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Deep Dive

Answers To The Top Questions About Independent Distribution

The process of choosing a distributor can be difficult and confusing for indie artists and labels. Billboard deconstructs the market and demystifies the process.

For independent artists and labels, navigating the distribution landscape can be daunting. In the past year alone, TikTok, SoundCloud and Tencent have launched distribution offerings; 300 Entertainment and Republic Records have started indie distribution divisions; Sony purchased AWAL for north of $400 million; UnitedMasters raised $50 million in a funding round valuing the company at $550 million; and TuneCore parent company Believe went public on the Euronext Paris stock exchange, raising almost $350 million. And that’s to name just a few: It seems that everyone in the music business is trying to get in on the distribution space, causing a headache for artists and labels trying to navigate the choppy waters of how to get their music into the marketplace, and with what level of support. As Alex Valenti, founder of 3V Method, a management, recording and publishing company, puts it: “Distribution is more crowded than it has ever been, and the competition is higher than ever.”

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This competitive aspect can work in an artist’s or label’s favor if they have done their homework. As a number of artist management and label sources interviewed for this story said, everything is negotiable in the distribution business.

There are arguably three levels of distribution companies that artists, labels and their teams can access, starting with the self-service style of DistroKid, TuneCore and CD Baby, where a new act can pay as little as a flat fee of $20 per year to have its music put on the major streaming platforms. Distributors such as Level and Stem are the next step and offer more services and hand-holding. Indie distributors such as AMPED, Redeye Worldwide and MVD have substantial experience with physical distribution as well as digital, for example. And at the top of the ladder, major label-owned distribution companies like Alternative Distribution Alliance (Warner), The Orchard and AWAL (Sony), and Ingrooves and Virgin Music Artist & Label Services (Universal) are full-service and tend to have more clout with digital service providers and physical product manufacturers.

Going with a distributor over a label is often a cheaper move and enables an artist to retain ownership and — depending on the services negotiated — a healthier royalty split. The self-service companies often offer tiered rates ranging from simply getting music to DSPs to various levels of marketing and playlist support, while the larger companies offer more and direct hands-on services like synch placement and digital advertising. The larger distributors also provide sophisticated data and financial systems that help labels better market their music and manage their finances. But according to sources in distribution, there are really only two major differences from one distributor to the next: funding and the services offered.

“Sometimes it’s just about the best rate, and for certain projects a no-fee, no-frills digital distribution is a fine option,” says Josh Madell, head of artist and label strategy at Secretly Distribution. “Or it’s all about the investment — [for example,] they want someone who’s giving data analysis just for financial backing. There are all different approaches.”

For an independent artist wanting to avoid the major-label route, the choice of which distributor to go with can be a difficult one that raises many questions even before the search begins. Here are answers to the most frequently asked.

What rates do distributors charge for their services? 

When distribution was a purely physical business, distributors historically took a 17% to 23% cut of sales revenue, and the larger indie distributors collected 20% to 25% on a global deal. Now that distribution is largely digital, the rates have changed somewhat, and a label’s size and its share of current and anticipated hits, or an artist’s longevity and success, can result in lowering them. The high price of vinyl albums today and distributors’ current no-return policy have also resulted in their willingness to take a smaller cut for physical distribution, which ranges from 10% to 25% of revenue. The digital distribution commission spread is typically 10% to 20%, and if physical and digital distribution is needed, a blended rate is negotiated. Distributors will sometimes work with a large indie label for a lower rate to help spread out overhead, which typically amounts to 9% of an indie distributor’s sales. Some majors have achieved economies of scale that cut those costs to as little as 2%, however.

Added services usually lead to increased fees. If an artist or label wants its distributor to provide marketing, radio promotion or both, that typically adds 5% to 10% to the distributor’s cut. Extra expenses can be incurred if travel is required. If the campaign is unsuccessful, the distributor will usually reduce its fee.

A distributor may also agree to a budget-based marketing campaign in which it spends an agreed-upon dollar amount as it sees fit to promote a title or a specific group of titles. The label or artist is charged that amount, but the distributor does not earn a commission on that expense. If the promotion campaign is successful, the distributor is rewarded with increased commissions because of higher sales or digital activity.

What are key factors to consider when choosing a distributor? 

Labels are more likely to want a digital distributor with a global reach. This way, they only have to deal with one company. For digital-only artists and labels, data insights and tools to analyze the data are crucial. It is especially difficult to sort through payments from around the globe, so distributors that can provide labels with consolidated data and the tools to parse and import that data into their own systems to determine royalty payments are especially attractive to labels. Distributors that will directly pay collaborators who worked on a track are particularly valuable to artists and songwriters.

What are the advantages to using a major-owned independent distributor? 

Indie labels with big records like the ability to bring in a major-label radio promotion team to help work their releases — if the right kind of deal can be struck. The major labels and by extension the indie distributors they own have extensive deals in place with vinyl plants, which means that indie labels with a big physical presence can often get priority at a plant. Indie labels also like having access to a major label’s out-of-print catalog for licensing purposes.

What size advances are distributors paying?

For a desired label, the major-owned indie distributors might fork over as much as one year’s projected label revenue as an advance. For bigger labels, that could mean as much as a $10 million advance. Smaller distributors might have to pay out a $1 million to $2 million advance to land a desired label. Advances mostly are recoupable, but they do not have to be paid back all at once. An advance might be recouped by the distributor paying 50% or 75 % of proceeds each month to the label.

Distributors can also serve as a cash backstop if a label needs funds to close a deal to sign an artist, launch a marketing and promotion campaign or pay for a larger than expected vinyl manufacturing order. Today, however, labels have additional resources to raise capital, including bank financing.

What is the minimum level of staffing and array of job responsibilities distributors need to operate successfully? 

In the 1990s, during the heyday of the CD, distributors employed an average of three employees per $1 million in revenue made. Today, the average is closer to 1.5 employees per $1 million. That suggests distributors are working with less staff, but sales volume is much larger, particularly at the bigger distribution companies, so staffing levels are about the same as they were when physical product dominated, but the number of employees per function has changed, and new positions have been created. Warehouse and sales staff are smaller, but systems and operations teams have grown to process all the data generated by the billions of microtransactions reported by DSPs. Due to the technical expertise needed for many of the latter jobs, salaries have increased on average.

Why do labels that can directly deal with a DSP still choose to use digital distributors? 

Each DSP has its own technical requirements that must be met in order to upload — the term often used is “ingest” — a label’s music. As one label executive put it, “It takes a lot of work and know-how to be compliant in the YouTube world.” And with voice-activated search systems such as Siri and Alexa becoming more prevalent, digital distributors have tools, knowledge, experience and other resources that are superior to those in-house at an individual label. Marketing is also a key factor. While the labels are still responsible for getting a new release noticed, digital distributors help elevate that awareness in a business where over a million tracks are uploaded to digital services monthly.

How do majors working with indie distributors decide which labels and artists will be handled by the distributor? 

Although the majors funneled acts they signed in the 1990s and early 2000s through indie distributors, they rarely do so today, although a major that wants to sign an artist who doesn’t like the deal it is offering him or her will instead use an indie distributor and negotiate the cost of having the label work the artist’s releases.

What payment schedules do independent distributors, DSPs and brick-and-mortar retailers use? 

Distributors tend to pay monthly on a net 45-day basis, meaning payments received in December would be paid to artists and labels in mid-February. DSP payments can range from 60 days from the date of consumption to 120 days from the date of transaction — the latter term usually applies to payments made by global territories outside the United States. Brick-and-mortar payments range from 60 days to 90 days from the end of the month in which a product shipment was received. Retailers typically adopt 60-day terms, while wholesalers use 90-day payouts.

Do distributors help get vinyl albums made? 

Yes. Delays in vinyl and, more recently, CD manufacturing can be substantial, and distributors can play an important role in navigating and expediting that process. Executives at established labels even say that independent distributors can be helpful with their vinyl orders because they have teams with a lot of experience and resources in that sector. Moreover, distribution fees usually include order fulfillment: The vinyl will be shipped to their warehouse and orders will be sorted, packed and shipped. They are also experienced with drop shipments — for example, fulfilling orders by individual stores or an artist on the road that needs product replenishment at the merchandise table.

Do holdbacks — also called reserves, in which the distributor retains 10% to 15% of revenue owed to a label in case of returns — still exist in the physical business now that labels no longer take back unsold vinyl? 

Distributors usually negotiate the right to maintain a reserve but use them to a much lesser degree. Today, retailer holdbacks are limited to CDs, and those have become rarer as well because brick-and-mortar buyers are much better at managing inventory. “Labels aren’t pumping a lot of product into the big boxes anymore, and that’s where a lot of the returns used to come from,” says one distributor. On the other hand, wholesalers will still hold back a considerable amount of payment for physical product they acquire from distributors, which can affect labels that sell to wholesale accounts.

What are the advantages of using Merlin instead of a distributor, and why do distributors use Merlin? 

For one, there’s cost savings. Merlin’s digital pipeline and reporting can cost as low as 1.5% to 5.5% of revenue. The independent rights association provides data reporting for 1.5% of revenue, but labels still need a digital pipeline to accommodate the different technical specifications that each DSP requires for ingestion. For labels that want to handle their own distribution and marketing, some services, such as FUGA, offer a digital pipeline-only option. Terms mostly differ, but industry sources say these limited arrangements can be had for about 4% of revenue. The downside is that labels that don’t have the expertise and bandwidth to market to streaming platforms risk having their releases languish.

Merlin is also a powerhouse in the indie distribution framework, and some labels and distributors will use it to target certain DSPs because the organization has the clout to strike better deals. Those labels and distributors will then rely on their own marketing strength to break a song or artist.

Additional reporting by Dan Rys.