City;
  • Tranoï Femme, from 4 to 7 March 2016, at Cité de la Mode et du Design, Palais de la Bourse and Carrousel du Louvre in Paris.

In order to organise an appointment with ialci’s lawyers, please fill out and send us an online contact form Crefovi and ialci will revert back to you in due course, with some suggested appointment times, in order to meet up during the trade shows, and with some questions and points about your legal enquiries in order to address them adequately during those appointments. In addition to being present at ialci’s booth during the whole duration of each trade show, for free advice and consultations to Tranoï’s exhibitors and visitors,  ialci’s lawyers will also organise various workshops on legal topics of particular interest to the exhibitors and visitors of Tranoï’s trade shows, on intellectual property, fashion finance, agency and distribution agreements, lawful use of social media, etc. Annabelle Gauberti, founding partner of London fashion and luxury law firm Crefovi, will coordinate ialci’s and her law firm’s presence at Tranoï. She will be present on ialci’s booth at all times.  Tranoï’s goal is to welcome more than 4,000 visitors over three days at its multiple sites in Paris, and more than 1,000 visitors over three days at the Tunnel, Chelsea, in New York. One of the USPs of Tranoï events is the focus on creating a real dialogue between attendees and speakers, so if you happen to attend some panel discussions or workshops Annabelle is participating in, or if you see ialci’s booths on Tranoï Paris and New York, please don’t hesitate to ask her a question! You can also catch her afterwards if you have anything specific you would like to discuss. See you there!

crefovi, ialci, annabelle gauberti, fashion law

Annabelle Gauberti on ialci’s stand in Paris fashion week in March 2016

Tranoi, Crefovi, ialci, Amy Goldsmith, Annabelle Gauberti

Amy Goldsmith and Annabelle Gauberti in NYC in February 2016

Tranoi, ialci, Crefovi, Annabelle Gauberti, Amy Goldsmith

Amy Goldsmith and Annabelle Gauberti in NYC in February 2016

Tranoi, ialci, Crefovi, Amy Goldsmith

Amy Goldsmith during her presentation on “Social media and online marketing: best conduct guidelines for fashion and luxury businesses” at Tranoï NYC in February 2016

 

Tranoi NYC 0216 AG

Annabelle Gauberti during her presentation on “Social media and online marketing: best conduct guidelines for fashion and luxury businesses” in NYC in February 2016

 

Highlight trailer of ialci and Tranoi partnership during Paris and New York fashion weeks, in January, February and March 2016

crefovi, ialci, annabelle gauberti, fashion law, paolo gelato

Paola Gelato in Paris in January 2016

 

crefovi, ialci, annabelle gauberti, fashion law

Adarsh Ramanujan and Annabelle Gauberti, lawyers members of ialci, in Paris in January 2016

ialci, crefovi, tranoi, tranoi NYC

Annabelle Gauberti, Amy Goldsmith, Holger Alt and Philippe Laurent in NYC in September 2015

 

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London fashion and luxury law firm Crefovi to partner up with Tranoi during NYC trade show

Crefovi : 18/09/2015 9:21 am : Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Events, Fashion law, Hostile takeovers, insolvency & workouts, Intellectual property & IP litigation, Law of luxury goods, Litigation & dispute resolution, Media coverage, Mergers & acquisitions, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids

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London fashion and luxury law firm Crefovi will provide legal services to exhibitors and visitors during Tranoi NYC trade show at the Tunnel, Chelsea, from 18 to 20 September 2015

 

tranoi trade show, crefovi, ialci, legal services, fashion, luxuryCrefovi and the international association of lawyers for creative industries ialci are delighted to team up with prestigious fashion trade show organiser Tranoi, in order to provide on-site legal services to exhibitors and visitors attending Tranoi NYC trade show at the Tunnel, in Chelsea, from 18 to 20 September 2015.

Tranoi is the ever-expanding fashion trade show business founded by the Hadida family, renowned for establishing multi-labels concept stores L’Eclaireur. L’Eclaireur founder, Mr Armand Hadida, is the creative director of Tranoi while his son, Mr David Hadida, is Tranoi’s general director.

With more than 90% of exhibitors at Tranoi NYC coming from Europe, and most visitors to Tranoi NYC coming from the US, Japan, Italy and France, it will benefit from responsive and expert legal services provided by several member lawyers of ialci, qualified under English law, French law, NY law, Belgium law, Italian law and German law.

ialci is formed by a group of lawyers who specialise in advising fashion and luxury brands. The lawyers from ialci, including Crefovi’s founding partner Annabelle Gauberti, will have a booth at Tranoi NYC trade show at the Tunnel, from 18 to 20 September 2015, where both exhibitors and visitors will be able to come and ask their legal questions.

Exhibitors and visitors can meet and talk to ialci’s lawyers during short one-to-one introductory meetings, at Tranoi New York Show, on 18, 19 and 20 September.

In order to organise an appointment with ialci’s lawyers, please fill in and send us an online contact formCrefovi and ialci will revert back to you with suggested appointment times and questions about your legal enquiries.

Crefovi and ialci will organise various workshops on legal topics of particular interest to the exhibitors at NYC Tranoi, on intellectual property, fashion finance, etc.

The objectives of Tranoi are to:
– Facilitate connections between fashion businesses and the right professionals to support them with their challenges;
– Present highly curated fashion products, sold by the exhibitors, to the most high-profile and sought after multi-label stores, department stores, online stores in the world;
– Showcase the French and international innovations that serve the fashion industry.

Annabelle Gauberti, founding partner of London fashion and luxury law firm Crefovi, will coordinate ialci’s and her law firm’s presence at Tranoi. She will be present on ialci’s booth at all times. 

Tranoi’s goal is to welcome more than 1,000 visitors over three days at the Tunnel, Chelsea, in NYC.

One of the USPs of Tranoi events is the focus on creating a real dialogue between attendees and speakers, so if you happen to attend some panel discussions or workshops Annabelle is participating in, or if you see ialci’s booth on Tranoi NYC, please don’t hesitate to ask her a question! You can also catch her afterwards if you have anything specific you would like to discuss. See you there!

ialci, crefovi, tranoi

Annabelle Gauberti, Amy Goldsmith, Holger Alt and Philippe Laurent, all members of ialci at Tranoi NYC in September 2015

Tranoi NYC, ialci, crefovi,

Amy Goldsmith and Philippe Laurent during their presentation on “What intellectual property rights are worth protecting and how?” at Tranoi NYC in September 2015

 

Tranoi NYC, Crefovi, ialci

Annabelle Gauberti and Holger Alt during their presentation on “Distribution and agency agreements: what to look out for? How to make sure that you will get a winning deal for you and your brand” at Tranoi NYC in September 2015 

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Neighbouring rights in the digital era: how the music industry can cash in

Crefovi : 26/07/2015 9:51 am : Antitrust & competition, Articles, Copyright litigation, Entertainment & media, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Litigation & dispute resolution, Media coverage, Music law, Private equity & private equity finance, Technology transactions

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Why sound recording producers, sound recording artists and performers as well as digital service providers have everything to win in finding a consensus on neighbouring rights in the digital era 

Neighbouring rights in the digital eraAs we detailed in our previous article on our take on Midem 2015, the music industry’s digital revenues grew by 6.9% to USD6.9 billion in 2014 and are now on a par with the physical sector.

Indeed, globally, like physical format sales, digital revenues – which comprise incomes from both digital downloads and streaming – now account for 46% of total music industry revenues. In 4 of the world’s top 10 markets, digital channels (streaming and downloads) account for the majority of revenues (i.e. 71% of total 2014 industry revenue in the US; 58% of total 2014 industry revenue in South Korea; 56% of total 2014 industry revenue in Australia and 45% of total 2014 industry revenue in the UK).

In particular, streaming is going from strength to strength, with music digital subscription services – including free-to-consumer and paid-for tiers – growing by 39% in 2014, while downloading sales declined by 8% but remained nonetheless a key revenue stream as they still account for more than half of digital revenues (52%).

Global brands providing music streaming subscription services, referred to here as “digital service providers” or “DSPs”, such as Deezer and Spotify, continued to reap the benefits of geographical expansion. There were some notable new entrants into the streaming area: YouTube launched its subscription service Music Key in late 2014, while Apple launched its own streaming service roll out in July 2015 further to its USD3 billion acquisition of Beats, and Jay Z and other top artists re-launched talent-managed streaming service Tidal earlier this year.

Streaming subscription revenues predictably offset declining downloading sales to drive overall digital revenues, pushing subscription at the heart of the music industry’s portfolio of businesses, representing 23% of the digital market and generating USD1.6 billion in trade revenues.

Music industry analyst Mark Mulligan predicts that streaming and subscriptions will grow by 238% from the 2013 levels, to reach USD8 billion in 2019, with download revenue declining by 39%. He concludes that streaming and subscriptions will represent 70% of all digital revenue by 2019.

While this evolution towards more music streaming is very customer-friendly (who does not want to have the option to select and potentially hear millions of tracks, anywhere in the world, on a device no bigger than the size of a jean’s pocket?), new legal and business issues have arisen as a result.

In particular, right owners of musical content (i.e. right owners in the musical composition – typically, songwriters, composers and music publishers or collective licensing organisations – on the one hand, and right owners in the recorded performance of that composition – typically, the record label, the recording artist-performer and non-featured musicians and vocalists – on the other hand) repeatedly ask themselves how they are financially benefiting from this surge in streaming consumption and income. How do they get paid?

Also, more and more digital service providers want to know how they can access high-quality musical content and obtain the right to stream the widest musical catalogues on their platforms, at a reasonable price. Since scaling up is the key to success for any technology company, DSPs also want to have the right to stream such musical content all over the world.

Finally, as the surge in musical digital consumption and income is becoming a factual evidence, certain categories of income streams are developing and taking more of a preponderant role. For example, sound recording performance rights, or “neighbouring rights”, are a growing source of global revenue for recording artists and record labels. While recorded music sales of physical products have declined 66% since their high in 1999, revenues from overall neighbouring rights have increased dramatically, reaching Euros2.034 billion globally in 2013.

Musical rights represent around 90% of the royalties collected in relation to neighbouring rights. Audio-visual rights are worth around Euros200 million, benefiting mainly to performers, while the rest of these royalties (around Euros1.834 billion) relate to musical neighbouring rights. Where are these musical neighbouring rights going? How are they collected then distributed?

This article focuses on how deals are done with digital service providers, in the musical streaming arena, in relation to sound recording performance rights. We will, in a future article, look at the licensing aspects of mechanical rights and performance rights for right owners in the musical composition, in the digital era. Here, we focus only on neighbouring rights and the situation of right owners in the recorded performance of a musical composition – typically, the record label, the recording artist-performer and non-featured musicians and vocalists.

 

1. Getting to grips with neighbouring rights in the digital era

Neighbouring rights, also called “related rights”, were consecrated by law, step by step, in order to ensure that people who are “auxiliaries” to the creation and/or production of content (artists, performers, music producers, film producers, non-featured musicians and vocalists, etc) can have more control over their creative endeavours.

There is no single definition of neighbouring rights, which vary much more widely in scope between different countries than authors’ rights or copyright.

However, the rights of performers, phonogram producers and broadcasting organisations are certainly covered by related rights, and are internationally protected by the Rome Convention for the protection of performers, producers of phonograms and broadcasting organisations, signed in 1961.

Aside from the Rome Convention, another international treaty addresses the protection of neighbouring rights in the musical sector: the WIPO performances and phonograms treaty (WPPT) signed in 1996.

At the European Union level, three directives have been instrumental in developing a harmonised legal framework relating to neighbouring rights: the directive of 27 September 1993, relating to the coordination of certain rules on author’s rights and neighbouring rights applicable to satellite broadcasting; the directive of 29 October 1993 – replaced by the directive n. 2006/116/EC of 12 December 2006 – on the term of protection of copyright and certain related rights; the directive n. 2001/29/EC of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.

As mentioned above, sound recording performance rights represent the bulk of all neighbouring rights collected worldwide, and they are a growing source of global revenue for recording artists and record labels.

For example, in the US, SoundExchange, the organisation responsible for collecting and distributing sound recording performance royalties, distributed USD590 million in 2013, a dramatic increase from the USD3 million the organisation distributed in 2003. In the decade since SoundExchange’s inception, the organisation has generated USD2 billion in royalties to artists and record companies.

Out of a total of Euros2.034 billion of neighbouring rights collected in 2013, 48.9% originate from Europe (Euros1.101 billion), 30% from North America (Euros681 million), 11.9% from South America (Euros268 million) and 8.6% from Australasia (Euros192 million).

With a 28% share of worldwide royalties, the US is the main market for neighbouring rights, even though the collection of such rights is limited to the public performance of sound recordings on digital medium only (such as online radio like Pandora, satellite broadcasting like Sirius/XM and also online streaming of terrestrial radio transmission like iHeartRadio). Unlike most of the world, the US does not apply sound recordings performance rights to broadcast radio, terrestrial radio and performance of sound recordings in bars, restaurants or other public places.

The market of neighbouring rights is mainly concentrated in 10 countries, which control 82% of worldwide royalties, with a strong concentration in Europe. Apart from the US, the United Kingdom (12%), France (11%), Japan (7%), Brazil (7%), Germany (7%), Argentina (3%), the Netherlands (3%), Canada (2%) and Norway (2%), are the top 10 worldwide markets. Outside the US, sound recordings enjoy broader performance rights for broadcast (including terrestrial radio), public performance and so-called communication to the public.

Globally, sound recording performance rights are administered by music licensing companies or collecting societies. These organisations are responsible for negotiating rates and terms with users of sound recordings (e.g. broadcasters, public establishments, digital service providers) collecting royalties and distributing those royalties to performers and sound recording copyright owners.

There are around 60 collecting societies around the world focused on sound recording performance royalties.

 

2. Collecting societies and neighbouring rights: the future is bright for right owners

2.1. How are neighbouring rights protected and collected on a territorial-basis?

While it could appear that neighbouring rights are protected and remunerated in a very homogenous way around the world, thanks to the structured international and European legal framework described above, in fact these related rights and the business practices of collecting societies are very different and vary from territory to territory.

Each of the 60 collecting societies operates in a territory which recognises performances in slightly different ways and has a specific business practice.

For example, the US Copyright act grants owners of sound recordings an exclusive right to “perform the copyrighted work publicly by means of a digital audio transmission“. This right is limited by a statutory license for so-called “non-interactive digital audio transmissions“. Therefore, services which comply with the statutory license may stream sound recordings without permission of the copyright owner, subject only to remitting data and payment to SoundExchange. The US Copyright act specifies how SoundExchange divides and distributes the royalties: 50% go to the sound recording copyright owner; 45% is distributed to the featured recording artist; and 5% is sent to an independent administrator which further distributes those royalties to non-featured musicians and vocalists.

In the United Kingdom, the UK copyright, designs and patents act grants sound recording copyright owners exclusive performance rights in their sound recordings. In addition, the UK act gives performers on those sound recordings a right of “equitable remuneration” for a share of the licensing proceeds for uses of the sound recordings. Therefore, when a sound recording is broadcasted in the UK, the performers on those sound recordings have a right against the producer (i.e. the record company) of the recording as to a share of the producer’s revenue from that usage. From a legal standpoint, it is very different from the US statutory license regime where the featured artist’s share is as against the user of the sound recording, not the record company. As mentioned above, the UK is the second largest market for neighbouring rights globally. According to the 2014 financial results of UK collecting society PPL, it collected a total of £187.1 million total licence fee income (from broadcast, online, public performance and international revenue sources).

In Germany, the Law on copyright and neighbouring rights similarly grants performers and producers rights to remuneration for the performance of their sound recordings. While this German law grants performers rights of equitable remuneration for the broadcast of communication to the public of their fixed performances (i.e. sound recordings), it grants producers a share of the performer’s proceeds from the licensing of broadcast and communication to the public rights. Therefore, the producers’ revenue from such activity is as against the performer, not the user of the sound recording. This is the exact opposite to the UK regime, and nothing like the US system.

In France, the Intellectual property code also grants sound recording copyright owners exclusive performance rights in their sound recordings, through a statutory license. Like in the US, digital service providers which comply with the statutory license may stream sound recordings without permission of the copyright owners, subject only to remitting data and payment to SCPP (when the record producer is a major), SPPF (when the record producer is an independent label), ADAMI (for performers) and SPEDIDAM (for non-featured musicians and vocalists). The Intellectual property code provides that 50% of the royalties go to the sound recording copyright owner, while the other 50% go to the performers and non-featured musicians and vocalists.

2.2. How are neighbouring rights protected and collected on a cross-border basis?

One of the recurring questions that artists and labels ask themselves is how they are protected from one territory to the other. Indeed, music is a global business, especially in the digital era: artists successful in one territory often are successful in others.

Worldwide success implies that the sound recordings of artists are going to be performed publicly in other territories than where they reside. How, then, can performers and producers collect sound recording performance royalties in territories where they are not nationals and may not have direct agreements with the relevant societies?

The answers are complex and derive from the application of the provisions set out in the Rome Convention and the WPPT above-mentioned.

Article 2 of the Rome Convention details the level of protection that it grants nationals of contracting states in each others’ territories. In short, contracting states owe nationals of other territories the same level of protection they recognise for their own nationals. This concept of “National Treatment” is key to international copyright treaties and works to ensure that members do not unfairly discriminate against nationals of other contracting states.

Articles 4 and 5 of the Rome Convention specify that sound recordings made by nationals of contracting states, first recorded in contracting states, or first published in contracting states, are eligible for National Treatment. Similarly, a performer’s performance will be granted National Treatment if it was rendered in a contracting state, incorporated in a protected sound recording, or if not recorded, broadcast from a contracting state.

Article 12 of the Rome Convention sets out the equitable remuneration for performers, producers (or both) for secondary uses of their sound recordings (e.g. broadcasting, communication to the public).  The US is not a signatory to the Rome Convention because, in 1961, this country did not recognise sound recordings as copyrightable subject matter (only in 1995 were sound recordings granted a limited digital public performance right in the US).

Article 4 of the WPPT sets out the treaty’s national treatment requirements. Contracting parties must grant nationals of other contracting parties the same level of protection they grant to their own nationals. Article 3 of the WPPT imports the qualification criteria for performers and producers from the Rome Convention (articles 4 and 5). Thus, performers and producers who would be entitled to National Treatment under articles 4 and 5 of the Rome Convention are entitled to National Treatment under article 3 of the WPPT, as if all members of the WPPT were Rome Convention members. This ensures that US performers and producers eligibility is analysed in the same way, even though the US is not a Rome Convention signatory.

Article 15 of the WPPT details the equitable remuneration right of performers and producers and largely follows the provisions of article 12 of the Rome convention. A contracting party may recognise an equitable remuneration right for secondary uses of sound recordings (e.g. broadcast, communication to the public) for performers, producers or both, or may choose not to recognise such a right at all. Contracting parties may choose to limit their application of article 15 by depositing a notification detailing the scope of its limitation. Such notifications may have implications for the level of national treatment member states owe each other’s nationals under article 4.

Article 4 of the WPPT requires contracting parties to provide full national treatment to each others’ nationals. However, article 4(2) states that contracting parties may limit the scope of national treatment to the extent another contracting party has availed itself of a reservation under article 15. For example, because the US does not recognise a terrestrial broadcast right for its own nationals or those of any other country, most WPPT members choose not to grant terrestrial broadcast rights to US nationals, even though they are recognised for their own nationals. This concept of “like-for-like” treatment is often referred to as “reciprocity” and is distinct from “national treatment”.

When seeking to maximise the amount of royalties one collects for artists and record companies abroad, these concepts of “national treatment” and “reciprocity” are critical to keep in mind. Understanding what qualifies for full national treatment and what qualifies for limited reciprocity can have an impact on the amount of neighbouring rights revenue an artist or label realises.

For example, a US performer recording in Europe would be qualified for performer royalties (or a European performer recording in the US).

Eligibility for royalties is often a fact-based, case-by-case analysis focused on the nationality of performers and producers, where recordings took place, and where they were first published. Knowing these important facts is crucial to ensuring that artists and labels receive what they are owed.

Collecting societies play an important role here: not only do they collect fees from users in their own territories and distribute those to their domestic royalty recipients, but they often act on behalf of their member artists and labels to collect undistributed royalties abroad.

In particular, PPL in the UK, and SAMI, in Sweden, have a share of international royalties above 20% in their respective total amount of royalties collected. This is explained by the fact that both UK and Swedish music are great exports around the world. Consequently, PPL has identified international income as a growing source of revenue and has set up a very dynamic policy of royalties collection abroad, signing dozens of reciprocity agreements with sister collecting societies.

 

3. Sound recording owners and digital service providers: how to get the streaming deal done?

In its latest report on neighbouring rights in the digital era, French collecting society ADAMI highlighted that the worldwide market of neighbouring rights in collective management should grow exponentially in the next few years.

However, the report noted that the share of sound recording public performance royalties attributed to digital is still quite low, apart in the US where related rights in collective management only come from digital sources (i.e. streaming). As more and more consumers use streaming – as opposed to music downloadings and physical formats -, ADAMI forecasts that the share of sound recording public performance royalties deriving from streaming will become an essential part of the income paid to performers and record producers.

For now, most of the sound recording public performance royalties collected by collective management societies originates from equitable remuneration, which is in part linked to advertising revenues of commercial radio and TV.

Digital service providers regularly get a lot of flak from performers and independent record producers, for the low share of sound recording public performance royalties attributable to streaming, that these right owners get back.

In particular, top talent such as Taylor Swift and Radiohead left Spotify with fracas, in 2014 and 2013 respectively, complaining that end-consumers don’t pay enough to access their catalogues on Spotify. It is true that as artists earn on average less than one cent per play, between USD0.006 and USD0.0084 according to Spotify Artists, it may seem that DSPs are not pulling their weight here.

 Having said that, what digital service providers are interested in is to have access to top-quality musical content, worldwide, that they can offer on their streaming platforms to end-consumers at a reasonable price.

To achieve that, they must define a commercial strategy in relation to the type of musical content they want to offer and in which territories. Such commercial strategy, which explains the service description and consumer offering as well as the economic model backing that up – should be set out in the DSP’s business plan and then in its term sheet of a licensing agreement.

Depending on such business strategy, the size and gravitas of the DSP, as well as its budget to secure the rights to the public performance of sound recordings, the digital service provider may decide to obtain either “statutory licenses” from collecting societies, as described above, and/or negotiate bespoke licenses.

Indeed, it is important to note that the statutory license does not apply where there is a direct deal between the digital service provider and the phonogram producer. This has happened with the deals struck between Clear Channel and phonogram producers such as Glassnote (the label for Mumford and Sons) and Big Machine (the label for Taylor Swift).

For example, Merlin is a global digital rights agency for the independent label sector, which offers the attractive option of globally licensing, via a single deal, the world’s most important and commercially successful independent music labels. Among the DSPs that Merlin license, feature Soundcloud, Vevo, Google play, Deezer, YouTube and Spotify. Recently, Merlin has entered into a direct deal with Pandora, giving that digital service provider its first arrangement outside the statutory system.

In Europe too, many customised streaming services are licensed directly (rather than collectively). Some phonogram producers tend to keep their “making available” rights, rather than mandating collecting societies to license them on their behalf.

Snowite is another recorded music rights licensing organisation that negotiates bespoke licensing deals, on behalf of DSPs such as Fnac Jukebox and Reglo Musique, with majors, indie labels and collecting societies. 

Another important contributor to the success of getting a deal done between DSPs and owners of sound recordings, is the music lawyer: it is essential to reach out to a lawyer who understands how to translate the vision of the digital service provider into a deal that can get done. Such lawyer should also guide the DSP in implementing its licensing strategy with sound recording owners, in particular by favouring introductions and referrals to key decision-makers within major and independent record labels.

 

To make the most of the financial opportunities offered by neighbouring rights in the digital era, and by streaming in particular, performers, recording artists and their record labels should actively seek attractive opportunities to license their sound recordings to top digital service providers, while ensuring that consistent and accurate reporting of their licensing partnerships are in place, notably through the exercise of royalty audit rights. Digital service providers will get access to all the music catalogues they want for their streaming platforms, as long as they understand and accept the (financial) needs of sound recording owners.

Annabelle Gauberti, founding partner of music law firm Crefovi, which specialises in advising the creative industries, out of Paris and London. Having worked with creative clients for more than thirteen years, Annabelle is an avid believer in the importance and value of looking forward, and planning ahead, to thrive in the current music industry and its new paradigm. The work undertaken by her regularly includes advising songwriters and composers on publishing deals; producers and performers on record deals and all of the latter on streaming deals and sync transactions; as well as intellectual property registration and protection, intellectual property and commercial litigation, negotiating merchandise deals and partnerships between brands and bands.

Annabelle thanks her peer members from the International association of entertainment lawyers (IAEL) and, in particular, her co-authors of the books “The Streaming revolution in the entertainment industry” and “Licensing of music – from BC to AD (before the change / after digital)” for the extremely valuable content that they wrote, and that she used in part, on a fair use basis, to draft the above article.

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Crefovi’s take on Midem 2015: wider income streams, that transparency issue and levelling the playing field

Crefovi : 09/06/2015 7:56 am : Articles, Consumer goods & retail, Copyright litigation, Entertainment & media, Events, Fashion law, gaming, Hospitality, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, leisure, Litigation & dispute resolution, Media coverage, Music law, Private equity & private equity finance, Technology transactions, Trademark litigation

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Midem 2015 ended yesterday and here are below the three key issues which were discussed and debated during this whirlwind of a music trade show

MIDEM 2015

Harvey Goldsmith, legendary producer and promoter of rock concerts, charity events & TV broadcasts and Annabelle Gauberti, founding partner of music law firm Crefovi, at MIDEM 2015

1. Diversification of income streams: a good way to hedge your bets

Firstly, all stakeholders in the music industry agreed, during Midem 2015, that revenue streams and provenance are increasingly diversifying.

While physical format sales hold steady in key territories such as the UK (still 41% of total industry revenue nationwide in 2014!), Germany, Japan and France, the industry’s digital revenues grew by 6.9% in 2014 to US$6.9 billion and are now on a par with the physical sector.

Indeed, globally, like physical format sales, digital revenues now account for 46% of total industry revenues worldwide. In 4 of the world’s top 10 markets, digital channels account for the majority of revenues (i.e. 71% of total 2014 industry revenue in the US; 58% of total 2014 industry revenue in South Korea; 56% of total 2014 industry revenue in Australia and 45% of total 2014 industry revenue in the UK).

Digital subscription services, which are part of an increasingly diverse mix of industry revenue streams, are going from strength to strength. Revenues from music subscription services — including free-to-consumer and paid-for tiers — grew by 39% in 2014 and are growing consistently across all major markets.

Global brands, such as Deezer and Spotify, continued to reap the benefits of geographical expansion and there were some notable new entrants into the streaming market: YouTube launched its subscription service Music Key in late 2014, Apple made its US$3billion acquisition of Beats in preparation for its own streaming service roll out, while Jay Z and a raft of other music stars re-launched talent-managed streaming service Tidal.

The subscription model is leading to more payment for music by consumers, many of whom appear to be shifting from pirate services to a licensed music environment that pays artists and rights holders. The number of paying subscribers to subscription services rose to 41 million in 2014, up from just eight million in 2010, representing a rise of 46.4%.

Subscription revenues predictably offset declining downloading sales (-8%) to drive overall digital revenues, pushing subscription at the heart of the music industry’s portfolio of businesses, representing 23% of the digital market and generating US$1.6billion in trade revenues.

However, digital downloads remain a key revenue stream as they still account for more than half of digital revenues (52%) and are helping to propel digital growth in some developing markets such as South Africa, Venezuela, the Philippines and Slovakia.

Revenues from advertising-supported streaming services, such as YouTube and Vevo, are also growing — up 38.6% in 2014.

Revenue from performance rights – generated from broadcast, personalised streaming services and venues – saw strong growth. Performance rights income was up 8.3% to just under US$1billion, representing 6% of the total 2014 music world sales.

Revenues from synchronisation deals — the use of music in TV adverts, films, video games and brand partnerships — was up 8.4% in 2014 and now accounts for 2% of total industry revenue. The UK, Germany and France all saw better than average performances in this sector improving 6.4%, 30.4% and 46.4% respectively.

While this diversification of income streams hedges the economic risks borne by music right owners, as music stakeholders are guaranteed to monetise their intellectual property rights and therefore “collect the cash” one way or the other, such diversification also highlights the complexity and “tyranny of choices” that characterise the music industry today.

Indeed, retail consumers are lost when faced by the cascade of choices that they have to make, in order to select the best musical providers and formats in this creative industry which is furiously moving ahead at an ever-increasing pace, under the impulse of technology behemoths such as Apple and Google.

What musical format to choose from? Should I listen to my favourite music tracks on a physical, digital, download format?

If digital, which streaming provider should I use or subscribe to? YouTube, Tidal, Deezer, Spotify or Apple on the subscription side? DailyMotion, Vevo or YouTube on the ad-supported streaming side?

We predict that music streaming providers are going to enter a fight to the death, as both the music and tech sectors are built around the “winner-take-all” economic model. In the next five years or even less, only one or two streaming providers are going to rise above all others, through consolidation, mergers and acquisitions or – simply – bankruptcy of their competitors.

While end-consumers are still struggling to “bet on the right horses” (and we suspect that these lucky horses will be music streaming services backed by monopolistic and cash-rich giants such as Google and Apple), music right owners, their collecting societies, publishers and managers also balk at the prospect of having to collect and audit income revenues from so many sources and in so many different shapes and forms.

 

2. Transparency: much room for improvement

While the music industry breathes a huge sigh of relief as revenues generated by various income streams are – finally – either relatively stable (physical, downloads) or growing (streaming, sync, performance rights, live acts), music stakeholders feel powerless when faced with the task of efficiently collecting the cash and managing their rights worldwide in a digital age.

It seems that no one wants to take on the role of claiming, on behalf of the songwriters and performers, the cash from streaming sites such as YouTube and Vevo, and of reviewing and auditing those income statements sent by the likes of YouTube, Spotify, Deezer, etc!

Publishers and record labels each refuse to accept that it is their role to check all of these – extremely-complex – digital stream income statements, relying on collecting societies to do the bulk of the work, while managers and agents merely rumble that talent is not paid enough per stream play.

It is true that, with royalty rates per stream play varying between US$0.00012 (for AmazonCloud) and US$0.07411 (for Nokia), while YouTube pays US$0.00175 and Spotify pays US$0.00521, one wonders how performers and songwriters can return a profit out of licensing their catalogues to streaming providers, no matter how many times their tracks are played on these.

Top talent such as Taylor Swift decided to check out from streaming sites such as Spotify, in November 2014, unimpressed by the argument made by Spotify that they had paid out over US$2billion to artists since 2008, and was on track to pay Swift around US$6million for the year.

Another very secretive area of this streaming business, which is slowly and reluctantly becoming less opaque, revolves around the exact terms agreed between top streaming providers and major record labels. Indeed, in May 2015, the agreement entered into in January 2011 by Spotify and Sony, the major record label that owns music by Michael Jackson, Bruce Springsteen, Mariah Carey and One Direction, was leaked to the press. It turns out that the money is really good … for labels. Sony received US$25million in advance payments in the first two years of its contract, then another US$17.5million from an optional third year. The label likely did not share these payments with its artists. “The whole streaming business has been a ridiculous system of not paying independent labels and artists” commented Allen Kovac, manager of Motley Crue and Blondie.

In this context, a raft of tech start-ups are appearing in the music ecosystem, in order to provide some research and auditing tools to music stakeholders, so that they can track what songs are played, where such music is played, by whom and when. Often, these tech start-ups are snatched up by tech behemoths such as Apple (which bought British startup behind music analytics service Musicmetric in January 2015, a company supporting record labels track digital sales, streams and social stats, which could become part of Beats Music relaunch).

Transparency is therefore still very much of an issue in the context of music streaming, even though music streaming websites, who all have a battle to the death to win, are competing with each other in order to offer the best tracking tools possible to their record labels’ and talent partners.

 

3. Levelling the playing field: EU is winning

Finally, the IAEL legal summit during MIDEM 2015 was critical to fully size the challenge facing US and EU policymakers and lobbyists, in allowing and improving the collection of performance rights on a pan-territorial basis.

Indeed, among the top 10 international music markets in 2014, the US is the only one that does not generate any sound recording public performance rights for its artists and producers (the revenues collected by SoundExchange being now reported under the “Digital” category, as they relate only to digital sound recording performance royalties). In other words, artists and producers, in the US, do not receive public performance royalties when their recordings are played on terrestrial radio.

Unsurprisingly, because of the many conflicts of interests and conflicting agenda priorities that US congress has to contend with, lobbyists representing the US music industry are feeling a little discouraged, while their copyright reform bills, such as the Songwriter Equity Act, the Allocation for Music Producers Act and the Fair Play Fair Pay Act, slowly progress through the meanders of the House of Representatives.

We think that there is a high probability that these US bills remain wishful thinking, as, for example, US radio broadcasters and other stakeholders fiercely push back on any introduction of a sound recording public performance royalty for AM/FM radio. Denying the receipt of public performance royalties from terrestrial radio plays, both domestically and on foreign territories, costs the US up to US$100million in foreign revenues alone each year. Indeed, since the US does not pay sound recording public performance royalties for terrestrial radio play to foreign artists and producers, foreign countries do not pay these royalties to US artists and producers either.

This lack of harmonisation, by the US, of its inefficient and damage-inducing legal framework with the much more talent-friendly European-wide legal framework, may cause great harm to the US music industry in the long-term, with US artists, producers and managers not hesitating to work from abroad in order to benefit from wider sources of income and, in particular, sound recording public performance royalties.

In the European Union, it is full steam ahead: further to the entry into force in February 2014 of the EU directive on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online use in the internal market, fairer competition – as well as sound collaboration – have at last arisen between all EU-based collecting societies. Cross-border licensing of online rights in musical works, across the 28 European member-states, is now a given, making the European Union the world champion for protecting content-creators’ rights worldwide.

 

All in all, it was a very enjoyable, leads-generating and content-packed MIDEM 2015 for us and we will be back next year, especially if another mega party at the Carlton is in the works!

 

Annabelle Gauberti, founding partner of music law firm Crefovi, which specialises in advising the creative industries, out of Paris and London. Having worked with creative clients for more than thirteen years, Annabelle is an avid believer in the importance and value of looking forward, and planning ahead, to thrive in the current music industry and its new paradigm. The work undertaken by her regularly includes advising songwriters and composers on publishing deals; producers and performers on record deals and all of the latter on streaming deals and sync transactions; as well as intellectual property registration and protection, intellectual property and commercial litigation, negotiating merchandise deals and partnerships between brands and bands.


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Manual for use by the corporate art collector

Crefovi : 21/09/2014 12:58 pm : Art law, Articles, Banking & finance, Capital markets, Consumer goods & retail, Emerging companies, Entertainment & media, Law of luxury goods, Media coverage, News, Private equity & private equity finance, Tax


 

In the past, major collectors would buy larger houses to show their art works. Now, many private collectors – in particular corporate art collectors – find or build large spaces to show their art and then continue to buy art to exhibit within them.

Increasingly, private collectors are taking on the role of non-profit institutions (such as museums and institutional associations).

corporate art collectors, corporate art collection, crefovi, art lawThey have large gallery spaces, often purpose-built, with storerooms, extensive archives, libraries and staff. They mount exhibitions that are open to the public, publish catalogues and organise education programmes. Some have artist residencies and ambitious mission statements.

In a nutshell, some private collectors are building private art museums and foundations.

While these private art collections are dotted around the globe and can be very interesting to visit, they may create tensions between public museums and private museum building: will these private museums act to divert private funds that might otherwise have gone towards public programming? Will there be fewer donations of artworks to public institutions? Should the government be supportive of, and incentivise, private museum building? Within the private collections, will this mean that the artworks are not maintained as rigorously as they might be in the public sector?

Before we answer these critical questions, let’s review how a corporate art collector may achieve such a project of building a “private museum”.  

 

1. So, what do you want to build exactly?

Why have so many companies, large and small, chosen to collect art? The reasons are as varied as those for collecting personally, but generally fall into one of several camps.

The earliest, famously pioneered by Chase Manhattan (now J.P Morgan) under the direction of David Rockefeller, tended to be the offshoots of an owner’s intense personal interests.

Then comes a broad and ever-expanding category of companies with the foresight and means to enliven their properties with pieces that have both investment potential and prestige value.

From the perspective of the bottom line, it makes much more sense to buy art that has a reasonable chance of appreciation than to buy decorative works which will eventually become obsolete: faced with bare walls, particularly in areas used by clients and senior staff, a company would be wise to invest in promise and quality and hope to add both beauty and a source of future capital to their workplace.  

Charlotte Appleyard and James Salzmann, in their book “Corporate Art Collections – a handbook to corporate buying” subdivide corporate collections in four broad categories:

– First, there is the traditional corporate collection, where works are being purchased directly from galleries or artists to enhance the office environment. These might be considered to be “curatorially led”, seeking to enrich the office cultural ecology. Many of the collections that fall into this category are owned by banks or financial service organisations such as Standard Bank of South Africa Limited.

– The second category includes those collections that seek to say something about the company’s corporate identity. Either by accident or design, these collections have become very involved with how the company is perceived or would like to project itself. For example, the law firm Simmons & Simmons is now the proud owner of a sizeable contemporary art collection, started by former partner Stuart Evans, which is famous for its ownership of many works from the Young British Artists.

– The third category is broadly referred to as “the philantropists” or “corporate patrons”. Whilst almost all of the collections extend their interests through sponsorship of the arts, a small but growing number have structured their entire collection strategy around a charitable remit through the creation of prizes or direct engagement with the domestic and international artistic community. For example, British Airways collects, commissions, educates and promotes through the visual arts, comprehensively and widely.

– Finally, the “all-rounders”, companies whose work with the arts permeates their identity, office environment, social outreach and sponsorship. The best example that comes to mind, when talking about “all-rounders”, is Louis Vuitton. The eponymous founder of Louis Vuitton developed an intense interest in contemporary culture, as his success grew. He frequented the salons heald in the studio of Felix Nadar, later patron and dealer of some of the most famous names in the 19th century painting, including Monet, Renoir, Sisley, Cezanne and Degas. The Louis Vuitton brand is proud of its close relationships with contemporary artists such as Yayoi Kusama, Takashi Murakami, Daniel Buren, etc. In addition to the Espace Culturel Louis Vuitton, where temporary exhibitions of contemporary artists are held, the Fondation Louis Vuitton is due to open its doors this month.  

As a newcomer to corporate art collecting, it is critical to lay out some solid foundations to a private museum building project.

Indeed, the top management of the company toying with the idea of corporate collecting should seek professional advice from the outset, by consulting with reputable art galleries, curators, lawyers, brokers and researchers, in order to clarify what objectives are to be achieved through building a private art collection.

Ideally, a business plan should be drafted from the inception of this project, in order to set up some short-term, medium-term and long-term goals for the corporate art collection to reach, as milestones.  

 

2. And where do you want to build your corporate art collection?

In parallel to this dialogue between the top management of the aspiring corporate collector and its advisors on the scope of the future art collection, room must be made – literally – to talk about the available space.

A full assessment of the space available to display art ought to be made at the outset. Most corporate collections concentrate on wall-based work because offices do not typically have the room to accommodate sculptures.

However, the London office of Deutsche Bank, which is the work base of some members of the team of around 20 staff who manage Deutsche Bank’s art collection, displays an impressive set of sculptures in its reception hall.

Other corporate art collections evolve, over the years, from office-hanging art to fully-fledged private museums located in purpose-built buildings. The Fondation Cartier, for example, was inaugurated on 20 October 1984 in Jouy-en-Josas, in Versailles and then moved, 10 years later, to its current location in Paris, which is a purpose-built architecture of glass and steel created by starchitect Jean Nouvel.  

 

3.  Is it a foundation? A trust? Is it a limited liability company?

Making decisions about the scope, space and location of the future art collection are essential to then decide which legal form such collection should take.

Options for a collector may be to either locate or transfer his or her collection to a trust or foundation, the choice often depending on state laws and the nature of the reporting requirements, some of which can be onerous.

Such arrangements may permit an individual collector to avoid estate taxes and maintain some control over the assets.

Trusts and foundations can offer viable, creative solutions for collectors concerned about the fate of their artworks.

In the UK, it is possible for anyone to set up an art owning charitable foundation and/or private museum and whose purposes include the holding, preservation, study and promotion of cultural property.

The majority of such organisations are established as charitable companies limited by guarantee, although some are established as charitable trusts.

In order to enjoy the full range of tax exemptions and reliefs, charities in England and Wales are obliged to register with the Charity Commission and HMRC to demonstrate public benefit. In France, private museums may be run by associations, state-approved or corporate foundations.

Let’s have a look at the example of Don and Doris Fisher, founders of the Gap. They put together an outstanding collection of contemporary art through the years and then created a trust through which their collection would be loaned to the San Francisco Museum of Modern Art for a period of 100 years (renewable for another 25) as if absorbed into the permanent collection. The Fisher heirs would maintain control of the collection with a trust that stipulated: (1) 75 percent of works displayed in the new wing must be Fisher works; (2) the most important works must be shown every five years; and (3) the work can be deaccessioned (i.e. sold) only to upgrade the collection and in consultation with the collection curator, who has veto power over certain pieces. This creative arrangement was a win for all, preserving the collectors’ vital legacy and catapulting an average museum into a premier position.

Other collectors, like the Rubells and Martin Z. Margulies, have established private-operating foundations which, by sharing their collections with the public, provide certain tax deductions while allowing them to maintain control of their collections during their lifetimes.

An additional tax strategy employed by collectors is to convey the artworks to a limited liability company and transfer interests in the entity to family members or trusts.  

This allows the collector, through the entity, to maintain a degree of control over the collection while discounting the value of the collector’s estate at death. The caveat here is that the entity needs to have a legitimate business purpose and the collector should not retain too much control.

While François Pinault built some of his very substantial art collection firstly in his own name, he then transferred his cultural assets into the holding company Artemis that manages his and his son’s (François-Henry Pinault) shareholdings in the various businesses of the group (luxury with Kering, art auctions with Christie’s, real estate, art, vineyards, press, etc). The François Pinault Foundation was then founded and currently owns and manages the two permanent display spaces of this powerful contemporary art collector: Palazzo Grassi and Punta della Dogana in Venice.  

 

4. Because tax matters

Anywhere in the world, the corporation is at its heart about the balance sheet, no matter how large or small the figures.

While the stated reasons for corporate collecting will almost never include taxes, it remains a fact that tax codes may permit, albeit in a grey manner and to varying degrees, deductions along three principal lines: depreciation, investment credits and charitable donations.

For example, American depreciation laws allow companies to deduct against their profits the cost of their assets, so long as three conditions are met: the assets have been acquired for a business purpose, they have a lifespan and they can be said to deteriorate over time.

While the usual candidates for depreciation range from computers to plant machinery, there is an argument to be made – particularly in the contemporary primary market – that works of art or decorations can also be classified as depreciating.

Despite the international bad rep that France has in relation to its tense and versatile relationship with taxation, this country is at the forefront of adopting fiscally-friendly policies for corporate art collectors and sponsors.

The law of 1 August 2003 relating to sponsorship, associations and foundations, so-called “Aillagon law”, greatly contributed to creating a favourable legal and tax framework for the financing of privately-funded art and cultural initiatives of general interest.

All art sponsorship payments (“mécénat”) allow corporate taxpayers to benefit from a 60% tax reduction on corporate tax (up to 0.5% of the EBIT). If such cap is reached, or if the EBITDA is nil or negative, the French company can roll such tax reduction during the next 5 tax years.

Both the US and France grant hefty tax relief to companies which buy works of art to constitute corporate art collections. For example, article 238 AB of the French tax code provides that companies can deduct, from their taxable turnover, the acquisition price of original art works produced by living artists, over a period of five years.

Another Gallic example is the tax cuts granted to French companies that make donations to public bodies which main activity is to present contemporary art fairs to the public.

In the United Kingdom, a new Cultural Gifts Scheme has been set up in 2012, to boost charitable donations. Companies which donate prominent cultural or art objects to the nation can now receive a reduction in their corporate tax liabilities.

The maximum value of the tax reduction available in relation to the donor’s liability to corporation tax is 20 per cent of the agreed value of the object. Total tax reductions under this scheme, and taxes offset under the existing inheritance tax Acceptance in Lieu scheme, is subject to an increased annual limit of £30 million a year overall. This scheme enables UK companies which own corporate art collections to gift important works of art to UK public institutions and receive a reduction on their corporation tax liabilities.  

 

 5. Get me some art, baby!

Now that the scope, space, legal form of the corporate art collection have been set and clarified, and now that the tax advantages of setting up a corporate art collection have been assessed, it is time for the corporate collector to get to work and buy some art works.

A number of the best corporate art collections started with modest budgets. Quality rather than profit has steered most of them, and in most cases this approach has resulted in the formation of very valuable collections.

The budget needs to be set to cover not only the costs of the works themselves but any professional fees, including consultants, legal fees, art handlers, installation and insurance.

Many books have been written on the subject of sound art collection management – from buying art, to practicalities of ownership and deaccessioning. I recommend, in particular, “Owning art – the contemporary art collector’s handbook”, “The Art collector’s handbook” and “Commissioning contemporary art – a handbook for curators, collectors and artists”.

Since these topics pertaining to art collection management are similar for all types of collectors – individual or corporate – I will not delve further into these.

However, I emphasise that a corporate art collector must take particular care in its dealings with art works, artists, art galleries, auction houses and other collectors because any behaviour deemed inappropriate in the art world, adopted by such corporate art collector, may have a severe impact on the reputation of this company, even beyond the microcosm that is the art world.  

 

To conclude, I do not think that private collections are diverting fluxes of money from public non-profit art institutions (such as public museums) to more “egotistic” projects. I think that certain types of corporations will be happy with sticking to charitable donations and sponsorship – widely incentivised by tax regimes around the world -; while others will want to go a step further and fulfil with a more personal touch their cravings for the arts.

These more intense and passionate art collectors will decide to set up a corporate art collection and/or private museum, depending on their goals, available space and budget.

Certain countries, such as France and the US, are extremely proactive in fostering both types of corporate involvement with the arts, while others, such as the UK and Italy for example, have much room for improvement, especially in relation to supporting corporate art collections and private museums.        

 


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Crefovi @ HEC’s luxury certificate to teach the law of luxury goods

Crefovi : 27/05/2014 11:57 am : Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Events, Fashion law, Hostile takeovers, Intellectual property & IP litigation, Law of luxury goods, Litigation & dispute resolution, Media coverage, Mergers & acquisitions, News, Private equity & private equity finance, Trademark litigation, Unsolicited bids, Webcasts & Podcasts


 

Crefovi @ HEC – Crefovi’s founding partner, Annabelle Gauberti, taught the 54 MBA and Master students enrolled in HEC’s luxury certificate, about the law of luxury goods.

Crefovi @ HEC, Luxury Certificate, Annabelle GaubertiOn Monday 26 May 2014, Annabelle Gauberti went to HEC, in Jouy-en-Josas, to teach the MBA and Master students enrolled in HEC’s Luxury Certificate. 

The courses were on intellectual property in the luxury sector and luxury finance law, respectively.

To access the slides of the two courses, you can click on the links below:

1) slides relating to the course on intellectual property in the luxury sector

2) slides relating to the course on luxury finance law.

Some additional informational content on the topic of intellectual property in the luxury sector is available by clicking here.  

You will be able to view the Massive Open OnLine Course (MOOC) shot during the course on luxury finance law soon.

In the meantime, check out this page often to see some updates!  

 

Annabelle Gauberti is a visiting lecturer @ HEC and regularly teaches its students on the law of luxury goods.     


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