Since Tunecore May Be Getting Sold, Is It Time For An Audit? [Chris Castle]


0001After being bought up by Believe Digital, there are rumors that TuneCore and its owner company could soon be up for sale to a major company.  Chris Castle writes that a potential change in ownership could spell audit time for TuneCore and Believe.

___________________________

Guest post by Chris Castle of Artist Rights Watch

BLANCHE
Whoever you are, I have always depended on the kindness of strangers.

From A Streetcar Named Desire, screenplay by Tennessee Williams

Hypebot is reporting that Believe Digital is offering itself for sale:

Believe Digital is for sale and units associated with at least two of the three major label groups have expressed strong interest, sources tell Hypebot. Other possible buyers include BMG, Concord and several private equity firms.

Founded by current president Denis Ladegaillerie in 2004, Believe began an aggressive expansion in 2015, financed by $60 million from private equity firms TCV, XAnge, GP Bullhound and Ventech. TCV also led a $250 million funding round for Spotify in September 2014, and is a major investor in Vice Media.

Believe declined to comment for this story.

One source described global music executives jumping on planes to Paris to visit a “due diligence data room” set up so that they could view financial, legal and other business documents prior to the relatively tight bid deadline set by Believe. Other execs added Paris to last week’s MIDEM itinerary.

After Believe aquired TuneCore in 2015, Ladegaillerie said that the combined companies would generate more than $250 million that year, which he boasted was was “bigger than any player in the market outside of the three major labels.”

When Tunecore was acquired by Believe Digital in 2015, it was only a matter of time until Believe flipped the new company to a bigger buyer, probably a major.  While it’s hard to know how much Believe actually makes from its distribution fees, there is no evidence so far that Believe has any intention of sharing its selling price with the artists that give it value–even though Believe owns none of the catalog it distributes (as far as I know).

TunecoreHere are a couple of questions for lawyers and business managers of Tunecore artists:

Contract Terms: When you made your client’s deal with Tunecore, would you have accepted the same terms from a bigger company?

Transparency:  Do you have any idea what Tunecore’s or Believe’s deals are with the digital platforms to which it distributes your client’s music?

Mechanical Royalties:  Are your clients getting paid mechanical royalties on everything they distribute through Tunecore?  (Given that executives of some licensing agencies specifically mention Tunecore artists as the source of thousands–or perhaps millions–of royalty free “address unknown” NOIs, they’re probably not.)

Has your client paid mechanical royalties on everything they record that Believe distributes?  If Believe is sold and there is a routine company-wide audit of mechanical royalties for that buyer company at a later time, are your clients prepared to pay their share of any audit settlement?

Audit Rights:  It is standard operating procedure for artists and labels to audit their distributor.  “Audit” is an industry shorthand for “royalty compliance examination”–which means that you look at the distributor’s books and make sure that what they receive matches to what you got paid under the terms of your contract.  Don’t let anyone tell you that an “audit” is unnecessary because they have “audited financials”–that’s a grand deflection based on an equivocation of the word “audit” because a “financial audit” or “audited financials” have absolutely nothing to do with a “royalty compliance examination”.  A financial audit is for the company’s investors, not for the artists it distributes.

To my knowledge, neither Believe nor Tunecore have ever been audited by an artist, and if they have they kept it very quiet.  That suggests that all Tunecore artists assume that Tunecore has paid out hundreds of millions of dollars over a 10-12 year period and never made a mistake–an assumption based on no knowledge of Tunecore’s own deals with distribution platforms like Spotify which has its own problems.

To my knowledge, Tunecore or Believe artists also have no idea whether Tunecore ever audited any of these distribution platforms ostensibly to protect the interests of their artists. Again, if they did, they kept it very quiet.

An audit of Tunecore should be a relatively simple task as its entire business model should be based on 100% pass through of all revenue it receives.

I’m not suggesting that Tunecore or Believe are making mistakes or engaging in shady practices.  I’m just suggesting that audits are routine and keep people feeling good about doing business together.

Termination Rights:  If your clients are having second thoughts about continuing on after a sale of Believe Digital, you should probably check your client’s agreement for the answer to the first question to ask before anyone signs a contract–how do I get out of this?

Form Contract:  Many digital distributors use a “take it or leave it” form contract modeled after a software shrink-wrap license.  The two are not the same, but to my knowledge the validity (or “enforceability”) of such a contract (which may rise to the level of what lawyers call a “contract of adhesion”) has never been tested in the digital distribution context.

It may be well for lawyers and business managers to consider if or how these issues affect your clients in the context of the Believe potential sale.