Specimen Distribution Agreement

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Whilst recent years have seen a continuing process of consolidation amongst the major and large independent record companies and music publishers it has also witnessed, at the other end of the scale, the proliferation of smaller independent record and production companies. 

Whilst many of these consist of little more than the artist in their bedroom studio the growth of online sales, the use of marketing tools such as YouTube and the falling price of recording “studio standard” masters means that there are many more people and companies with records to sell. Until the internet becomes the standard way of buying new music all of these new entrants to the industry will fail unless they can get their records into the retail outlets where the vast majority of music is still sold.

Distributors act as wholesalers who get stock from record companies into shops and supermarkets. The scope of service offered by distributors is as varied as the number of record companies there are. For some clients they will merely move physical stock and bill their retail clients for their purchases. Others will press and market the records for the record company and do just about everything short of signing the artist and putting them into the studio.

The following is a brief explanation of the key clauses of a fairly typical specimen Distribution Agreement however in practice such agreements vary considerably in form and content. It is almost inevitable that any established distributor will have its own standard terms upon which they contract. Whilst it is sometimes possible to get them to change these terms it will depend upon the labels’ bargaining power – a small label with no track record of sales will face an uphill battle to negotiate changes. These notes are for guidance only; they are not intended to be a treatise on such agreements and do not replace the need to get independent legal advice on any agreement you thinking of signing as there are almost inevitably going to be particular circumstances which need to be addressed.

Guiding notes

Clause 1: Term

The term will generally be a period between one and five years.

Clause 2: Territory

For a small record company it would be usual to have a distribution deal for UK and possibly Eire and to distribute via licensees in other territories. However some distributors now try to secure rights for a wider territory, typically Europe. Obviously if you already have licence deals in place for European territories you will need to be careful about what rights you can grant. If you do not have such licences this could be a good way to service the European territories, although it might be preferable to deal directly with distributors in the countries in which you are interested..

Clause 3: Grant of Rights

Almost inevitably the distributor will require an exclusive arrangement – they do not want to be trying to sell your stock to shops that have already been supplied by another distributor.

The specimen agreement is for physical distribution of records only and all “online” rights are reserved to the artist as record company. Many distributors will offer an “online” service (although we are not aware of any who insist on such rights) but it is important to compare the distribution fees with specialist “online rights aggregators” and only to grant these rights to a third party who can get you a better deal with the online music services than you would obtain yourself. If you do grant online rights you should only give exclusivity in relation to the online music services that you want the distributor to service – for example if you already have a direct deal with iTunes or Napster you should exclude these.

Clause 4: Services

As suggested above the range of different services that may be offered by a distributor is wide. This clause deals with what could be called a “standard” service of sales and distribution. The distributor will pre-sell your product to their retail clients, take their orders, arrange picking and physical delivery to shops and deal with invoicing and payment. As may be expected the more services you require the more the distributor will charge and it is often cheaper to arrange for the pressing of CDs yourself rather than go by the distributors rate card.

Clause 5: Fees

This clause deals with the charges made by the distributor. In this instance the distributor deals with invoicing and so will take its fee directly from monies received.
The level of distribution fees can be anything from about eighteen percent of dealer price (which means the price charged to retailers) to thirty five percent. Fees are also charged for movements of stock from the distributor’s warehouse back to the label or to third parties for promotional or other purposes and when records are shipped as overstocks or deletions. These charges will be of the order of five to eight per cent of dealer price. Although it does not appear in the specimen agreement some distributors make an annual charge for holding stock of one or two percent – this should be resisted.

Another trend which has become more common with the proliferation of small record companies is for the distributor to charge a monthly fee as well as commission. This should be resisted where possible but if not then ensure that any fee paid is offset against any commission that would otherwise be payable. (This is in fact an almost complete reversal of the situation that used to prevail whereby the distributor would pay the record company an advance which it then recouped from sales – such advances are no longer the norm unless the record company has an established sales history).

Clause 6: Returns

This clause is important as it sets out that the distributor shall not be entitled to ship your records on a sale or return basis. This is increasingly difficult to negotiate as more and more record retailers expect to do business on this basis However even where records are not distributed on a sale or return basis the distributor will accept returns of faulty or damaged stock or stock sent in error and will make a small charge for handling such items (although this should not apply where the return is the fault of the distributor) and will take a reserve against such returns.

Clause 7: Conditions of Sale

This clause is fairly self explanatory but it should be noted that the distributor will probably have negotiated what are known as “file discounts” with major customers which are discounts given to that customer on all stock supplied by the distributor. It is important to limit such discounts and, if possible, to get the distributor to tell you in advance what they are and to seek your approval before changing them (you are unlikely to get this concession but, as always, it does no harm to ask).

Clause 10: Accounting

There is really no reason why a distributor should not account on a monthly basis. It is also sensible to ensure that the distributor holds client money in a separate account so that in the event of insolvency it will be much less likely that these funds should be available for the distributor’s creditors. This can be very difficult to get (and almost impossible from larger distributors) but it is worth asking.

As with all agreements of this kind it is important to ensure that you have adequate rights to audit the distributor’s books.

Clause 11: Warranties and Indemnities

As with all agreements it is important to make sure that the warranties you give are true and sustainable. It is important to note that the artist/record company will be responsible for the payment of all third party royalties.

Clause 13: Insurance

By this clause the distributor undertakes to insure your stock for the replacement manufacturing costs (but not recording costs). It is therefore important for you to arrange insurance at all other times.

Clause 14: Miscellaneous

The most important part of this clause is the right to terminate the agreement in the event of uncured breach or insolvency.