Surface Festival works with thousands of bands every year and we get asked constantly about record companies, how they work and whether bands can set up their own. Rapid changes are taking place in today’s music industry; securing that record deal is harder than ever before. But do you really need that record deal? Or do you want to release your music independently? Or maybe you want to build up your profile and fan base with your own independent record label first so that when you approach larger record companies at a later date you’re in with a better chance?
Many artists, early in their careers, create their own labels which are later bought out by a larger company such as Nothing Records, owned by Trent Reznor of Nine Inch Nails; and Morning Records, owned by The Cooper Temple Clause, who were releasing EPs for years before the company was bought by RCA, to name a few. Going independent takes guts, but it’s been done. And it can be done again!
So what does it take to start an independent record label and become the next Motown, Ministry of Sound or Rough Trade? Today we’ll be looking at the business skills you’ll need to set up your own label.
This article is split into the following sections:
– Income Vs Costs
– Music Trade Associations
– The Business Plan
– Trading Status
– Music Industry Collection Societies
– MERLIN and Online Licensing
– Your Website
– Digital Distribution
– Physical Distribution
– Chart Eligibility
– Codes & Numbering Systems
– Last But Not Least: Money
– Useful Contacts
As with any new business you’re going to have to find some start-up cash. Public funding is available but is often limited to economically deprived areas, and with the current economic climate securing this is few and far between. Governmental support is more often given in the form of training and business advice.
If you have very limited resources you could set up a joint venture of two or more partners where each person puts in a smaller sum, maybe £250 or £500 each. If very strapped for cash you could even pay the agreed sum into your label fund over a set time, maybe six months, while you carry on working in your day job to secure further funds.
The key is to find enough money to record and release your first song(s). After this the aim is to make your money back on every release so that you can continue to release more music off the back of your original investment. Start small by building a track record, contacts and experience; as the business grows so will hopefully profits.
Your bank might give you a loan or overdraft. Make sure you can handle the interest payments and stick to the repayment period, if you don’t you could end up in debt.
Another alternative are ‘Business Angels’. These are business investors who can offer you expertise as well as funding. HOWEVER: They will normally want a share in your business as well as involvement in running your business. Think twice if you want to keep control of your business yourself.
Then there are venture capital firms. Again, these will often only fund you in exchange for a sizeable chunk of your business. Additionally they usually restrict their investments to more established artists and those with a proven track-record of business success.
You could also consider the Enterprise Finance Guarantee scheme (EFG) (www.startups.co.uk/enterprise-finance-guarantee.html). This is a scheme with government guarantee to boost the credibility of small business loan applications. The aim is to support new lending to economically viable small businesses that need funding support. The decision on whether or not to grant an EFG loan is wholly delegated to the bank, the government does not have a say. So it is best to meet with your bank manager for more detailed advice on the EFG and to discuss your requirements.
An idea out-of-the-ordinary is to try getting your fans to fund your label. ‘Four Day Hombre’ was the first band to do this with their record label ‘Alamo Music’. A number of the band’s fans invested the capital to formalise the label and hence became shareholders in Alamo. This fan investment helped pay for the recording and release of their debut album.
Whichever way you decide to fund your new venture, one of the first things you will have to do is set up business bank account.
Income vs Costs
When calculating your budget you must consider how much money your record label is likely to generate (income) and what your costs will be. The aim is to keep your costs down and your income up.
Unfortunately costs often need to be paid before you see the related income – for example you will probably need to pay recording and digitising and/or manufacturing costs before you see income from actual music sales. It can be a bit of a balancing act to stop your cash-flow from drying up as you wait for that well-deserved income.
Music Trade Associations
Joining a specialized trade association can give you a wealth of information, support and contacts when setting up a new music business. They provide training, publish research, and lobby government on music-business-related matters. As an independent label you can either join AIM (Association of Independent Music, www.musicindie.com), or the BPI (British Phonographic Industry, www.bpi.co.uk). Historically, the major labels joined BPI, whilst the independents have been members of AIM, although there is more of a mix-up happening now.
The Business Plan
This may sound scary, but don’t let the dreaded words ‘business plan’ put you off. Even if you’re not immediately looking for outside investment, the best way to ensure your objectives are in line with your budget is to write a business plan – even if you only ever write it for yourself.
Your business plan will help you organise the steps for getting your music to market, it should show in detail what the business will be doing, who will be running it and how it will generate turnover and profit. You will need to try and calculate all your foreseeable costs so that you can derive the price and the number of records and/or downloads you’ll need to sell to break even. Think about: What are the total costs of starting your label? How long will it take for the label to earn these costs back (called the ‘payback period’), and will the business have enough cash to keep going until this point (cash flow forecast)?
There are no hard and fast rules on how to set out your business plan but you can get free samples of business plans by searching Google to give you some ideas. Also local high street banks and government-backed organisations like Business Link (www.businesslink.gov.uk) give advice on writing a business plan as well as a wealth of practical guidance on starting up your own business. Many high street banks also provide ‘starter packs’ with tips and checklists – even if you don’t take out their loans, you can always help yourself to the literature!
When you set up your business you will have to think about which status you want to trade under. This is a lot simpler than you might think, there are four types of businesses:
1# The sole trader
2# The partnership
3# The limited company
4# The limited liability partnership (LLP)
1# The sole trader:
Operating as a sole trader means there is just you, one person, working for yourself. You will need to tell HMRC (HM Revenue & Customs) that you’re working for yourself. You will be liable for paying income tax on your profits as well as national insurance contributions. The HMRC will send you a self-assessment tax-return form every year for you to fill in. The biggest worry as a sole trader is if the business goes into debt you would be personally liable for these debts.
2# The partnership:
Similarly with a partnership you will need to inform the HMRC of your self-employed status. But, as the name suggests, you’ll be working with one or more partners. It is advisable to draw up a formal partnership agreement with the help of a solicitor. The partnership agreement should state exactly what each partner has invested into the business, how the work is going to be shared, how profits (and losses) will be split, and what happens if the partnership ends. Each partner pays income tax on their share of the profits, and each partner is liable for any debts the business gets into.
3# The limited company
Legally, with a limited company, the company is a separate entity to you as a person. As the company has its own legal personality it can own assets such as computer equipment, its name, copyrights and so on. Profits made are not automatically your personal income; instead they stay within the company. As an owner you would own shares in the company. To make a personal income you would have to draw a salary or dividends out of the limited company. Equally, any debts the company gets into are not your personal debts. This means if the company went into debt or got sued you wouldn’t have to pay money from your own pocket since the company is, legally, a separate body.
Before you can begin operating as a limited company you have to register the business with the Registrar of Companies (Companies House). To save time you can even buy ready-to-use companies ‘off-the-shelf’ from Companies House ( www.companieshouse.gov.uk). The down side of limited companies is that you’ll have to file annual audited accounts (which the public can inspect) and you’ll have to pay an accountant to handle paperwork, tax/VAT registration, and so on. Limited companies also have to pay corporation tax and you will need to operate a PAYE system to collect and pay income tax and national insurance contributions from employees – if you are drawing a salary out of the company this will include you.
4# The limited liability partnership (LLP)
A limited liability partnership (LLP) has elements of a limited company as well as elements of an ordinary partnership. It is like a limited company in terms of administration and its legal existence as a separate entity to its members. However in relation to tax it is similar to a partnership: It pays no corporation tax but partners pay income tax on profits as well as their own national insurance contributions. The main advantage of an LLP is that the company itself (like a limited company) is responsible for any debts that it runs up, not the individual partners.
Music Industry Collection Societies
Music industry collection societies collect license fees and distribute income to copyright owners when their works are copied, broadcast or performed in public. Radio and TV stations, broadcasters, clubs, pubs, restaurants, shops, hairdressers and taxis that play music in public are all required to have a license. The collection societies collect the license fees and then distribute the money to their members. So in order to receive this money you need to become a member and register your works with one or more of the music industry collection societies.
The two main collection societies for the music industry are the PPL (Phonographic Performance Limited) and the PRS for Music (Performing Rights Society for Music). These collection societies are both slightly different. PPL licenses rights in relation to copyright ‘sound recordings’. The PRS on the other hand administers the performing right in the underlying musical and lyrical compositions (e.g. the ‘song’). So as a basic, PPL represents record companies and performers whereas PRS for Music represents composers, songwriters and music publishers.
As a band with your own independent label it is advisable to join both the PPL and the PRS for Music. The PPL will collect money from broadcasts of your recordings. It’s free to join and can help you generate that much needed income as a performer and record label (www.ppluk.com/en/Record-Companies/Joining-PPL–VPL/). The PRS will collect money for you as a composer/songwriter when your songs are played or performed in public, so will provide a separate income. Every person within the band who has written lyrics or music needs to apply for individual membership (www.prsformusic.com/creators/wanttojoin/Pages/Benefitsofmembership.aspx).
MERLIN and Online Licensing
If you have already decided to join the trade association AIM (Association of Independent Music) you will probably receive plenty of information from them about MERLIN. AIM is part of a global trade body called WIN (World Independent Network), who have established a global music licensing agency for independents, called MERLIN (www.merlinnetwork.org).
Merlin is a non-profit organisation which focuses on online licensing for independent music companies. Membership is free and as a member they will represent you in enhancing the commercial exploitation of your copyrights on a global basis. This means they will protect your copyright in light of infringement or abuse. They will also help you improve your ability to compete in the digital marketplace, help you to access new revenue streams in the ever changing world of digital music, and help your new label to secure deals that would be hard to negotiate locally or individually.
Creating a dedicated website is another way of building profile and generating revenue for your label. You can use the website to provide general information, to market yourself and your products, and to use as a point of sale by offering downloads and merchandise. 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.
In order to drive traffic to your site consider using a SEO (search engine optimisation) company to ensure your website and any other relevant websites mentioning your band come in the top search engine results. The higher you come in Google and other search engines the more people will find you, and this should hopefully lead to more sales. Also consider using social networking sites and blogs to drive further traffic to your site.
Since January 2007 all legal digital downloads purchased from online stores such as iTunes, 7 Digital, eMusic and many others have been eligible for inclusion in the weekly singles charts. Therefore with enough downloads in one week any track that is digitally available can be a hit. Additionally, with physical CD sales dropping, the most efficient and most cost effective way to release chart eligible singles now is as a digital download. Therefore let’s focus on digital distribution of your single(s) first, you can always find a physical distributor later if/when you decide to release an album in a physical format such as CD.
Theoretically you could distribute your tracks across the web yourself by single-handedly uploading these to online stores across the internet. However online retailers come in many shapes and sizes, from the per-track/per-album downloadable model used by iTunes to the subscription model used by eMusic. This can be difficult to navigate especially as many of the bigger retailers require music to be supplied already digitised in their preferred format. The other problem is that you’d have to deal with separate licensing agreements with each retailer, coordinate your release dates so that tracks go live at the right time, and manage royalty tracking yourself. This can be very time-consuming. You would probably find it quicker and easier to get a digital distributor or DRM (Digital rights management) to do all this for you.
Once you have chosen a digital distributor to suit your needs the process of getting your tracks for sale online is pretty straight forward. You will need to provide them with a master of your recording and all the details (often referred to as Metadata) for your release. The largest and most reliable digital distributor is Zimbalam.
For albums, physical CDs currently remain the dominant format. There are various ways you can produce and distribute albums on CD. From the simple DIY method of burning CDs on your home PC and selling these at gigs and via your website, to getting your CDs professionally replicated and produced at one of the many pressing plants across Europe. We would advice to start small and if you use a professional duplication service find one that produces high quality CD’s in small runs. Make sure any CDs you produce look professional so that you can use them for promo, press, radio, promoters and for sale.
Once your label grows bigger and you decide to go for a distribution deal to get shops to stock your music you will want to find an actual pressing plant to produce your CD’s. Make sure you get samples and test pressings of your CD before committing to an order. Many pressing plants don’t do runs of CDs shorter than 500 copies, so you want to get it right before you decide to spend your money.
Getting the distribution deal can be a bit more tricky. If you have no proven track record distributors can be reluctant to take you on. You will have to prove that your have a strategy in place for your label. You will probably have to show them where and when your band is gigging, any favourable press cuttings, and if there’s any marketing to support your release.
Some distributors also expect the deal to be exclusive; this means no other distributor in the UK can sell your records. However you want to make sure that that you can still sell your records from your own website and at gigs, so ensure you reserve these rights in your agreement.
It is useful if you can manage to negotiate a manufacturing and distribution deal in one. This saves you having to press your CDs beforehand. This can save time but also means you won’t have to pay for pressing a large run of CDs before receiving any sales income. On the down side these combined deals can mean you lose control over the quality of your CDs and, as your distributor chooses the pressing plant, manufacturing costs can be more expensive than if you found one yourself.
Don’t forget that there are other hidden costs of physical distribution. Often CDs are distributed on a sale-or-return basis, which means that retailers can return unsold stock. You will probably have to pick up the bill for removing the stock from the store and then pay for them to be scrapped. Don’t rush into a distribution deal, search around for the right deal to fit for you, if you need one at all.
If you want to ensure your releases are eligible for the UK charts you must make sure that all of your release formats and their content comply with the chart rules. You can find the Official UK Chart Company’s rules on www.theofficialcharts.com.
Digital formats will need to be registered with CatCo. You will need to obtain an ISRC (International Standard Recording Code) for each of your individual digital tracks and a digital barcode for each of your digital formats. For ISRC numbers and to register with CatCo contact the PPL via www.ppluk.com. You can get a barcode for digital use from www.gs1uk.org.
Physical formats will need to be registered with Millward Brown and you will need to obtain a catalogue number and barcode. You can get a barcode from www.gs1uk.org. It is also a good idea to contact the PRS for Music (www.prsformusic.com) to check whether your chosen catalogue number(s) have been used in the past. If you are selling your CDs via retailers you must also ensure that you notify all of your chosen retailers with the correct release information. Alternatively your distributor (if you have one) should be able to help you with all of this.
Codes & Numbering Systems
Barcodes are used to track record sales via retailers and online. Without them, physical and digital sales couldn’t be tracked, royalty payments couldn’t be disbursed, and retailers couldn’t manage their stock. GS1 is the UK business association responsible for barcoding (www.gs1uk.org). Contact them to obtain both physical barcodes for selling in store and digital barcodes for selling online.
# Catalogue Numbers:
You’ll need to ensure that no other company has taken the catalogue number(s) you allocate to your releases or your label name. Contact the PRS for Music (www.prsformusic.com) to check whether your chosen catalogue number(s) have been used in the past.
# ISRC Codes:
International Standard Recording Codes are an international identification system for sound recordings and music videos. Each ISRC is a unique identifier for a specific recording which can be permanently encoded into a product as its digital fingerprint. Tracks with an encoded ISRC automatically get identified for royalty payments. Having an ISRC code also ensures that details of your tracks are held on the CatCo industry database and are entered for chart data. Contact the PPL (www.ppluk.com) to get your first registrant code. After this you will be supplied with details of how you can simply allocate ISRCs to your sound recordings and music videos.
Running any type of business means that you will be dealing with various legal issues from time to time. Don’t be put off by this; it’s just a part of running a business. Find and consult an experienced lawyer to help you. Below are just a few scenarios you’re likely to come across:
# Band agreement:
As being in a band in itself is like running a business it is advisable to draw up a band agreement. This agreement should outline things such as the recording budget, how royalties are to be split, and who’ll own the band name in the event of a break-up.
# Recording contracts:
Even if you are only planning to sign your own band to your label it is a good idea to set out a recording contract between your label and your band (and any other bands or artists you might sign in the future). This contract should deal with the obligations of each party and should discuss copyright ownership and both mechanical rights and performing rights. If you are planning on growing the label in the future it is advisable to insert an assignment of copyright clause into the contract in favour of your label. This way your label can build its catalogue over time which will help make it more attractive to a potential future buyer. The contract should also include what will happen if either party wants ‘out’, if the band were to split up or if the label were to close down.
Before you choose a label name (and band name as a matter of fact) you must make sure you have the right to use the name you’ve created. If you don’t want anyone else to use your name you should consult a lawyer with regards to making a trademark registration.
If you plan to use other people’s artwork, photographs, trademarks or logos on your posters, flyers, website, record sleeves etc you will need to get their consent first.
# Producer contracts:
If you’re planning on using a producer or remixer you’ll need a written agreement with them. This should outline things such as the recording budget and producer royalties. Make sure you include a clause which assigns the copyright in the sound recording to your label.
# Publishing deals:
If any of the songs you have written or co-written become a hit the publishing income can be substantial. To take full advantage of any royalties, cover fees and synchronisation income consider creating your own publishing company. Don’t think you have the time to be running another company? Consider setting up the publishing company but assigning the day-to-day administration of publishing to a bigger publisher, who in turn will take a commission on earnings.
# Copyright notices:
Include the correct copyright notices on sleeve notes and inlay cards. Sound recordings should display the (p) symbol, year of release and owner’s name. Original songs and cover versions should display the © symbol, year, composer, and publisher’s name.
Last But Not Least: Money
There are higher profits to be made by starting your own record label instead of signing to one. You will own the rights in all the sound recordings you release which means no middle man taking a large cut of the money. And don’t forget you will profit even further if you license tracks for compilations or for use on TV, in films and in adverts. As your portfolio grows so will the overall sales value of the company. Chris Blackwell sold Island Records to PolyGram (Seagram) for £300 million and Richard Branson sold Virgin Music to EMI for £210 million. This is obviously the top end of the scale but they both started out as unknowns.
Companies House www.companieshouse.gov.uk
HM Revenue & Customs www.hmrc.gov.uk
Intellectual Property Office www.ipo.gov.uk
AIM (Association Of Independent Music) www.musicindie.com
BPI (British Phonographic Industry) www.bpi.co.uk
PRS For Music www.prsformusic.com
PPL (Phonographic Performance Ltd) www.ppluk.com
MU (Musicians’ Union) www.musiciansunion.org.uk
Music Week www.musicweek.com
International ISRC Agency www.ifpi.org
Millward Brown (For The UK Charts) www.millwardbrown.com
BASCA (British Academy Of Songwriters, Composers and Authors) www.basca.org.uk