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In order for an independent record company in the U.S.
to distribute its product overseas it will probably have to enter into a
contract with a foreign record distributor. These foreign licensing
agreements may be entered into on a long term basis or on a project by
project basis.
As a preliminary matter, you must make sure that the indie's agreement
with its recording artist (or with the owner of the masters if the indie
is purchasing a master recording from a producer, etc.), provides for a
worldwide right of distribution and sale, and permits the indie to use
licensees to exploit these rights. Otherwise, the artist or producer or
other owner of the masters has the right to do the foreign licensing deals
directly.
There are various types of foreign licensing deals. One option is to enter
into a deal with a major overseas distributor for all territories outside
of the U.S. (e.g., Universal, BMG, etc.). The advantage to one foreign
distributor is that it simplifies matters from an accounting as well as a
logistical perspective. Most such deals will give this distributor a first
option on all of the indie's product for an extended period of time (e.g.,
3-5 years). In effect, under this scenario the indie has an overseas
affiliate.
A variation of this scenario is to have a different affiliate company in
each country or territory. In such a case the indie might have an
agreement for an ongoing affiliate relationship with a different company
exclusive for each territory (e.g., EMI in the ECC, Avex in Japan).
Finally, the indie may have no ongoing affiliates but would take each
master recording, release it in the U.S. territory, and then "shop" for a
distributor in each different country around the world. Many people go to
MIDEM in Cannes, France, each January to try to make such international
deals. This process can be tedious but it gives the indie the ability to
have more control over who releases the indie's product in each different
territory.
Regardless of the type of distribution arrangement, there are several
basic issues that should be dealt with in the agreement between the indie
label (usually referred to as the "licensor") and the foreign distribution
company (the "licensee"). The following is an outline of the important
deal points that must be negotiated.
To start with, the indie or licensor should get an "advance" against
royalties on product delivered (e.g. $500 - $5,000). This advance is
literally a non-refundable payment of royalties in advance of when they
are actually earned by the foreign distributor. This advance is then
"recouped" or paid back out of royalties payable to you if and when they
are earned. Since royalties may be a long time in coming and are usually
only accounted for on a semi-annual basis, the entire foreign licensing
business is built on the advance/recoupment/royalty system.
As for an appropriate royalty rate, in foreign deals it is often a
percentage of the "price paid to the dealer" or the "PPD". This is usually
something between the retail price and the wholesale price depending on
how PPD is defined in the agreement but, in order to get a monetary
equivalent of 10%-12% retail, in most cases it would probably require a
rate of between 15%-20% of PPD. You must be very careful because
percentages can be deceiving. It really depends on what number your
percentage is applied to - and the definition of PPD is often a heavily
negotiated issue in any foreign licensing deal. Of course, it is best to
try to get the royalty percentage applied to the highest number possible.
I also try to make the licensee state the actual dealer price or PPD as a
dollar amount so I can apply the percentage and do a "penny count" and
know exactly how much the client receives per record sold. Also, I always
make sure that the clients gets a piece of any flat fee or third-party
license made by the licensee (although it is very important to be sure
that any such sublicenses are limited to the particular territory only).
A very important point when it comes to payment is to make sure to specify
that all payments are made by wire transfer because foreign checks usually
take up to 90 days to clear into a U.S. bank account. As for accounting
statements, as with U.S. record labels, most foreign licensees pay
semi-annually. Since conducting an overseas audit can be logistically as
well as financially troublesome, in order to add teeth to the accounting
provision and to incentivize the foreign licensee to make prompt, accurate
payments, I try to get the foreign licensee to agree to pay for the cost
of any audit if it is determined that there is a discrepancy and/or a
mistake was made in excess of a certain percentage (e.g., the licensee
actually owes you 10% or more than the actual amount paid to you).
Be sure that there is a firm release commitment provision. If the foreign
licensee does not release the product in its territory (or any particular
country within its territory) within a certain time after delivery (e.g.,
90-120 days) then the rights granted to the licensee in the product would
revert to the indie record company. This forces the foreign company to
either perform or allow the indie to go to another company in that
territory to do the job. I try to relate all timeframes to a fixed date in
the contract rather than to the delivery of product or the release of
product since such dates can be disputed by the parties. Sometimes you can
get a provision added that also states that the agreement can be
terminated if the licensee fails to make any payment or fails to release
any product which has been delivered.
Even if the product is released, the license agreement will usually
provide for a term limit (e.g., 3-5 years) after which the indie can
either continue to do business with the licensee or can terminate the
contract and have the masters returned. Most such provisions will provide
that the licensee can continue to sell residual product from its warehouse
on a non-exclusive basis in the territory. Be sure to put a time limit on
this sell-off period (e.g. 6 months) and be sure to specify that the
licensee must start to limit its manufacture of product at least 3-6
months before the contract period ends.
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