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CD Baby's New Digital Deal Is Not What It Seems
Poorly Structured Contract Could Tie Up the Rights of Artists for Years
By Moses Avalon
(more articles from this author)
2003-08-12
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It was like I had climbed the church bell-tower of some rural hamlet and shouted, "There is no Santa Claus, it's just a children's story!" And the townsfolk were outraged: "CD Baby sold out? How could you say that? Derek Sivers is such a righteous dude!" On and on.

CD Baby has been called the Mecca of the Do-it-Yourself music industry, and its CEO, Derek Sivers, the Pied Piper of up-and-coming recording artists. But now, the country's most successful independent online distributor of CDs may have crossed a line that could get them in hot water with thousands of their clients.

CD Baby functions like Amazon.com for artists not signed to major labels. Artists can use the company's website to sell their CDs and thus are relieved of the burden of warehousing and shipping their inventory themselves and the accompanying problems of monitoring credit card accounts. More importantly, CD Baby takes only $4 for each sale and passes the remaining $5-$8 per unit back to the artist every 30 days.

The deal has always been non-exclusive, allowing artists the right to market their own work in their own way, and keep them free to make a deal with a major label, should opportunity come a-knocking. The model has been hugely successful, particularly among artists who are shut out by the tightly-guarded distribution arteries of the major record labels. CD Baby's recent alliance with Tower Records boosted their profile and its wunderkind CEO, Derek Sivers, who has become a folk hero, gracing several music industry trade magazines with his Tibetan Zen pony-tail and trustworthy smile.

Last month, however, it appears that the dark side of the Force may have seduced the young Jedi. CD Baby launched a new service that emulates the very business model that their philosophy has thus far rebelled against - one where the artists' music is controlled exclusively by CD Baby without the promise of significant distribution.

The New Deal With Apple/iTunes

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The new "Digital Distribution" deal offered on the CD Baby site has attracted hundreds of enrollees over night (at $40 a head), due mostly to CD Baby's claim that their clients will have the possibility of being distributed on Apple Computer's extremely successful iTunes service. Only one month old, iTunes has distributed millions of major label singles already, breathing much-needed life into the desperate lungs of the retail record business. Apple, until now, has been distributing only acts signed to major labels. Several months back they invited representatives of the five major record distributors to a "secret conference" to announce their deal. Derek Sivers was the only invitee that didn't have an entourage of lawyers. He was "chosen," many thought, to be the sole indie pipeline for the iTunes service. It made Apple appear oh-so hip.

Giving a shot at distribution on iTunes is, in the minds of many unsigned artists, almost like competing with the big name artists on MTV, a dream come true for many struggling acts. But is it a real shot, and what rights are CD Baby artists giving up in exchange for this chance? Is CD Baby itself being played for a sucker? Facts that are surfacing as a result of this investigation may reveal that there is another agenda for Apple's choice of Mr. Sivers to be the sole emissary responsible for acquiring content for Apple.

A Contract Of Tortured Credibility

According to the eight attorneys who responded to my initial query, the CD Baby contract has several major loopholes that could permanently hinder an artist's ability to navigate beyond the Do-It-Yourself realm to the strata of major label artist; something most of CD Baby's clients presumably want. Many clauses in the CD Baby contract tie up rights exclusively for a minimum of three years, and some clauses attempt to grab rights to the artist's "underlying compositions" themselves ("songs," for those who don't speak legalese.) This turns the CD Baby contract into an EXCLUSIVE publishing and distribution deal fused together.

Most major label recording contracts have similar clauses that stick their hands deep into the pockets of artists, but there is usually an advance of some magnitude as part of the exchange. With CD Baby's deal the artist pays for the exclusive licensing of their music.

Furthermore, the CD Baby contract allows them to sell their exclusive licenses to ANY third party without conferring with their client first. (Let's hope it's to a third party that pays royalties, since their agreement is a "flow-through" deal to their clients.) This in effect makes CD Baby's basic business model no different than that of a standard major label, except there is no advance to the artist, no promotion campaign, and no MTV video. (And we thought record deals couldn't get much worse.)

Given my experience with the dark side of the music business, I immediately jumped to a cynical conclusion. But several attorneys interviewed for this piece felt that the CD Baby contract's "bad clauses" were more the result of "sloppy drafting" rather than any attempt at subterfuge. Others were less generous. They are backing-off from recommending the CD Baby deal to their clients, saying emphatically that the contract contains "poorly drafted [and] risky language."

After receiving several emails from artists and lawyers and reviewing the contract myself, I contacted Mr. Sivers and went over each of the points at the end of this article. Some changes were made the following day, like the addition of a 30 day-opt-out clause, but the most egregious points remain as of the date of this piece, and conflicting language makes even the 30-day-opt-out clause's validity questionable.

I commented on this and recommended to Mr. Sivers that he pay for a proper analysis spearheaded by my company along with several legal experts. Eliminating my usual fees for analysis, I estimated the costs for research and the retaining of two legal experts at $2000. He passed on the offer, citing insufficient funds and stated to me that he had a trustworthy lawyer. Then he added an odd musing, that since "so few people will sign up for the deal, it doesn't matter if it's not perfect."

Considering the magnitude of the situation, I would have thought that getting a second professional opinion would be a no brainer. Also, many signing the CD Baby contract will not have the benefit of a lawyer to look over their shoulder. And this is a fact that perhaps CD Baby was not taking into consideration.

Sympathizing with Mr. Sivers' apparent financial situation, I offered to do it for FREE, footing the bill myself. I felt it was THAT important. Mr. Sivers responded with interest, but his attorneys never contacted me.

CD Baby's Point Of View

Question: Now that CD Baby has been made aware of these issues, will they change their agreement to reflect better terms?

Answer: No.

Initially, Sivers claimed that this is all much ado about nothing. He says the contract is limited ONLY to Digital Distributions. Why this makes it okay, escapes me, but regardless, several attorneys, including industry veteran, Doug Breitbart, who once managed Debbie Gibson, have a less cavalier attitude: "I do not believe the rights being obtained [by CD Baby] are limited to digital or streamed content but could be stretched to include an assignee who is a traditional CD based distributor."

Confronted with the fact that his deal grabs at underlying copyrights and actual CD sales, Sivers claimed that their Digital Distribution contract reflects almost verbatim the terms of the iTunes deal and that CD Baby was compelled to include these terms to please Apple. Mr. Sivers could not show me what he was referring to, explaining that Apple insists that he keep the contract "confidential."

If It Smells Like Fish...

"This smells, and not sweetly," said one music lawyer who thinks that CD Baby may have a duty to disclose the terms of the iTunes deal. "This notion of Apple's insistence that terms in its proposed contract with CD-Baby MUST be imposed on the bands with which CD-Baby contracts, coupled with an apparent insistence that CD-Baby cannot show them the contract - does not sit well."

Other companies who have signed with Apple say the iTunes deal has nothing to hide. Allen Jacobi, owner of Pyramid Records is one. He has been in the music business for over 20 years: "There is no nastiness in the iTunes agreement. It is very simple and straightforward." All this conflict among veteran attorneys and experts tortures Mr. Sivers' credibility on the subject. Yet, according to Sivers, his lawyers claim that anyone who thinks this is more that a harmless licensing deal is "completely wrong."

Without seeing the Apple contract for oneself, it's hard to get at the truth. And no one is giving the general public a peek at the terms of the iTunes deal.

That is, up until now.

In my capacity as a Journalist, I came to possess a copy of the iTunes contract. It was "leaked" to me from a prominent music industry attorney in Los Angeles, who asked to remain anonymous. I can not guarantee that I received the actual contract. (CD Baby didn't immediately respond to my request for confirmation.) I can say that it looks and reads like the real thing.

Going on good faith, and trusting the source, I did a comparison that amalgamates significant contributions by several veteran music business attorneys, each with over 10 years experience in the practice of law. The consensus is that it can clearly and credibly impeach the claim made by Mr. Sivers and his attorneys, that the objectionable clauses in the CD Baby agreement are there SOLELY because they need to be compliant with Apple. Furthermore, the comparison shows that the CD Baby contract does, in fact, unnecessarily grab rights to underlying compositions and unnecessarily grants CD Baby the right to distribute them "at will," to whomever, without first obtaining permission from the artist.

Nowhere in the "Apple iTunes contract" is it required that CD Baby be the "exclusive" distributor of these works, or get their hands on the "underlying compositions." In fact, there is language to the contrary. The "iTunes contract" makes it VERY clear that Apple is only interested in "sound recordings." In short, the Apple agreement is very safe for the party supplying the content, whereas the CD Baby deal is in question.

In Derek We Trust

Even cigarette companies caution you that their product might be dangerous. Will CD Baby post any warnings about the risks of their offer? Nah. Sivers and his attorneys maintain that my lawyers and I have a reading disorder. Instead, they're taking more of a "caveat emptor" approach, with karma as the bedrock of their warranty. In a public email response Sivers said, "I know a lot of this has to go on trust and my reputation as a moral dude." (see: http://www.musicthoughts.com) However, this premise pre-supposes that Derek Sivers (or some other "moral dude") will always be the owner of CD Baby!

One does not have to look back too far in time to remember the MP3.com debacle. At first, Michael Robertson was the champion of the indie. Many artists signed with MP3.com based on trust and perceived opportunity. And they were right for a while - until Vivendi Universal bought them and started changing the terms left and right, to their benefit, and not the artists'. A perfect example of what could happen with CD Baby.

Plus, if trust were the only issue this might be a flaccid concern. Even going on good faith, there are still problems; what if CD Baby is successful in getting iTunes to distribute these recordings, and the CD Baby contract is determined to be unenforceable against their clients? Apple may have a serious case for breach, as well as copyright infringement, against CD Baby. Such a scenario could tie up the rights of those who have signed the CD Baby contract in court indefinitely. (One lawyer I interviewed, said that was unlikely. I say, famous last words.)

And, if they are not successful in getting iTunes to take an interest in their catalog, then CD Baby will likely start selling these masters to just about any Digital Tom, Dick or Harry, and the client will have nothing to say about it.

The net result is that an artist could find himself in a situation where his songs are not distributed through iTunes, but through some fly-by-night outfit, and also be unable to license these rights to any third party record company. Since CD Baby's deal specially states that they are only required to pay a client on money they receive from a third party distributor, this scenario will likely result in $0 to the artist. What else is new?

And, even nastier, should iTunes and CD Baby find themselves in an acrimonious position in the future, these rights could fall into probate. Opting out at that time may require that the artist employ a lawyer. (P.S.: Nevada where CD Bay is incorporated - does not allow suits filed from out of state. You would have to go directly to Nevada to sue them. This is one reason that many businesses are attracted to filing there.)

And finally, what if Apple refuses to distribute any of the CD Baby catalog and then offers to buy CD Baby outright, hoping to inherit a huge bundle of artists' rights? What happens then? Will Mr. Sivers refuse to sell to Apple? Even for one-million dollars!?! How about thirty-million? How do we know that Sivers and Apple don't already have a pre-bid on the table? Don't you think a person signing with CD Baby should get the opportunity to consider these things BEFORE they commit?

Because acquisition of these rights, as well as ANY warning signs about the high risk nature of this deal, are absent from CD Baby's advertising AND because the possibility of a CD Baby artist getting their songs distributed by iTunes is, in fact, very remote, the offer falls into the standards of a "Bait and Switch," as defined by the Federal Trade Commission's Consumer Protection Regulations. (For more on FTC "bait and switch" standards: www.ftc.gov/bcp/guides/baitads-gd.htm)

But Why?

One can only speculate as to why a company with a flawless reputation would take this downward spiral. I have four possibilities. From most cynical to most benign they are:

- Despite their enormous popularity, CD Baby has relatively few hard assets and their model is built on a format that has an insecure future: the CD. To sell the company for any significant amount, they would need to acquire a lot of intellectual property. The easiest way is the old tried-and-true method: get artists to give you their music by promising them wide-spread distribution. It's an old game.

- Another possible reason for CD Baby's unwillingness to change the "exclusivity clauses" is because they have already made arms-length deals with several other online companies who will act as the proverbial fishnet for new clients. Companies like Oasis CD/RaindogRecords.com have made offers that claim distribution "Access" to iTunes via CD Baby. Such people signing these contracts may find themselves in the same position - locked into an exclusive deal - with little realistic hope of distribution though iTunes.

- A third alternative was contributed by an anonymous expert in entertainment law. He suggests that Derek Sivers and CD Baby are pawns in a larger game played by Apple: "Apple can afford marginally anti-competitive behavior and can certainly afford to induce innocents such as Derek to become complicit without wanting or intending to be. After all, Apple and its computer competitors behave without regard to 'brick and mortar' rules, including state and federal competition laws, as a matter of standard business practice and have shown an ability to defend against states and the feds without a burp to their bottom line profitability. CD Baby probably cannot." More on this as it develops.

- Fourth possibility: CD Baby's CEO just really has no grasp of the issues at hand.

I honestly do not know the truth yet. But, bottom line: either CD Baby is ignorant of the rights they are taking, or they are deliberately taking advantage of their clients' trust.

In this advocate's view (and giving CD Baby the benefit of the doubt) if CD Baby refuses to remove ALL the exclusive language and the words "underlying composition" from their contract, then they should at the very least post a consumer warning about the risks of the deal. If, after that, and after the client is informed of the risks, an artist wants to take a shot with them, then more power to the client and to CD Baby.

Furthermore, CD Baby should highlight IN BOLD any new changes they make to their contract, so that those who signed the older versions can easily see the changes.

Finally, I invite Mr. Sivers to persuade Apple to allow him to let the general public to see the terms of his iTunes contract (at least those that pertain to rights granted). This way, no one has to take my word for anything and the artist can understand EXACTLY what they are buying into when they sign with CD Baby.

I hope that CD Baby heeds these issues and amends their contract. They have done a great deal to help independent artists. I very much like this company's concept and would like to be able to recommend this service with a full and open heart.

Those who have already signed this deal and are in need of advice may contact me through my website www.MosesAvalon.com.

Seeing Is Believing

A report with side-by-side comparison of the "iTunes contract" and the CD Baby contract, with explanations and highlights of the "bad clauses" will soon be available on MosesAvalon.com at http://www.mosesavalon.com/cdbaby.htm

The report amalgamates significant contributions by several veteran music business attorneys, each with over 10 years experience in the practice of law.

Below is a brief summary of the report's findings. Although a host of legal professionals contributed to these conclusions, these are, none-the-less, non-legal interpretations and are still undergoing research. Understand them, but do not worship them. These comments DO NOT apply to CD Baby's regular "hard media" distribution deal, upon which they have built their good reputation. They also presuppose that the contract "leaked" to me is the authentic iTunes contract.

For reference, read the actual CD Baby Digital Distribution contract: http://cdbaby.net/dd?f=6

The CD Baby contract creates the following scenarios that are NOT required by Apple iTunes (except points 4 and 7 below):

1) The CD Baby contract could hold onto artist's rights (including elements of A SONG'S PUBLISHING) beyond its initial term of 3 years. In fact, some elements of the contract are so contradictory that some rights could be held up indefinitely. This is not required by Apple iTunes.

2) The deal is EXCLUSIVE. Meaning that artists signing this contract will not be able to sign a major label recording contract as long as they are bound to it. (Artists who signed the contract before July 24th are bound to it for a minimum of 3 years, with no opt-out option.) It also allows CD Baby to keep the digital distribution rights even after the contract is finished, or if the artist wants to opt out of the deal. This is not required by Apple iTunes.

3) The deal's main cache for artists (that the artist's music will be made available through Apple iTunes) is a phantom promise. No such guarantee is made in the contract. In fact, the reverse is asserted: that CD Baby is under NO obligation to release anything, at any time.

4) The policies created in this new deal are biased against Urban music, favoring singer-songwriter and Alterative-Rock styled artists, since the use of samples that are not cleared is disallowed. (Virtually no indie artist has the money to clear samples.) This policy extends to so-called "cover tunes" as well, even if they are properly licensed through Harry Fox. This is not even possible at the moment since HFA WILL NOT issue digital licenses to individuals. Furthermore, a mechanical license is required by law BEFORE sales are generated. This deal would make that impossible, because CD Baby has little choice but to reject any master, sample, or song that is not FULLY owned by the artist, But they do not employ a staff that "screens" each new submission. NOTE: this is part of the Apple iTunes deal.)

5) The deal sets up a scenario whereby CD Baby could sell not just digital transmissions over the internet, but actual CDs to brick-and-mortar stores as well and not pay the artist for these sales. It also is retroactive to ANY old CDs that were already being distributed by an existing CD Baby client. This is not required by Apple iTunes.

6) The deal also allows CD Baby to license the digital rights to ANY third party without first acquiring the permission of the artist. This is not required by Apple iTunes.

7) If the artist is unable to perform his obligations under the contract for reasons that are beyond his control, the term of the contract is suspended, locking him in indefinitely. (This is reflective of the iTunes contract.)

Related MusicDish e-Journal Articles:
» Trust, Not Fear, Sells Music (2003-08-18)
» Analysis of the CD Baby Digital Distribution Agreement (2003-08-18)

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