This Article Originally Published October 1998
by Donald S. Passman
CD ROM means "Compact Disc--Read Only Memory," which is a fancy way to say that you can play it but you can't record on it. CD- ROMs look just like the music CDs you buy, but when you put them in your computer, they display visual material, such as graphics, pictures, text and videos. (Enhanced CDs are also a form of CD- ROMs, but they are treated more like records.)
In order to put out a CD-ROM, you need to clear the rights, which means getting permission to use whatever materials you want to include. The process of clearing multi-media rights is almost as enjoyable as having your teeth drilled, as it involves making lots of itty bitty deals for small amounts of money, where the other guy has no reason to move quickly because he doesn't make much.
Here's what needs clearing:
- Musical Clearances CD-ROM clearances are very much like those for records, meaning that the owners of materials usually want a royalty every time the CD-ROM is sold.
- Non-Musical Clearances This includes photos, text, data base, film clips, inflatable squeaky toys, etc, and also some weird things like the right of publicity and privacy and "moral rights" for some countries outside the United States. Also, the unions have a say in all of this because, when you take existing recordings from one medium to another, you are putting musicians out of work. Accordingly, the unions want something called Re-Use Payment.
The Economics of CD-ROM Deals
There are two different kinds of deals for CD-ROMS: a Whole-Package Deal and a Piece-Meal Deal (these are not industry terms--I just made them up). A Whole Package means that the CD-ROM company makes a single deal with all the rights holders in a bundle. An example would be a CD-ROM that features one artist, where the company contracts with the artist and his or her record company for all of the rights to the recordings, publishing, likeness of the artist,etc. The royalties on these deals run somewhere in the range of 10% to 20% of wholesale, with the norm being in the 10%-15% range. At the time of this writing, wholesale was approximately $21.00 to $26.00 for a suggested retail of $39.95 to $49.95. The companies haven't yet figured out how to charge packaging deductions, so don't tell them. Sometimes, the royalty escalates with sales, although the escalation points are low by record standards because these titles sell a lot less copies. For example, a deal might be a 10% royalty up to 25,000 units, 15% from 25,000 to 50,000 and 20% over 50,000.
Some of the CD-ROM deals are done with a 50/50 profit split instead of a royalty. This is very similar to a profit split on record deals where the CD-ROM company first gets back all of the costs and expenses from gross revenues, and then the rights providers and the company split the profits on a 50/50 basis.
Assuming that the CD-ROM company is unable to do "one-stop shopping," they have to run around and acquire rights from a lot of different places. This is what I call a "Piece-Meal Deal." It's also what I call a major pain in the butt because it means making lots of deals with a bunch of people. And who are these people? Why, the owners of the master recordings, songs, videos, still photos, reviews, liner notes and other text materials and whatever other junk you include.
The payment for small stuff (like reviews) is usually done on a buy-out basis, meaning there's no royalty (just a flat fee and an "hasta la vista"). The fees generally range around $250 to $1,000.
People who own songs and recordings are not nearly so accommodating, and so, either the buy-outs are more expensive or more commonly, the owners want a royalty. The amount paid for masters and songs is usually about the same, and there are no hard and fast rules. If the publisher gives a buy-out, which is increasingly rare, it will be in the area of $500 to $5,000 plus (depending on the length of use and the importance of the material.) Also, if there are only a few songs played in full, it will be more expensive for each song than if there are little snippets of a lot of songs.
When there’s a royalty, a “snippet” type use would get about one- cent to five-cents per song (plus another one to five cents for the master), usually with a guaranteed minimum of 10,000 units. If the CD-ROM is music-driven (meaning that the music is an essential element), then it goes up to the range of eight-cents to fifteen-cents per unit, again with a 10,000 unit minimum. </p> </p>
Sometimes, the royalty is based on a percentage of the wholesale price (5% to 10%), which is divided amongst the songs on the basis of playing time, often with a guaranteed minimum of ten-cents to fifteen-cents per song. So, for example, if you had a two-minute use of your song and there was twenty minutes total of music, you would get 10% of the total royalty, but not less than twelve-cents.
These grants of rights are usually for a limited time (about three to five years), and they may also be limited to the United States or other designated territories. The licenses are also non-exclusive, which means that the owners are free to grant the same rights to any other CD-ROM company. However, in the case where the CD-ROM is a capsule of one artist's career, the company will want some exclusivity to prevent anyone granting rights to a competitive CD-ROM that features the same artist's career.
Donald Passman is a Los Angeles-based music attorney with the firm of Gang, Tyre, Ramer & Brown. Specializing in music business law for over 20 years, his clients include major publishers, record companies, film companies, managers, producers, songwriters, and artists such as REM, Janet Jackson, Quincy Jones, Tina Turner and Green Day. On a regular basis, we will be excerpting from Mr. Passman's best-selling book, "All You Need To Know About The Music Business."
From "All You Need To Know About The Music Business" by Donald S. Passman. ©1991, 1994, 1997 by Donald S. Passman. Reprinted by permission of Simon & Schuster, Inc.