CD Baby Part II: Digital Sales
CD BABY – OLD AND NEW
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Does the Disc Maker’s Merger Mean Better or Worse Service
For 1000s of its Digital Distribution Clients?
By Moses Avalon
In part one we looked closely at the physical fulfillment side of CD Baby’s service. There we saw that, under the pre Disc Makers model, only a small percentage sold a significant volume of CDs. These are stats where the new management has promised to “move the needle.” To catch up go here.
Many of you responded with things like, “I made money with the old CD Baby.” But all of the examples included the money made from Digital Distribution, not CD sales. Does the CD Baby Digital Distribution system make money for its clients? No argument. But there are cautions that the company won’t warn you about.
In this Part 2 I’m going to put their deal under the microscope. And we’ll hear from Tony van Veen of Disc Makers/CD Baby and Peter Wells, co-founder of TuneCore, CD Baby’s primary competitor and a company with a radically different philosophy.
Also, at the end, Van Veen answers readers’ questions about the new & improved CD Baby.
Away we go…
BIRKENSTOCK DREAMS
One thing CD Baby clients will have to look forward to is that it is now in the hands of a seasoned business person. Aside from van Veen hailing from the Wharton School of Business, Tony has run a top notch company for many years. One that has shown consistent growth even in times of nationwide economic hardship.
Derek Sivers was more the hippy boss who discovered that idealism and business often don’t make a good cocktail. An example was his tragically flawed “profit sharing plan” which ultimately shared more animosity than profit amongst his workers. He allowed the plan to be designed by the very people who would benefit from it—his employees, then signed off on the plan without close review, only to later realize it was according to one source, “so generous [to the employees] that it was unsustainable.” Sivers canceled it and workers ultimately saw nothing.
Van Veen is not likely to make a similar mistake. In talking to him over that past few weeks about reforming the Digital Distribution contract to assuage the problems that many have had with the old CD Baby draft, he seemed responsive to change. Something Sivers resisted, even from people he trusted, exhibiting an almost Presidential fear of appearing fallible. Those problems, how they evolved and how they affect the tens of thousands of CD Baby digital clients, is the subject below.
DIGITAL DIPLOMAT
It began in 2003. Sivers was the only indie presence at the Apples’ launch of iTunes. Since Apple didn’t want to appear exclusionary, yet also didn’t want to deal directly with every garage band, they embraced the concept of “aggregators”; sub-contractors that would acquire the rights to the music files and prepare them for upload to Apple’s drives. Unfortunately, Apple made NO REGULATIONS about what these companies could or should charge, and in so doing created a new “wild west” cottage industry within the music biz.
Sivers, because CD Baby had the largest collection of unsigned artists was the first aggregator and so had a brief monopoly on this gateway. He chose to charge a $35 set up fee and a 9% override for pipelining clients’ music to iTunes and eventually other digital stores. Nine percent seemed reasonable to many, and in fact still remains one of the lowest vigs in today’s market. In exchange, the artist had to grant their digital rights in ALL areas exclusively for three years. (Recently this was changed to a 30 day renewable term.)
But, the small company didn’t really have the infrastructure to deal with the various needs of thousands of clients. As a result, Sivers had to issue a one-size-fits-all, click-to-agree contract. According to Sivers over 3000 signed up in the first few weeks without reading the fine print. And, as with any exclusive contract, the fine print was worth reading.
THE OLD DEAL
Despite criticism from industry lawyers and CD Baby users who opted out of CD Baby after my awareness piece in August 2003, Sivers refused to change the main element in his contract that has become the focus of concern. Namely, the references to acquiring the rights to “underlying compositions.” (i.e: songs as opposed to the recordings of the songs).
Sivers said time and again that “underlying compositions” is never mentioned in the agreement, but in paragraph 12f it says, “’Your Authorized Content’ means sound recordings and underlying musical compositions.” (In the original contract–August 2003–this phrase was in paragraph 1e, but in the April 2006 version it was moved to the rear of the contract where it is less likely to be noticed.)
Lawyers for CD Baby claimed that the use of this language is benign. However, it is worth noting that all but one other aggregator avoid it. Sivers told me in a 2003 email that the clause was required by the Apple/iTunes agreement, but in my talks with Apple, they denied this. Finally, instead of just changing this one sentence, Sivers chose to publicly call me and my lawyers “crackpots,” and accused us of trying to extort money from him.
In my conversations with van Veen I asked if he would be dealing with the danger clause in a more professional fashion. He responded, “Yes. We have no interest in doing a land grab at any artist’s underlying compositions. We’re working on some other items pertaining to our requirements for administration of the underlying rights and as part of that process we’ll revisit that wording… we’re reviewing the agreement language to simplify the agreement further if possible.”
THE ELUSIVE “NON-EXCLUSIVE”
When other aggregators began to pop up they promoted “non-exclusivity” as their edge. To seem progressive, Sivers changed the word “exclusive” in the CD Baby contract to “non-exclusive.” Unfortunately, just changing a word didn’t make it a reality.
If a digital rights contract was truly non-exclusive, one would be able to use different aggregators for different types of digital sales, i.e.: one aggregator for iTunes/Rhapsody, and another for ringtones/streaming media. Since these are two entirely separate types of sales it would make sense for an artist to want to allot these valuable rights, just as many split the rights for songs to publishing companies and master recordings to record companies.
However, CD Baby’s software automatically and aggressively submits their client’s material everywhere, even if they were already in a store with a CD Baby competitor, thus trampling over any previously established relationships.
Sivers claimed that he could not change his “all or nothing” system to accommodate individual configurations. This meant that if you use CD Baby and a second aggregator you were almost guaranteed to end up with double placements, tangled sales information, disputes over proper payouts, consumer frustration and possibly even suspension from some the bigger stores. And in fact, this is what happened to many.
Sivers’ solution was Zen: “be chill,” go with the flow and not use multiple aggregators. Thus proving that his contract was non-exclusive– as long as you didn’t use anyone else.
Sivers posted reassurances on his blog, “We will never prevent you from doing anything you want with your music… We do not take any rights to your music. This is not a record deal,” and my personal favorite… “You are just lending us the right to be your digital distributor.”
In reality, the pre Disc Makers’ CD Baby system did the exact opposite. It restricted the artist from dividing digital rights to specialty aggregators, plus, the artist absolutely did “GRANT” their rights to CD Baby. Calling it a “loan” of rights was an outright irresponsible play on words. It is a “record deal.”
Legitimate labels will RARELY sign people who have “loaned out” their digital distribution rights even if it is truly non-exclusive let alone the quasi-non-exclusivity that manifests in the pre Disc Makers CD Baby deal. Publishing companies will think twice about it as well.
Van Veen: “We are in the early stages of developing technology that will make it easy for artists to opt in or out of any retailer we partner with, rather than opt into our entire group of retailers. When you have hundreds of thousands of titles distributed among over 100 digital stores, each generating sales, there’s a huge flood of data. Sometimes, things go wrong. What’s important, is that we always correct it.”
NINE IS THE NEW ZERO
Other aggregators have tried competing with CD Baby for market share, but none have made the dent as much as TuneCore. They did it by offering 0% vig over CD Baby’s 9%. How can you compete with 0% I asked Van Veen?
Van Veen: “I think the 0% is a great gimmick but is not good in the long run for most artists. Last year we paid an average $100 for every album signed up for digital sales. This is after our 9%, so every album generated average gross sales of $110, and our 9% amounted to approximately $10. If those artists had been on another service like TuneCore they likely would have made less, because TuneCore is not in as many stores and their own contract states that there is an annual storage fee of $19.98 per album. If you turn that into a percentage ($19.98 divided by $110) you end up with 18.1%, or roughly double CD Baby’s rate. So the average artist on TuneCore needs to sell DOUBLE what the average CD Baby artist sells in order to break even. Therefore, our 9% commission is actually lower than a so-called 0% commission.
Peter Wells, co-founder of TuneCore:
Wells: “I’m not sure how 9% could be less than 0%, but perhaps my math is faulty. [Charging a percentage] might have made sense back in the old days, when the distributor had a giant warehouse, a fleet of trucks and salespersons. But digital distribution is just a file; I have much less risk. TuneCore has paid out an average per album of $314.29. Plus, although CD Baby has more stores, iTunes, alone sells more than all our other stores combined. The market will decide, but I’m confident musicians who want to be part of the new business model rather than the old, percentage-based model, will choose TuneCore. After all, if you’re giving a percentage, you’re working for someone else. I think these days, people want to work for themselves, 100%.”
WHAT UP – CONCLUSIONS
All-in-all, in the next two years there will be great expansion for artists’ rights in this area. With economic problems facing all companies, driving everyone to tougher competitive strategies, my guess is that we’ll be seeing a great deal more leverage falling on the side of artists looking to license their digital rights.
Hold out! If an artist is savvy, knows their rights and the landscape they should be able to protect themselves very well. If you don’t know your rights or need some lessons in how the crazy business functions. Here’s an easy way get some: www.confessionsworkshop.com
LAND OF TONY
Q: How is Mr. Van Veen going to improve on the sales configurations?
Van Veen: “Until recently, the default price for an album download on cdbaby.com was the same as the album price. One of my first moves was to change the default price for a download album to $9.99, putting us on even footing with the other digital stores and we’re also going to make it possible to sell singles this way.”
Q: Will CD Baby continue with the “swiper sales” credit card service? We use this ALL the time and would otherwise not be able to take credit cards at shows!
Van Veen: No worries, swiper sales will continue.
Q: What’s going to happen with the Super D distribution arrangement, where they agreed to put physical product from CD Baby to brick & mortar stores
Van Veen: The current plan will continue, but we may come up with a system that (with the artist’s permission) allows us to sell CDs at a lower wholesale price to Super D, so that the retail price at third party stores or web sites is similar to the CD Baby retail price.
Q: Will the new CD Baby consider some innovation such as a splash page before the download occurs that reminds buyers that they don’t have the right to “share” the song?
Van Veen: I doubt we’ll add such a splash page, because it is non-standard in the industry, it could scare off customers from buying, and with independent artists, they need every customer they can get.
Q: Is Disc Makers going to retain CD Baby’s hands-off, approach to making artists jump through hoops regarding things such as proof of sample clearances, licenses, releases & mechanicals?
Van Veen: The artist is liable for copyright infringement, but as the seller we can get dragged into any messy infringement claim. That’s why we need to get solid assurances from the artist that they have secured the necessary licenses. We have partnered with RightsFlow, a third party mechanical rights clearing firm, and will soon roll out a service where artists can easily secure mechanical licenses for digital sales on a pay-as-you-go model. [Note: Unlike Harry Fox, where you pay in advance for about 1000 sales— Moses]
Q: How much of this deal is about trying to weaken (or even eliminate) CD Baby in order to increase the bargaining hand of labels with respect to artists?
Van Veen: That would be pretty silly. Why would we pay good money for CD Baby if we intended to weaken or eliminate it? Particularly since we’re all about artists, and not about labels. We’re looking to strengthen CD Baby and build our artists’ sales.
Thanks for reading… If you haven’t already, check out the new music business on-line course.
4 responses to “CD Baby Part II: Digital Sales”
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Great Post!!!
I love CDs even back then when tapes rule the music industry I was one of those who would buy authentic tapes and CDs. I wish we’d go back to those times. I’d buy your CDs. 🙂
Good day! Would you mind if I share your blog with my zynga group? There’s a lot of folks that I think would really enjoy your content. Please let me know. Cheers
I agree with Tia! I’d buy your books on CD any day! Great post!