RECORDING CONTRACT ROYALTIES: Revised
IVAN HOFFMAN, B.A., J.D.
Clearly the most significant change is that “hard copy” records are now primarily limited to CDs despite a limited market for original vinyl copies and that a vast amount of recordings are now sold via downloading.
Royalties can be paid on the basis of a royalty rate multiplied by the manufacturer’s suggested retail list price (SRLP) or on the basis of some “wholesale” price, sometimes referred to as the “published price to dealers” (PPD).
The artist’s royalty rate will of course vary depending upon the relative bargaining positions of the parties. Deal making is, after all, about who wants who more. However, generally speaking the artist’s royalty rate will run anywhere from 6% to 10% or perhaps a bit higher, when based upon the SRLP. If the label calculates royalties upon a PPD basis, the rate is about 60% higher than the retail rate but of course it is calculated on a lower base price. The artist may negotiate for an escalation of these rates as the deal progresses, either based upon sales (i.e. 7% up to x units, 8% for sales in excess of x units and so on), or higher in subsequent years and on subsequent albums. Note that I use the term “royalty rate” since this number is vastly different than the “royalty” the artist actually receives. More on this below.
There are also deals for the artist which include a producer royalty, the so-called “all in deal,” in which the label will pay an additional royalty over and above the artist royalty to include a royalty for the producer, generally anywhere from 3% to 5% of the SRLP. Under such a deal, it is the responsibility of the artist to pay the producer out of the all in deal. Unless the producer is the same person as the artist, this all in deal can be tricky for the artist to make since often third party producers wish to be paid from the first record sold after the artist recoups. In such an instance, it may be that the artist is not recouped because the artist has several albums with the label but the producer is entitled to the producer’s royalties because the particular album on which the producer worked has recouped its recording costs. The artist is then in a cash flow bind since it owes money to the producer but has no money coming in. And if the artist is in a cash flow bind, likely as not so is the producer. There are ways to handle this in the deal with the label but such approaches are beyond the scope of this article.
However, the artist should be well aware that the royalty rate the artist is being offered is often far from the determining factor as to how much money the artist actually receives from the sale of records. This is because that rate is applied to a variety of provisions in which the basis for multiplying that rate fluctuates. There are reductions in rates for foreign sales (often half rate but negotiable for specific territories), for club sales (also often at a half rate and frequently on 85% or 90% of records sold with healthy discounts for promotional records, many of which provisions may also be negotiable), for sales at a discount and for “free” goods, which are records “given” away to customers of the label as inducements for purchases. The “free goods” clause is often quite a problem area in negotiations since these goods are often not actually free since the price to the customer is often a factor of these “free” records. This clause can be complex and unless there are firm limits, auditing this provision, which is where lots of money is often discovered, can be quite difficult. There are also reductions for packaging charges levied against the suggested retail list price, often 20%-25% of that price for CD formats. The artist should be aware that there should be no deduction for “packaging” when it comes to digital downloads.
And speaking of digital downloads, the negotiation should cover whether these are to be treated as licenses and thus paid at the higher rate for licenses (see below) or are treated as normal sales and thus paid at a much lower rate with the said deductions.
The above are only some of the many royalty reductions that serve to reduce the amount upon which the royalty rate is calculated. And then, once the actual dollar and cent figure is reached, the label is often allowed to withhold an amount, often undefined except that it must be “reasonable,” to cover returns of records. This category is ripe for negotiation since what is “reasonable” is uncertain at best and without firm contractual standards, making a claim for these monies is quite difficult. Clearly here as well there should be no deductions for reserves against returns of digital downloads.
There are also provisions regarding the licensing of the master recordings for other uses, such as in films, television shows and commercials. The artist should be aware of these provisions as this form of exploitation can be very lucrative indeed. Most often, the label and the artist split the income from such licenses equally but the way income is defined in the contract is often quite determinative of how much the artist actually receives.
As with all deal making, there are no firm rules that can be applied. Each deal, like each artist, is unique. What some other band received in its contract is not determinative of what your band might get. Having an attorney who knows the ins and outs of the deal is quite important but in the end, it is the marketing clout of the artist that matters as much. Knowing what to ask for is as important as being able to command what you ask for.
These royalty calculation issues and many more make the negotiation
of a recording contract quite complex and this article is not intended
to be exhaustive of all these many issues. Since the recording contract
is often the single most important agreement an artist or producer will
sign during their careers, the artist and producer are well advised not
to enter into such an agreement without the negotiation and thorough review
of such contract by a qualified attorney very familiar with such deals.
An unfavorable contract can spell disaster for the recording artist and
Copyright © 2010 Ivan Hoffman. All Rights Reserved.