Distribution and licensing deals can be structured in a number of different ways. The following answer describes very basic deals and is intended merely as a guide – your own situation may be different.
Licensing is when another business – usually another record label, but occasionally a distributor – “buys” the rights to an album from you. They pay you a set fee, and then they take on the task of acting as the label for that album in the territory for which they licensed the album. For instance, let’s say you have a US based label, and you have an album on your label that you want released in Spain. A label in Spain then licenses the album from you. The Spanish label now has the rights to sell that album on their label in Spain. They take the responsibility for manufacturing the album, promoting it, and getting it distributed in Spain. If they make tons of money selling it there, then the rewards are all theirs – you don’t make any money beyond your original licensing fee. If they lose money on the album, then that loss is all theirs – you still keep your licensing fee.
Distribution, on the other hand, refers to getting your albums into the shops. With a distribution deal, you only make money on what you sell, and you as a label are responsible for manufacturing, promotion, and so forth. If you make a lot of money, you get to keep it all, but if you lose a lot of money on the album, then the losses all come from your pocket.
Licensing and distribution each has its pros and cons. For your own territory, a distribution deal is ideal, because it leaves you in the driver’s seat. You want to build a name for your label, and to do so, you have to be in control of your own releases and your own artists. In rare cases, an indie label may have an artist that is generating a lot of buzz, and bigger labels may start sniffing around, wanting to license the album for themselves. A licensing deal may be appropriate in a label’s own territory in this case – the bigger label may have the resources to give the artist more promotion, and the licensing deal could be a sizable cash injection for the small label. As a general rule of thumb, however, go for distribution rather than licensing in your own backyard.
When it comes to getting your albums into the international market, however, licensing offers plenty of benefits for a small label, including:
- A label based in a particular territory knows that market better – they already have relationships with the media, the distributors, and the stores, so they will have better tools to promote the artist.
- Distributing overseas can be costly. You may need to hire a PR company or radio plugger in that country to generate some press before any shops will stock an album, which can get pretty pricey.
- Licensing is good for cash flow – it puts a big check in your hand up front.
- Licensing deals let someone else carry all of the risk
Of course, if the album is a big hit in the new territory, and the overseas label makes a bundle, your licensing fee could start looking pretty paltry. That’s the inherent risk with licensing, but it’s a good gamble for many small labels. Managing an overseas distribution situation is time consuming and requires working closely with the distribution company. Most small labels are juggling enough as it is. Unless you have enough staff at your label that someone can devote adequate time to managing the overseas distributors, then a licensing deal may be your best bet.