CD Baby has been called the Mecca of the Do-it-Yourself music industry, and its CEO, Derek Sivers, the Pied Piper of up-and-coming recording artists. But now, the country's most successful independent on-line distributor of CDs may have crossed a line that could get them in hot water with thousands of their clients.
CD Baby functions like Amazon.com for artists not signed to major labels. Artists can use the company's website to sell their CDs and thus are relieved of the burden of warehousing and shipping their inventory themselves and the accompanying problems of monitoring credit card accounts. More importantly, CD Baby takes only $4 for each sale and passes the remaining $5-$8 per unit back to the artist every 30 days.
The deal has always been non-exclusive, allowing artists
the right to market
their own work in their own way, and keep them free to make a deal with
a
major label, should opportunity come a-knocking. The model has been hugely
successful, particularly among artists who are shut out by the tightly-guarded
distribution arteries of the major record labels. CD Baby's recent
alliance
with
Tower Records boosted their profile and its wunderkind CEO, Derek Sivers,
who
has become a folk hero, gracing several music industry trade magazines
with his
Tibetan Zen pony-tail and trustworthy smile.
This month, however, it appears that the dark side of
the Force may have
seduced the young Jedi. CD Baby launched a new service that emulates
the very
business model that their philosophy has thus far rebelled against -
one where the
artists' music is controlled exclusively by CD Baby without the promise
of
significant distribution.
THE NEW DEAL WITH APPLE/iTUNES
The new "Digital Distribution" deal
offered on the CD Baby site has attracted
hundreds of enrollees over night (at $40 a head), due mostly to CD Baby's
claim that their clients will have the possibility of being distributed
on Apple
Computer's extremely successful iTunes service. Only one month old, iTunes
has
distributed millions of major label singles already, breathing much-needed
life into the desperate lungs of the retail record business. Apple, until
now,
has been distributing only acts signed to major labels. Several months
back
they invited representatives of the five major record distributors to
a "secret
conference" to announce their deal. Derek Sivers was the only invitee
that
didn't have an entourage of lawyers. He was "chosen," many
thought, to be the
sole indie pipeline for the iTunes service. It made Apple appear oh-so
hip.
Giving a shot at distribution on iTunes is, in the minds of many unsigned artists, almost like competing with the big name artists on MTV, a dream come true for many struggling acts. But is it a real shot, and what rights are CD Baby artists giving up in exchange for this chance? Is CD Baby itself being played for a sucker? Facts that are surfacing as a result of this investigation may reveal that there is another agenda for Apple's choice of Mr. Sivers to be the sole emissary responsible for acquiring content for Apple.
A CONTRACT OF TORTURED CREDIBILITY
According
to the eight attorneys who responded to my initial query, the CD
Baby contract has several major loopholes that could permanently hinder
an
artist's ability to navigate beyond the Do-It-Yourself realm to the strata
of major
label artist; something most of CD Baby's clients presumably want. Many
clauses in the CD Baby contract tie up rights exclusively for a minimum
of three
years, and some clauses attempt to grab rights to the artist's "underlying
compositions" themselves ("songs," for those who don't
speak legalese.) This turns
the CD Baby contract into an EXCLUSIVE publishing and distribution deal
fused
together.
Most major
label recording contracts have similar clauses that stick their
hands deep into the pockets of artists, but there is usually an advance
of some
magnitude as part of the exchange. With CD Baby's deal the artist pays
for
the exclusive licensing of their music.
Furthermore,
the CD Baby contract allows them to sell their exclusive licenses to
ANY third party without conferring with their client first.
(Let's hope
it's to a third party that pays royalties, since their agreement is a "
flow-through" deal to their clients.) This in effect makes CD Baby's
basic business
model no different that that of a standard major label, except there
is no
advance to the artist, no promotion campaign, and no MTV video. (And
we thought
record deals couldn't get much worse.)
Given my experience with the dark side of the music business, I immediately jumped to a cynical conclusion. But several attorneys interviewed for this piece felt that the CD Baby contract's "bad clauses" were more the result of "sloppy drafting" rather than any attempt at subterfuge. Others were less generous. They are backing-off from recommending the CD Baby deal to their clients, saying emphatically that the contract contains "poorly drafted [and] risky language."
After receiving several emails from artists and lawyers and reviewing the contract myself, I contacted Mr. Sivers and went over each of the points at the end of this article. Some changes were made the following day, like the addition of a 30 day-opt-out clause, but the most egregious points remain as of the date of this piece, and conflicting language makes even the 30-day-opt-out clause's validity questionable.
I commended
this and recommended to Mr. Sivers that he pay for a proper analysis
spearheaded by my company along with several legal experts.
Eliminating
my usual fees for analysis, I estimated the costs for research and the
retaining of two legal experts at $2000. He passed on the offer, citing
insufficient
funds and stated to me that he had a trustworthy lawyer. Then he added
an odd
musing, that since "so few people will sign up for the deal, it
doesn't matter
if it's not perfect."
Considering the magnitude of the situation, I would have thought that getting a second professional opinion would be a no brainer. Also, many signing the CD Baby contract will not have the benefit of a lawyer to look over their shoulder. And this is a fact that perhaps CD Baby was not taking into consideration.
Sympathizing with Mr. Sivers' apparent financial situation, I offered to do it for FREE, footing the bill myself. I felt it was THAT important. Mr. Sivers responded with interest, but his attorneys never contacted me.
CD BABY'S POINT OF VIEW
Question: Now that CD Baby has been made aware of these issues, will they change their agreement to reflect better terms?
Answer: No.
Initially,
Sivers claimed that this is all much ado about nothing. He says
the contract is limited ONLY to Digital Distributions. Why this makes
it okay,
escapes me, but regardless, several attorneys, including industry veteran,
Doug Breitbart, who once managed Debbie Gibson, have a less cavalier
attitude:
" I do not believe the rights being obtained [by CD Baby] are limited to
digital
or streamed content but could be stretched to include an assignee who
is a
traditional CD based distributor."
Confronted
with the fact that his deal grabs at underlying copyrights and
actual CD sales, Sivers claimed that their Digital Distribution contract
reflects
almost verbatim the terms of the iTunes deal and that CD Baby was compelled
to include these terms to please Apple. Mr. Sivers could not show me
what he
was referring to, explaining that Apple insists that he keep the contract " confidential."
IF IT SMELLS LIKE FISH…
"This smells, and not sweetly," said one music lawyer who thinks that CD Baby may have a duty to disclose the terms of the iTunes deal. "This notion of Apple's insistence that terms in its proposed contract with CD-Baby MUST be imposed on the bands with which CD-Baby contracts, coupled with an apparent insistence that CD-Baby cannot show them the contract- - does not sit well."
Other
companies who have signed with Apple say the iTunes deal has nothing
to
hide. Allen Jacobi, owner of Pyramid Records is one. He has been in the
music
business for over 20 years: "There is no nastiness in the iTunes
agreement.
It is very simple and straightforward." All this conflict among
veteran
attorneys and experts tortures Mr. Sivers' credibility on the subject.
Yet,
according to Sivers, his lawyers claim that anyone who thinks this is
more that a
harmless licensing deal is "completely wrong."
Without seeing the Apple contract for ones self, it's hard to get at the truth. And no one is giving the general public a peek at the terms of the iTunes deal.
That is, up until now.
In my capacity as a Journalist, I came to possess a copy of the iTunes contract. It was "leaked" to me from a prominent music industry attorney in Los Angeles, who asked to remain anonymous. I can not guarantee that I received the actual contract. (CD Baby didn't immediately respond to my request for confirmation.) I can say that it looks and reads like the real thing.
Going on
good faith, and trusting the source, I did a comparison that amalgamates
significant contributions by several veteran music business
attorneys,
each with over 10 years experience in the practice of law. The consensus,
is
that it can clearly and credibly impeach the claim made by Mr. Sivers
and his
attorneys, that the objectionable clauses in the CD Baby agreement are
there
SOLELY because they need to be compliant with Apple. Furthermore, the
comparison
shows that the CD Baby contract does, in fact, unnecessarily grab rights
to
underlying compositions and unnecessarily grants CD Baby the right to
distribute
them "at will," to whomever, without first obtaining permission
from the
artist.
Nowhere
in the "Apple iTunes contract" is it required that
CD Baby be the"
exclusive" distributor of these works, or get their hands on the "underlying
compositions." In fact, there is language to the contrary. The "iTunes
contract" makes it VERY clear that Apple is only interested in "sound
recordings." In
short, the Apple agreement is very safe for the party supplying the content,
whereas the CD Baby deal is in question.
IN DEREK WE TRUST
Even
cigarette companies caution you that their product might be dangerous.
Will CD
Baby post any warnings about the risks of their offer? Nah. Sivers
and
his attorneys maintain that my lawyers and I have a reading disorder.
Instead, they're taking more of a "caveat emptor" approach,
with karma as the
bedrock of their warranty. In a public email response Sivers said, "I
know a lot of
this has to go on trust and my reputation as a moral dude." (see:
http://www.musicthoughts.com/home) However, this premise pre-supposes
that Derek Sivers
(or some other "moral dude") will always be the owner of CD
Baby!
One does
not have to look back too far in time to remember the MP3.com debacle.
At first, Michael Robertson was the champion of the indie. Many
artists
signed with MP3.com based on trust and perceived opportunity. And they
were right
for a while - until Vivendi Universal bought them and started changing
the
terms left and right, to their benefit, and not the artist's. A perfect
example
of what could happen with CD Baby.
Plus, if trust were the only issue this might be a flaccid concern. Even going on good faith, there are still problems; what if CD Baby is successful in getting iTunes to distribute these recordings, and the CD Baby contract is determined to be unenforceable against their clients? Apple may have a serious case for breach, as well as copyright infringement, against CD Baby. Such a scenario could tie up the rights of those who have signed the CD Baby contract in court indefinitely. (One lawyer I interviewed, said that was unlikely. I say, famous last words.)
And, if they are not successful in getting iTunes to take an interest in their catalog, then CD Baby will likely start selling these masters to just about any Digital Tom, Dick or Harry, and the client will have nothing to say about it.
The net result is that an artist could find himself in a situation where his songs are not distributed through iTunes, but through some fly-by-night outfit, and also be unable to license these rights to any third party record company. Since CD Baby's deal specially states that they are only required to pay a client on money they receive from a third party distributor, this scenario will likely result in $0 to the artist. What else is new?
And, even
nastier, should iTunes and CD Baby find themselves in an acrimonious
position in the future, these rights could fall into probate.
Opting out at
that time may require that the artist employ a lawyer. (P.S.: Nevada--where
CD Bay is incorporated--does not allow suits filed from out of state.
You
would have to go directly to Nevada to sue them. This is one reason that
many
businesses are attracted to filing there.)
And finally,
what if Apple refuses to distribute any of the CD Baby catalog
and then offers to buy CD Baby outright, hoping to inherit a huge bundle
of
artists' rights? What happens then? Will Mr. Sivers refuse to sell to
Apple?
Even for one-million dollars!?! How about thirty-million? How do we know
that
Sivers and Apple don't already have a pre-bid on the table? Don't you
think a
person signing with CD Baby should get the opportunity to consider these
things BEFORE they commit?
Because
acquisition of these rights, as well as ANY warning signs about the
high risk nature of this deal, are absent from CD Baby's advertising
AND
because the possibility of a CD Baby artist getting their songs distributed
by
iTunes is, in fact, very remote, the offer falls into the standards of
a "Bait and
Switch," as defined by the Federal Trade Commission's Consumer Protection
Regulations. (For more on FTC "bait and switch" standards:
http://www.ftc.gov/bcp/guides/baitads-gd.htm)
BUT WHY?
One can only speculate as to why a company with a flawless reputation would take this downward spiral. I have four possibilities. From most cynical to most benign they are:
--Despite
their enormous popularity, CD Baby has relatively few hard assets
and their model is built on a format that has an insecure future: the
CD. To
sell the company for any significant amount, they would need to acquire
a lot of
intellectual property. The easiest way is the old tried-and-true method:
get
artists to give you their music by promising them wide-spread distribution.
It's an old game.
--Another possible reason for CD Baby's unwillingness to change the " exclusivity clauses" is because they have already made arm's-length deals with several other online companies who will act as the proverbial fishnet for new clients. Companies like Oasis CD/RaindogRecords.com have made offers that claim distribution "Access" to iTunes via CD Baby. Such people signing these contracts may find themselves in the same position - locked into an exclusive deal - with little realistic hope of distribution though iTunes.
--A
third alternative was contributed by an anonymous expert in entertainment
law. He suggests that Derek Sivers and CD Baby are pawns in a larger
game
played by Apple: "Apple can afford marginally anti-competitive behavior
and can
certainly afford to induce innocents such as Derek to become complicit
without
wanting or intending to be. After all, Apple and its computer competitors
behave without regard to 'brick and mortar' rules, including state and
federal
competition laws, as a matter of standard business practice and have
shown an
ability to defend against states and the feds without a burp to their
bottom
line profitability. CD Baby probably cannot." More on this as it
develops.
--Fourth possibility: CD Baby's CEO just really has no grasp of the issues at hand.
I honestly do not know the truth yet. But, bottom line: either CD Baby is ignorant of the rights they are taking, or they are deliberately taking advantage of their clients' trust.
In this advocate's view (and giving CD Baby the benefit of the doubt) if CD Baby refuses to remove ALL the exclusive language and the words "underlying composition" from their contract, then they should at the very least post a consumer warning about the risks of the deal. If, after that, and after the client is informed of the risks, an artist wants to take a shot with them, then more power to the client and to CD Baby.
Furthermore, CD Baby should highlight IN BOLD any new changes they make to their contract, so that those who signed the older versions can easily see the changes.
Finally, I invite Mr. Sivers to persuade Apple to allow him to let the general public to see the terms of his iTunes contract (at least those that pertain to rights granted). This way, no one has to take my word for anything and the artist can understand EXACTLY what they are buying into when they sign with CD Baby.
I hope that
CD Baby heeds these issues and amends their contract. They have
done a great deal to help independent artists. I very much like this
company's
concept and would like to be able to recommend this service with a full
and
open heart.
Those who have already signed this deal and are in need of advice may contact me through my website www.MosesAvalon.com.
SEEING IS BELIEVING
A report with side-by-side comparison of the "iTunes contract" and the CD Baby contract, with explanations and highlights of the "bad clauses" is available on by sending an email to MosesAvalon3@aol.com
The report amalgamates significant contributions by several veteran music business attorneys, each with over 10 years experience in the practice of law.
For reference, read the actual CD Baby Digital Distribution contract: http://cdbaby.net/dd?f=6
