Start Your Own Record Label

Marketing your music in a digital world

Published in SOS September 2007
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Music Business : Music Publishing

The world of music retail is changing fast, with digital distribution bringing new opportunities for independent record labels. Our in-depth guide to starting, running and developing your own business will help you get up to speed.

Richard Salmon

Start Your Own Record LabelDo you ever catch yourself bemoaning the state of the modern music industry? “How come he’s got a record deal?” you whine to anyone who’ll listen. “And she looks like Beyonce, but sounds like a foghorn!” Yet still the major record companies continue to prepare our McMusic tepid, homogeneous, and driven home by a marketing budget big enough to cure global poverty. In a pique of indignation and arrogance, you resolve to give those nasty majors a run for their money. You’re going to set up your very own independent record label, and sell your music to a grateful public.

There’s no shortage of indie success stories at present. Arctic Monkeys (Domino) are riding high with their Billboard-conquering second album, Favourite Worst Nightmare. Then there’s the likes of Bloc Party (Wichita), Kaiser Chiefs (B Unique), Maximo Park (Warp), Gossip (Back Yard) and Enter Shikari (Ambush Reality), to name but a few. In terms of discovering good music, and the long-term nurturing of talent, the indie labels are punching well above their weight.

So what does it take to start an independent record label and become the next Motown, Ministry of Sound or Rough Trade? In this article, we’ll be looking at the business skills and legal knowledge you’ll need to set up your own label, before considering how developments in the digital space can assist you in promoting your artists, and clocking up those all-important on-line sales.

The Business Plan

Arctic Monkeys, Bloc Party and Maximo Park have all achieved serious commercial success on indie labels.Arctic Monkeys, Bloc Party and Maximo Park have all achieved serious commercial success on indie labels.It needn’t cost a fortune to press up a few hundred copies of your self-produced release, but if you’re looking to sign a number of artists and make an impact on the charts, then it’s going to be a lot more costly. You’ll probably require the services of marketing, PR, and radio plugging specialists, as well as the support of a distributor. This sort of help doesn’t come cheap (for ideas on raising finance, see the ‘Cash Machine’ box). When looking to start your own label you’ll therefore need to be clear about your objectives. Are you looking to release a few tunes on an ad hoc basis, or do you want to establish the careers of chart-topping acts?

The best way to ensure your aspirations are aligned with your budget is to create a business plan. Not only will this help you organise the steps for getting your music to market, it’ll be a vital document for persuading others to invest in your venture. Your business plan should detail all costs associated with your label start-up. These can include studio time, producer’s and engineer’s fees, paying remixers and session musicians, marketing, PR, distribution, setting up a web site, and artwork and packaging. You’ll also need to cover the fees of professionals such as an accountant to do your tax returns and a lawyer to draft your contracts. If things go well, you might also want to take on a label manager to run things day-to-day.

Then there are your business overheads, including utilities, rates, rent, VAT and MCPS licences. Other expenses will accrue along the way — and remember, you’ll be paying out for manufacturing and promotional costs before you see any related income, so you’ll need a little spare in the bank.

Once you’ve calculated your costs, you’ll need to work out what you require in total to cover personal living expenses, as well as business costs for the first year. From this figure you can derive the price and the number of records you’ll need to sell to break even. Preparing a cash-flow forecast for the first 12 months, as well as a longer three-to-five-year plan, will help you to stay on track. Your business plan will also need to explain how and where your records will be sold, and provide some background on those involved in running the label, listing previous work experience and positions held at other labels, for example.The first step in setting up any business is to create a viable business plan.The first step in setting up any business is to create a viable business plan.

You should be aiming to break even on your first few releases. If you can keep your head above water in the short term, you’ll become more confident, establish a network of contacts, and be around long enough to generate revenue from other areas, such as compilation licensing.

Local high street banks, as well as organisations like Business Link (www.businesslink.gov.uk), can provide guidance on writing a business plan and offer a wealth of practical advice on starting up your own business. Many high street banks publish starter packs crammed full of tips and checklists, so even if you don’t take out their loans, you can always help yourself to the literature!

If your artists start selling, you’ll be able to generate income from a variety of sources, including sales of CDs, DVDs, vinyl, dual-disc, cassette, downloads, ringtones, USB formats and compilations. Check out the rules regarding chart eligibility of your proposed formats, prior to manufacturing your releases. You’ll save yourself a lot of trouble in the long run. The chart rules are explained at www.theofficialcharts.com/docs/OCC_Chart_Rules_Edition9.pdf.

Additional revenue streams can be earned from secondary licensing income, such as on foreign sales of your records. Furthermore, should you permit advertisers, video games producers, or film and TV companies to use your music, you can negotiate separate synchronisation payments for each project. PPL (Phonographic Performance Limited, www.ppluk.com) also pay your label a share of income whenever your sound recordings are broadcast on radio or TV or played in public. You could also look into developing a more broad-based partnership with your artists, whereby your investment in them is rewarded with a percentage of additional touring income (from ticket sales, live CDs, webcasts and so on), merchandise, publishing, management and sponsorship monies. This, of course, will have to be contractually approved by the artist and their lawyer beforehand.

Business Structure

Before you can open for business, you’ll need to choose a legal structure for your label. In the UK, you have four options: you can either operate as a sole trader, a partnership, a limited company, or as a limited liability partnership.

  • Sole traders work for themselves — a one-man-band. It’s simple and cheap to operate this way. Your accountant will need to notify the Inland Revenue of your status, and prepare an annual account. As a sole trader you’re liable for income tax on your earnings, as well as paying your own national insurance contributions. The main worry is that you’ll be personally liable for the debts of your record label, and will therefore need to make sure you don’t overspend on snazzy furniture, office space, indulgent studio gear and so on.
  • A partnership is where two or more people work together to combine their knowledge, talents and contacts. Partners typically agree to share profits and losses according to an agreed percentage, and should draw up a Partnership Agreement (use a lawyer for this!) detailing how the record label is to be run day-to-day, the duties of each partner, and what should be done in the case of a dispute, or if a partner leaves. Partners pay income tax on their share of the profits, and are jointly and severally liable (ie. individually and collectively) for all the partnership’s debts. Therefore, you’ll need to be certain you can trust your partner.
  • A limited company is a legal entity distinct from its owners. The company has its own legal personality and can own assets such as computer equipment, its name, copyrights and so on. The company is distinct from its owners, who have shares in the company and are also employees of the company. Companies pay corporation tax on profits, and a salary and/or dividends to directors. The incorporation process can take a little time, so a quicker alternative is to buy a ready-to-use company off the shelf from Companies House (www.companieshouse.gov.uk).

The main benefit of company status is limited personal liability for its owner/shareholders. So if your company were sued for millions, your personal liability wouldn’t exceed the sum invested or outstanding on any share capital. The down side is that you’ll have to file annual audited accounts, which the public can inspect, and you’ll also have to take on an accountant to handle paperwork, tax/VAT registration, and so on, if you expect to have any time left over for music-making!

  • A limited liability partnership (LLP) is not unlike a company in terms of administration, except that for tax purposes partners pay income tax on profits, as well as their own NI contributions. The main advantage is the limited personal liability associated with a company structure.

Business In The USA

If you’re setting up your label in the US, similar provisions apply. Your record label can be structured either as Sole Proprietorship (similar to UK sole trader), a General Partnership, a Limited Liability Company (LLC), a Joint Venture (a General Partnership of limited duration), or as a ‘C’ or ‘S’ Corporation.

The legal structure will be determined by a variety of personal considerations, including your projected involvement in the label (maybe you’re just providing finance?), the extent of your personal liability, the size of your setup, tax issues, and the profitability of your acts.

Incorporating a limited company takes time, but you can buy ‘off the shelf’ companies from Companies House.Incorporating a limited company takes time, but you can buy ‘off the shelf’ companies from Companies House.In brief, Sole Proprietors have unlimited personal liability for the debts of their business, and will pay income tax on the profits of the label. In a General Partnership, however, all partners are jointly and individually liable for the debts of the partnership. Partners share the day-to-day running, but their earnings are reported separately to the IRS, by way of a personal profit and loss return. A Joint Venture (note that this term has a different meaning in the UK), is essentially a form of partnership suited to one-off projects of a short duration. A Limited Liability Company (LLC) in the US is similar to its UK counterpart, combining the limited personal liability of a company with the tax advantages of a partnership. LLC owners can elect either to pay their tax at the corporate level, or instead receive profits, and pay tax individually. LLCs will observe fewer formalities than the more burdensome ‘C’ Corporation, which, although a separate legal entity, pays corporation tax as well as taxing its shareholders. ‘S’ Corporations can avoid this double-taxation dilemma, but only where the IRS first authorises ‘S Chapter’ status — in which case, shareholders are entitled to receive income direct. The abundance of state and federal regulation, together with high start-up costs and time constraints involved in issuing shares, appointing directors, and holding meetings, means musicians may wish to think twice before going down this road!

Legal Issues

Starting a record label requires that you deal with a range of legal issues, often on a daily basis. I’ve tried to mention some of the main ones below, but for specific advice on your affairs you should always consult an experienced music industry lawyer.

  • Recording contracts

If you’re going to sign and invest money in new artists, you’re going to need a recording contract to deal with the respective obligations of each party in the deal. Issues to consider include: how many singles or albums will you be releasing? What royalty rate are you paying? How much are you spending on marketing? Are you paying an advance? Are you providing a commitment to releasing the record internationally? Make sure you include a provision allowing you to enter compilation and sync licensing agreements, because these are potentially lucrative areas which will help you to recover much of your initial investment in an act.

The recording contract should deal with copyright ownership of the master recordings — and you should insert an assignment of copyright clause into the recording contract, in favour of your label. This will enable you to build your catalogue over time, and help make it more attractive to a future buyer. An indie label contract should also entitle the label to an ‘override royalty’ in the event that a major label buys out one of your artists.

  • Licensing deals

This is where an artist or producer retains copyright ownership of their recording, but allows a record company or distributor to sell the record on their behalf. Record labels can negotiate licensing deals for a whole album or even a single, for a fixed period, and usually for specific territories around the world. They are a useful way of avoiding the development costs associated with nurturing your own artists, and at the same time allow you to earn royalties from sales and build catalogue.

  • Producer contracts

If you’re going to be using a producer or remixer, you’ll need a written agreement detailing matters such as advances, the recording budget, session musician fees and producer royalties, as well as including an assignment of copyright in the sound recording to your label. Normally, producer royalties are paid from the artist’s royalty share.

  • Sample clearance

If you release records containing samples of other people’s tracks, you’ll need permission from the rights owners. Clearance is needed from the owner of the musical composition (usually the publisher), as well as a separate permission from the owner of the sound recording, (the record label). You’ll have to pay fees to include samples, so this should be factored into any release budget before you proceed.

  • Publishing deals

Publishing income from songs you or your artists have written or co-written can be substantial, especially if you have a hit. It’s advisable to create your own publishing company so that you can take full advantage of any PRS or mechanical royalties, cover fees and synchronisation income arising from the exploitation of your artists’ songs. Day-to-day administration of publishing can be managed on your behalf by a bigger publisher, who in turn will take a commission on earnings for services rendered.

  • Band agreements

If you’ve signed a band to your label, or are in the band, you should encourage them to draw up a band agreement. This agreement should deal with matters including how advances are to be split, the recording budget, and who’ll own the band name in the event of a break-up. Your label will need use of band or artist names for the sale and promotion of its records, and perhaps also for merchandising purposes, while leaving members may need use of the band name to promote a tour.

  • Consents

Do you have the necessary permissions to use artwork, photographs, trademarks or logos that may be included on sleeve notes, posters, or on your web site? You’ll also need to obtain signed consent forms from session musicians appearing on your recordings, to agree to have their performances recorded.

  • Trademarks

Make certain you have the right to use the name you’ve created for your label, and any band or artist names appearing on your releases. You should also consult a lawyer regarding making a trademark registration of the label name.

  • Copyright notices

Include the correct copyright notices on record sleeves and inlay cards. Sound recordings should display the (p) symbol, year of release and owner’s name; for original songs and cover versions, the notice should display the © symbol, year, composer, and publisher’s name.

Collection Societies

Unsurprisingly, collection societies collect licence fees and distribute income to copyright owners, when their works are copied or broadcast and performed in public. The MCPS (Mechanical-Copyright Protection Society) licenses the use of songs on behalf of its writer and publisher members, whenever their works are copied and distributed to the public — on CD, vinyl, video, film, musical greeting cards, or whatever. Therefore, before any British label can manufacture its releases it first needs to obtain a licence from the MCPS. The MCPS operate a number of schemes called AP1, AP2 and AP2A, and which is appropriate to you will depend on whether you’re licensed on the basis of manufacturing or actual sales, and whether you can obtain credit or not.

If you’re releasing your own unpublished songs, the MCPS should waive the percentage they normally deduct (on the basis that this should eventually come back to you in any case!). Likewise, MCPS will allow a certain amount of your stock to be issued for promotional purposes only. No mechanical royalties are paid on strictly promotional stock.

The current mechanical royalty rate is 8.5 percent of the dealer price (PPD) on most formats, and 8 percent on downloads. If you’re starting a label for the purpose of releasing your own self-penned material, this is unlikely to be a problem, but having to pay 8.5 percent of your sale price to composers may affect the number of records your label can afford to press in a run. And if you’re using copyright samples, recording cover versions, or commissioning remixes of other published songs, think carefully about whether your budget will extend to these additional payments.

Record companies should also join PPL (Phonographic Performance Limited). PPL is a UK society that collects and distributes airplay and public performance royalties on behalf of the owner of the sound recording — usually the record company. Radio and TV stations, clubs, shops, pubs and restaurants are all required to have a licence to play records in public. The licence fees collected by PPL are then distributed to over 3500 record labels, as well as to the performers appearing on the records. PPL maintains a huge database of recordings known as CatCo, and won’t be able to pay you until you become a member and register your works on their system.

Collection In The USA

In the US, mechanical royalty payments are handled by the Harry Fox Agency. Record labels will need to obtain a licence from the agency before they can sell records incorporating an original song or a cover version. Labels pay a mechanical royalty rate of 9.1 cents per song, per unit — this is known as the ‘statutory rate’. These monies are then passed on to publishers and songwriters via the agency. In addition to licensing physical formats — CDs, record, tape and so on — Harry Fox also license certain digital formats, including full-track downloads and on-demand streaming services. If your label’s pressing fewer than 2500 units of a record, you should consider the Harry Fox Songfile service, a quick and easy system for getting a mechanical licence on a small run. What’s more, under US law, where the copyright owner in a song has previously recorded and distributed their music to the general public in the US, your label becomes entitled to a compulsory mechanical licence to record that particular song — provided, of course, that you pay the licence fee. If you’re releasing your own songs on your own label, you don’t actually need a mechanical licence from HFA.

Historically, record labels in the US have been able to economise on mechanical royalty payments by invoking what are known as controlled composition clauses in performer/writer contracts. This is great news if you’re the label — as you may only have to pay 75 percent of the statutory 9.1 cents per composition — and bad news if you’re an artist who happens to compose their own material. As you’d expect, publishers don’t much like these clauses, but it’s a matter for your label, the artist, and their lawyer to iron out in negotiations.

The two major UK trade associations for record labels are AIM and BPI; most indie labels belong to the former.The two major UK trade associations for record labels are AIM and BPI; most indie labels belong to the former.Songwriter performance royalties in the US are licensed and collected either by ASCAP, BMI or SESAC. Whenever a song gets broadcast on TV or radio, or performed in public — live, or in a shop or restaurant — songwriters and publishers become entitled to a payment. ASCAP, BMI and SESAC pay their members in a variety of ways, and lay down separate eligibility criteria and contractual terms. ASCAP, for instance, makes dollar payments to individual writers for specific uses of their composition, and will often make bonus payments to writers of major airplay hits. BMI typically make minimum payments to members for use of their works within a certain area such as live venues, network TV and so on.

Curiously, record labels in the US (unlike their counterparts in the UK) do not benefit from a performance right covering analogue radio broadcast of their sound recordings. Although songwriters and music publishers receive performance royalties for airplay on radio and TV, labels and recording artists receive nothing from radio stations, unless they happen to simulcast their programmes over the Internet or via satellite. This bizarre congressional oversight has in some way been mitigated by the creation of Sound Exchange, the first US organisation to collect and distribute performance royalties to labels and featured artists from the digital and satellite transmission of recorded music. Digital cable and satellite television services such as Music Choice, satellite radio operators like Sirius, and some webcasters, each pay a statutory licence fee to broadcast sound recordings. Non-featured musicians and vocalists aren’t forgotten — they benefit from a 5 percent share of the pie, which is paid through to AFTRA and AFM’s Intellectual Property Rights Distribution Fund.

From a record label owner perspective, the great thing is that membership of Sound Exchange doesn’t preclude you from entering direct or ‘non-statutory’ licence agreements with hundreds of webcasters and digital music providers. You’re free to enter contracts and earn individual appearance or performance monies, or license your music for a campaign, provided the collective licensing and distribution of performance royalties stays with Sound Exchange, and you notify them. The same would be true of an artist owning their masters — they too can nominate Sound Exchange as their representative for the collection of statutory as well as non-statutory performance royalties.

Lastly, your indie label, plus any featured recording artist, is entitled to a share of income to compensate them for so-called lost royalties, resulting from home taping and the rental of music. By joining the Alliance of Artists and Recording Companies (AARC), sound recording owners receive home taping and rental royalties, and also have access to the latest SoundScan market data, all through one centralised body.

Trade Associations

In the UK, independent labels can either join AIM (Association of Independent Music, www.musicindie.com), or the BPI (British Phonographic Industry, www.bpi.co.uk). Both organisations represent their label members in the UK and internationally. They provide training, publish research, and lobby government on music-business-related matters such as duration of copyright and online licensing. Historically, the major labels — Universal, Sony-BMG, Warner and EMI — have been members of the BPI, whilst the independents joined AIM.

Distribution

If you have no proven track record, distributors can be reluctant to take you on. Large distributors such as Vital or Pinnacle, who distribute and export on behalf of many of the leading indies, will want to see that you have a strategy in place for your label before they’ll take your product. They’ll want to know how many artists you’ve signed to your label, whether they’re gigging, if there’s any marketing to support the release, and whether the artist has had favourable press reviews. If a distributor takes you on, they’ll want to sign up your label for a number of years. Two to four years is typical, but make sure you can get out of the deal earlier if things don’t work out.

Also,

The hidden costs of distributing physical products such as CDs include paying for transport to return, and destroy, unsold copies.The hidden costs of distributing physical products such as CDs include paying for transport to return, and destroy, unsold copies.the distributor will expect the deal to be exclusive. This means no other distributor in the UK will be able to sell your records, and if you want to sell records from your web site, you’ll need to reserve this right in your agreement.

If you do manage to secure the services of a distributor, they can often provide useful label management and sales and marketing support at retail, and for really successful independents, may also pay advances for the privilege of distributing their records. Don’t rush into a distribution deal. Search around for the right fit for your label and a company you feel you can trust to handle your money.

You might be able to negotiate a manufacturing and distribution deal instead of pressing your records beforehand. The advantage is that you won’t have to pay for pressing prior to receiving sales income. However, M&D deals may mean you lose control over the quality of copies made, and you may not get paid on all records sold unless you know the exact quantity. The manufacturing costs can also be a little on the high side.

Don’t forget that there are other hidden costs of distribution, such as transport, and stock movement charges, incurred when records are distributed on a sale-or-return basis. The record label usually picks up the bill when retailers return unsold stock, and often the label will have to pay for them to be scrapped.

Exporting Overseas

Many of the larger distributors handle export sales as well. If you prefer, you can strike direct licensing deals for your releases in foreign territories — perhaps via established labels or an overseas distributor. Choose the licensee carefully, and make sure you obtain a reversion clause in the licence agreement, so that should the licensee become bankrupt, you’ll get your rights back! You should also try to attend international trade shows such as MIDEM in Cannes (www.midem.com) or Popkomm (www1.messe-berlin.de) in Berlin. These conventions are a great way of discovering new artists and making international label and distribution contacts.

The Miami Winter Music Conference (www.wmcon.com) is a key date in the dance music calendar, and there’s also South by Southwest in Texas (http://2007.sxsw.com/music), as well as In The City (www.inthecity.co.uk/) in October, in Manchester. For a day at the seaside you should check out the T-Mobile sponsored Great Escape festival in Brighton as well (www.escapegreat.com).

On-line Distribution

So now you’ve dealt with your label infrastructure, it’s time to consider the digital distribution options available. Where once it was a matter of putting the needle on the record, the music consumer today is presented with a dizzying array of gadget-enabled possibilities: to upload, download, sideload, stream, podcast, webcast, SMS, or perhaps share peer-to-peer. There are more ways to get your music to market than ever before.

So is running a record label as easy as creating a web site and giving away a few MP3s? You can build a fanbase this way, and perhaps also shift a few records through a distributor. But as things stand, if you want to sell serious quantities of records, you’ll probably need support from radio and press, and be able to tour and market your music internationally.

Gnarls Barkley, Lily Allen and the Arctic Monkeys may look like they appeared in a puff of digital smoke, but an army of expensive pluggers, PRs and distributors have been hard at work behind the scenes. In your bid to avoid the system, the irony is that you may need to replicate it.

So what should a new independent label do to maximise sales? The best policy is to devise a digital strategy to run in tandem with your physical business. Some labels may opt for a purely digital setup — which can mean no manufacturing costs and no premises to rent — but they will still need to take care of the business and legal formalities mentioned above.

Merlin & On-line Licensing

Becoming a member of AIM (Association of Independent Music) is one of the first things a new label should do. AIM is part of a global trade body called WIN (World Independent Network), who have just established a new global music licensing agency for independents, called Merlin. Having the backing of indies in more than 20 territories, Merlin is able to offer a huge amount of the world’s independent repertoire for global digital licensing. Heavyweight indies already signed up to the licensing scheme include the Beggars Group, Ministry of Sound and PIAS, plus members of the American Association of Independent Music (A2IM). Being represented through Merlin will greatly improve access to the worldwide digital marketplace, and should help your new label to secure deals that couldn’t be negotiated locally or individually. Hopefully the indies will find themselves on a more level playing field with the majors — at least in the digital space!

There’s further good news, as Merlin has recently struck a deal with Shawn Fanning’s post-Napster creation, Snocap. This agreement should help fast-track indie label repertoire into Snocap’s virtual MyStore initiative, and provide new digital revenue streams for independent labels via Snocap partnerships with MySpace, and other key web sites around the world.

Social Networks

There’s more to social networking than MySpace, but the ubiquity of the Murdoch-owned brand is certainly impressive. However, you’ll need to do more than just post a few MP3s on the site to make an impact. Major and indie labels use MySpace as part of a broader marketing mix for their repertoire and as an A&R source, but the site can also assist smaller labels and artists, allowing them to offer downloads, announce tour dates, and communicate directly with fans. You can also make it easier for fans to discover your releases, by making sure that when you create a profile, you use the right keywords, categories and genre descriptors to identify the music. Indie and dance communities have flourished on the site, but it’s not just bands and labels that are using MySpace. International promoters, fanzines, management companies and brands are also on the look out to forge new partnerships — so make sure you make friends and keep your eyes peeled for fresh opportunities. With the Snocap deal now in place, labels can sell their music direct to fans via MySpace at no extra cost, and will also be able to control pricing structures.

Other social networks of musical relevance include Last.fm, YouTube, Bebo and Second Life:Start Your Own Record Label

  • Last.fm follows a radio-inspired model and bills itself as “the world’s largest social music platform, where you can show off your taste, see what your friends are listening to, hear new music, get personalised radio and recommendations”. You can upload your artist MP3s to the site so that listeners can check out your latest signings. Users listen to ‘neighbour radio’, which is based on the music that others with similar tastes to yours are listening to. Alternatively, users can create their own bespoke radio station streaming music they’ve tagged with ‘love this track’.
  • YouTube, as most inhabitants of this Earth now know, is a video-sharing site offering major and independent, legal and unlicensed audio-visual content. Legal wranglings aside, YouTube has helped make Internet stars of such acts as Terra Naomi (now signed to Island records), and OK Go, whose gloriously inventive treadmill video (see photo below) has been streamed over 13 million times.

For new acts, YouTube can still be needle-and-haystack territory. You can’t rely on video postings to break an act, but when used creatively, YouTube can complement your overall marketing strategy, and even if you don’t achieve any direct sales, still provides a free means of gathering ratings and comments on your music.

  • Not unlike MySpace, Bebo Bands allows unsigned and established artists to showcase their music. The band pages include a band member/friends list, plus a section for tour information, blogging, and hosting songs — which can be played or added to other user’s playlists. Bands can offer albums as well as artwork, and are able to edit the content of their band profile.
  • Second Life is an altogether more outlandish experience. For the uninitiated, it offers users a 3D virtual world built and owned by its six million-plus residents, who can purchase and develop their own virtual parcels of land. For new labels, Second Life offers interesting opportunities to interact with musically minded residents, and to become part of the flourishing digital economy trading in the in-world currency of the Linden Dollar. All transactions carried out in Linden Dollars can be converted to real US dollars at various on-line exchanges.

In addition to finding fans, selling records or merchandise, artists and labels could make use of the site by offering a webcast of a live show. This can be done by sending a live music stream from your computer to a Shoutcast (www.shoutcast.com) or Icecast (www.icecast.org) server, and mapping the server’s stream URL to a parcel of land in Second Life. People who visit the parcel in Second Life immediately hear the live music stream. Musicians are usually logged into Second Life at the same time as they’re performing, so they can interact with their on-line audience.

Second Life residents also run many virtual clubs and venues, specifically to host live music. So when you log on to Second Life, you should look for people in the Live Music Enthusiasts Group to explore your options.

Selling MP3s From A Digital Shop

Small labels may benefit from selling on-line via a third-party shop such as TuneTribe.Small labels may benefit from selling on-line via a third-party shop such as TuneTribe.In addition to social networking, small labels can take advantage of services like TuneTribe, which claims to be “a digital music download shop with a difference”. On TuneTribe, artists and independent labels get to keep 80 percent of the royalties and set their own download price. A big plus is that sales on TuneTribe are chart eligible, as they get reported to the Offical Chart Company. TuneTribe can take delivery of your catalogue and current releases through established distributors/aggregators, or through FTP sites; alternatively, you can use TuneTribe’s upload centre. They also offer a free digitisation service, should you need it — all you have to do is send them your music on a CD, together with any relevant data, and they’ll prepare it for inclusion on the site.

Sites like these tend to favour exclusive and pre-release downloads from labels, enabling them to create special editorial features around a release and attract new fans in the process. On TuneTribe, labels and artists are given their own area to manage and update as they choose, and have access to real-time on-line accounting, a label management service, and editorial support to maximise media exposure. TuneTribe have also partnered with web sites in the US, Japan and Europe enabling new record labels to build a fan base overseas.

Your Own Web Site

Creating a web site is another way of building profile and generating revenue for your label. Fans can interact with artists directly, stay on top of new releases and tour dates, and by selling downloads or merchandise you can help drive traffic and enhance the artist-fan relationship.

Your web site should aim to include photos, contact details, a biog, a message board, gig details and MP3s of your artists’ songs. To offer music, you’ll have to convert audio files to MP3s and upload them using an FTP program such as QueueFTP. You should also create streaming files so people can listen before buying. This can be done using programs such as Real Audio or Flash.

It’s advisable to give users the choice between DRM and DRM-free versions of your tracks. You can charge slightly more for unprotected, MP3-only downloads — as EMI are about to do — and in certain genres, such as dance, there is also a demand for high-quality WAV files.

Other than downloads, you might like to offer T-shirts, tickets, CDs, DVDs and other merchandise through your web site. The great thing about a web site is that it provides fans with a one-stop-shop where all your products can be bundled together. Remember that in order for downloads to be chart-eligible, you’ll have to work with a recognised partner, who can provide encoding and encryption services, e-commerce facilities, and any necessary territorial controls.

If you prefer, you could work with an on-line payment service such as PayPal, who take a percentage of each transaction. Companies such as Javien (www.javien.com/) also provide digital content commerce solutions and micropayment technology. For fans who don’t own a credit card, you’ll need to consider providing an address to send cheques and postal orders to.

Built-to-order Digital Shops

Big independent physical distributors such as Pinnacle have built digital shops for artists like the The Killers and Feeder, as well as the Perfecto record label — you can explore their digital shopping options at www.pinnacle-digital.co.uk.

The main advantage of using a company like Pinnacle for your digital business is that they also supply digital content to some of the world’s biggest retail sites, including iTunes, Napster, HMV, Virgin, Woolworths, Tesco and Yahoo. This is bound to give your repertoire a great deal more exposure than building a stand-alone web site.

Companies like 7Digital can also build a label or artist site for you, manage your release schedule, and maintain your download shop’s homepage. 7Digital allows users to control their own shop where all sales are chart-eligible. Take a closer look at their Audio Download Store initiative, which you can find at www.7digital.com/audio_download_store, and also their Indiestore service (www.7digital.com/indiestore). Indiestore is free to use and supports WMA, MP3 and iTunes’ FairPlay AAC format.

Other Digital Retailers

If you want to cut out the middle man and retain a greater share of the profits, you can always approach on-line retailers direct. On-line retailers come in many shapes and sizes, from the per-track or per-album downloadable model espoused by Apple’s iTunes (www.apple.com/itunes/), through to the streaming and downloadable subscription model used by the likes of Napster, eMusic, and Playlouder MSP (see below). Other key brands in this sector include Zune/Microsoft, and indie kingpin retailer Rough Trade.

The difficulty for small labels is that many of the bigger retailers require music to be supplied already digitised, in their preferred format. Napster uses WMA files, whereas iTunes sells downloads in their own AAC format. You may find it quicker and easier to get a digital distributor or DRM company to do your encoding and deliver your metadata for you.

The other problem is that you’ll have to manage separate licensing deals for each retailer, and coordinate your release dates to ensure that tracks go live at the right time. There’s also the thorny issue of royalty tracking and reporting to consider — services not supplied as standard by all retailers. For a label that wants to concentrate on discovering, signing, and marketing new artists, managing retail relationships with all these sites individually could prove time-consuming and more trouble than it’s worth.

Some notable on-line digital music retailers include:Some distributors, such as Pinnacle, will help you build your own digital shop for your label, and companies like 7Digital offer similar services.Some distributors, such as Pinnacle, will help you build your own digital shop for your label, and companies like 7Digital offer similar services.

  • eMusic

eMusic (www.emusic.com) boasts that it is “the world’s largest retailer of independent music and the world’s second-largest digital music retailer overall”. This is both a blessing and a curse for any new independent. You’ll have to share the limelight with 13,000 other independent labels! The eMusic service is a subscription-based one, allowing customers to own their music in MP3 format — compatible with all digital devices, including the iPod. The service allows customers to play tracks, burn to CD, and make as many copies as they like for personal use.

The up side is that genre or niche labels may find eMusic an ideal home, since much of its catalogue includes music outside of the mainstream. Whether it’s blues, jazz, country, electronic or reggae, they stock it. They’ve also bolstered their profile with recent signings including Arcade Fire and Barenaked Ladies, together with such perennials as Bob Marley and Miles Davis.

From a business point of view, the main concern is the low prices eMusic charge. Labels receive around half the money from each sale, but with tracks selling for as little as 22p each, labels are making only a few pence per unit. As you’d imagine, eMusic’s subscriber base has soared, but it is questionable whether such knockdown prices are really in the long-term interest of musicians and small labels.

  • We7

Musician and digital distribution pioneer Peter Gabriel’s new retail creation is an advertiser-supported free download service, going live in June 2007. We7 (www.we7.com) will offer DRM-free MP3s, bundled together with 10-second audio adverts targeting specific demographic groups — dependent on listener taste, age, gender and so on. Downloads will play back on MP3 devices including the iPod. After several weeks’ use, users can swap previously downloaded files for their ad-free clones, which can be owned permanently.

We7 offers the music industry a compromise, illuminating the dark void between unlicensed peer-to-peer networks and the gated kingdom of iTunes. Labels stand to earn a cut of the 30p to 60p per track We7 are charging advertisers, as well as a percentage of the 79p to 99p per download for the option of buying advertising-free MP3s. If Gabriel’s previous success with OD2 is anything to go by, the We7 service is likely to leave its overdue rival, Spiral Frog, looking rather like a tadpole.

  • Playlouder MSP

Playlouder (www.playlouder.com) is a subscription service offering customers a hybrid, licensed music and ISP service bundled together — hence the term MSP, for music service provider. Playlouder controls the sharing of music files on a closed network, and unlike its ‘illegal’ cousins, allows file-sharing traffic to be tracked and monitored so that revenues are returned to labels and other rights owners. Subscribers can exchange licensed music freely, in any bit-rate they want. The site offers users music from many independent labels, including AIM and major US indies Epitaph and Nettwerk, as well as from majors Sony-BMG and EMI.

  • Rough Trade Digital

Rough Trade, the consummate bricks-and-mortar indie retailer and label, have expanded into the digital content business, offering music in MP3 format, free of DRM. Since 2006, recordings have been encoded at 320kbps, so sound quality is very good. Single track prices start at 99p per download, and albums are priced between £6.99 and £7.99. Rough Trade (www.roughtradedigital.com) sells predominantly left-field rock and electronica, and offers music aficionados such goodies as limited-edition digital runs and obscure artists harvested from all corners of the globe.

  • Bleep.com

Bleep.com deals in all things electronica, and has added left-field rock to its expanding catalogue of releases. Artists appearing on the platform include Bjork, Aphex Twin and Danger Mouse, and customers can listen to full-length tracks prior to purchasing DRM-free MP3s, encoded at 320kbps. From a label point of view, Bleep.com (www.bleep.com) could lose you potential revenue, as users are able to forward downloaded tracks for free. This is offset by the fact that Bleep sell MP3s, WAV and Flac files, offering customers a multi-format purchase of the same track; for example, a DJ might want a superior quality audio file for when he or she plays out in a club.

Digital Distributors & Aggregators

There are numerous options for selling downloads on-line.There are numerous options for selling downloads on-line.If you don’t fancy chasing after digital retailers on a daily basis, why not consider using a digital distributor such as Vital:PIAS? Like their rivals Pinnacle (mentioned above), Vital:PIAS are physical distributors who also offer the same service for digital formats as for CDs and vinyl. The advantage of digital distributors is that they can handle relationships with multiple retailers, specialist music sites and ISPs on your behalf — leaving you free to concentrate on running your label. They can also help you with overseas markets, as they have distribution deals in place with digital service providers abroad. All back-office administration, including royalty tracking and reporting, is also taken care of. Digital distributors often provide their own in-house sales and marketing support, and they use their considerable bargaining power to secure placements for artists on major retail portals.

The purpose of an aggregator is to get signed and unsigned music onto digital services that won’t normally deal direct with individual artists. Typically an aggregator will license and store a large quantity of repertoire, but won’t be as familiar with it as an on-line distributor. The most high-profile aggregators at present include CD Baby, The Orchard, IODA and Consolidated Independent.

The main advantage of aggregators and digital distributors is that they take away the day-to-day stress of handling multiple licence agreements and coordinating releases, and can handle encoding and royalty administration for you. If you are going to do a deal with an aggregator, try and make it non-exclusive, and for a short term initially.

Make sure you supply the aggregator or distributor with accurate metadata. There’s little point signing, recording and digitally releasing music if fans can’t locate your tracks in their searches. Vital data to provide includes: details of track name, artist, genre, duration and ISRC codes. You’ll also be expected to deliver artwork in the required format.

Mobile Options

The market for music downloads to mobile phones is one you cannot afford to ignore.The market for music downloads to mobile phones is one you cannot afford to ignore.Until now, the mobile ringtone and download markets have been saturated with Top 40, major-label content, but this pattern is starting to change, as customers come to expect the same choice of independent label releases in the mobile world as can be found on-line. With millions of subscribers, a proliferation of channels, and the emergence of music-enabled handsets, mobile operators like Vodafone, O2, 3, T-Mobile and Orange are crying out for new and exciting ways to sell their multimedia bundles to customers. Globally, as many downloads are now made to phones as are made via the web, but the opportunities for a sale don’t stop there. Record labels can now supply fans with ringtones, realtones, ring-back tones, videos, wallpapers and over-the-air downloads — as well as combination packages of the aforementioned.

Like their on-line counterparts, mobile content retailers like Monstermob and Jamster prefer to deal with a one-stop-shop, so if yours is a new independent label looking to supply content for mobiles, your best bet is to find an aggregator. Aggregators you might wish to consider include AEI Mobile (www.aeimobile.com/index.html), whose independent-label clients include Ministry of Sound, Chrysalis, Gatecrasher and Tidy Trax, and Pocket Group (www.pocketgroup.co.uk), who are one of the leading aggregators in Europe, supplying over 50 operators around the world.

Then there’s VidZone, the leading mobile content provider for the UK independent label sector. As their name suggests, they offer music video downloads, in addition to video ringtones, audio downloads, and a weekly one-hour indie music TV show called VidZoneTV. VidZone supply the main European mobile networks and also operate two consumer music web sites: the VidZone music video subscription service (view at www.vidzone.tv) and VidZone Mobile, the company’s direct-to-consumer mobile web site, which is available at www.vidzonemobile.com. VidZone Mobile offers full-track audio downloads, music videos, real tunes and video ringtones for downloading directly to mobile devices.

Meanwhile, Omnifone have recently launched their MusicStation service, which is likely to become the main competitor not only to iTunes, but probably to MySpace as well. The service allows mobile phone users access to all four major record label catalogues on demand, for just £1.99 a week, using a player that runs on mid-range phones, GPRS, as well as high-end 3G phones. It’s expected that indie label content will follow shortly, following the creation of the digital licensing body, Merlin (see above).

This year will see Omnifone begin its global roll-out with Telenor in Scandinavia and Vodafone’s Vodacom in South Africa. In addition to the mobile-only service, there’s a PC and Mac version of the MusicStation service, costing £2.99 a week. The beauty of the direct deals it has in place with operators is that Omnifone can achieve a flick-of-the-switch global roll-out to handsets, which even iTunes hasn’t been able to achieve.

Podcasting

Aggregators such as AEI, Pocket Group and Vidzone can package your music for distribution to mobiles.Aggregators such as AEI, Pocket Group and Vidzone can package your music for distribution to mobiles.Last, but not least, there’s the podcast. Its most notable use to date has been for downloadable radio shows, with broadcasters such as Chris Moyles and comedian Ricky Gervais boosting the notoriety of the medium. But it’s not just broadcasters who can take advantage of podcasts. Small independent labels and artists can also upload podcasts to the iTunes Music Store, thus reaching a potential audience of millions. Labels and bands often give away free MP3s from their web sites, so why not provide them in your podcast as well?

There is further good news for record labels. Following the announcement of the PPL trial blanket licence deal with the RadioCentre — who act on behalf of most of the UK’s commercial radio stations — many stations will now be able to podcast shows containing 30-second clips of independent and major label music. The podcasts will be offered DRM-free, with all PPL revenue to be shared amongst the labels. For now it remains to be seen whether 30-second clips of songs will be enough to satiate the aural desires of commercial radio listeners.

Keep Your Head

Starting an independent record label is a pretty risky business, so it’s vital that you approach your new venture with your business head firmly screwed on. Your ultimate survival in the industry is dependent on you navigating both the physical and digital markets successfully, but if you have a strong desire to succeed, faith in your artists, and a little money in the bank, now may be the time to take that first step..

Cash Machine

Cash is the life-blood of any new business, and record labels are no exception. Maybe you’ve saved some cash from a day job? Perhaps you manage a band, and have earned some extra from gigs? But if there’s nothing in the bank, you still have a number of options for raising funds. You can go to your bank for a loan or overdraft facility. If you do, make sure you can handle the interest payments and the repayment period. Family or friends may be more willing to invest — perhaps at a preferential rate!

Alternatively, you might be able to secure funding in the form of a grant. The PRS Foundation (www.prsfoundation.co.uk) and Prince’s Trust (www.princes-trust.org.uk) both offer financial assistance to new music business ventures, provided you meet certain criteria. Venture capital firms such as Ingenious (www.ingeniousmedia.co.uk/ingenious.swf) may be willing to back you, possibly in exchange for a sizeable chunk of your new business, although venture-capital funding is usually the preserve of more established artists, of the Robbie Williams scale, and those with a proven track-record of business success.

Business Angels are another alternative. They can offer you expertise as well as funding, but will normally ask for an equity stake and possibly day-to-day involvement in running your business — dragons dressed as angels, if you will! More info on business angels is available from www.bbaa.org.uk/portal/ and the European Angel network at www.eban.org. You could also consider the Small Firms Loan Guarantee Scheme at www.startups.co.uk/Small_Firms_Loan_Guarantee_Scheme.YQc-qBloX8KDRw.html, although some ‘royalty-based’ businesses have been excluded from the scheme in the past. For more detailed advice on the SFLGS, it’s best to meet with your bank manager to discuss your requirements.

Whether you’re borrowing from a bank or elsewhere, lenders will expect you to provide some sort of security for the privilege, usually in the form of a charge over your assets — such as your home or car. Be careful, because if the debts mount up, you may find yourself without a roof over your head! Personal guarantees should be avoided unless limited by amount, and unlimited guarantees should never be given.

Four Day Hombre sold shares in their label to fans, in order to secure funding.Four Day Hombre sold shares in their label to fans, in order to secure funding.If it all sounds a bit too corporate, you could always try getting your fans to fund your label. Four Day Hombre sold shares in their own imprint, Alamo Music, to fans, to help pay for the recording and release of their debut album. The Crimea, recently dropped by Warner Records, have taken the novel step of giving away their album as a free download from their web site, in the hope that the increased profile will enable them to generate revenue from touring and merchandising instead.

Web sites such as Sellaband.com (www.sellaband.com) are also trying to alleviate the cash-flow dilemmas of new artists. Their site helps acts and small labels raise finance from believers (or fans), who can buy parts or shares in their favourite listed act. Once a band have raised $50,000, they can go in to a studio with a producer and record their debut album, which is subsequently released via the Sellaband network.

Codes & Numbering Systems

The world of music retail depends on a number of different cataloguing and coding systems, and it’s vital to ensure that your releases have the correct codes and numbers.

  • Barcodes

Barcodes are unique numerical markers used to track record sales on the high street and on-line. Without them, physical and digital sales couldn’t be tracked, royalty payments would falter, and retailers couldn’t manage their stock. The indie labels’ trade association, AIM, has recently concluded a deal with GS1 — the UK business association responsible for bar coding — making it cheaper and easier for indie labels to sell their music in physical and on-line stores, and to track payments. A more comprehensive overview of the new label scheme is available from the BPI information sheet at www.bpi.co.uk/pdf/Bar_Coding.pdf. Self-distributing artists and labels should email GS1 (info@gs1uk.org) for further information.

  • Catalogue Numbers

You’ll need to ensure that no other company has taken the catalogue numbers you allocate to your releases, or your label name. You can check this information with the MCPS prior to release (www.mcps-prs-alliance.co.uk/Pages/default.aspx).

  • ISRC Codes

International Standard Recording Codes (www.ifpi.org/isrc/isrc_faq.html) are an international identification system for sound recordings and music videos. ISRCs identify the master recording by encoding it with a unique and permanent digital marker during the mastering stage. The codes don’t identify physical duplicates, such as CDs or DVDs, so there’s no overlap with catalogue numbering or the barcode system.

Having an ISRC code will ensure that details of your tracks are held on the CatCo industry database, and that sales of your records are entered for chart data and royalty payment purposes. You should contact the helpdesk at PPL to obtain your First Registrant Code. You can then allocate ISRCs to your recordings.

  • Global Release Identifier (GRid)

A GRid is a brand new identifier that will identify electronically distributed music, be it single tracks, bundles or multimedia packages. A GRid is not a replacement for the ISRC codes, but will further the use of ISRCs because in order to allocate a GRid to a release, ISRCs will need to have been issued to the sound and video recordings contained in the release. Users need to apply for an Issuer Code from the GRid Registration Agency: www.ifpi.org/grid. A comprehensive guide to the GRid system is available from http://212.134.114.163/grid/index.html.

Chart Eligibility

If you want to ensure your releases are eligible for the UK charts, you can download the Official UK Chart Company’s rules on eligibility from www.theofficialcharts.com. They include important provisions relating to formats, playing time, pricing and so on. Charts compiler Millward Brown need two copies of any physical releases, along with the release information at least two weeks in advance, to ensure sales are recognised when they occur at chart-registered retailers.


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