Lesson 2: Recording Agreements

Lesson 2: Recording Agreements

“Overview … Importance of Recording Agreements … Contract Provisions … Royalties … Advances … 360 Degree Deals … Recap”
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Summaries

  • Lesson 2: Recording Agreements > Overview > Recording Agreements Demystified
  • Lesson 2: Recording Agreements > Importance of Recording Agreements > Importance of Recording Agreements
  • Lesson 2: Recording Agreements > Contract Provisions > Contract Provisions
  • Lesson 2: Recording Agreements > Royalties > Royalties
  • Lesson 2: Recording Agreements > Royalties > Royalties: Third Party Licensing
  • Lesson 2: Recording Agreements > Royalties > Royalties: Breakage Deductions
  • Lesson 2: Recording Agreements > Royalties > Royalties: Reserve
  • Lesson 2: Recording Agreements > Royalties > Royalties: Free Goods
  • Lesson 2: Recording Agreements > Royalties > Royalties: Streaming Services
  • Lesson 2: Recording Agreements > Advances > Advances and Recording Budgets
  • Lesson 2: Recording Agreements > 360 Degree Deals > 360 Degree or
  • Lesson 2: Recording Agreements > Recap > Lesson 2 Recap

Lesson 2: Recording Agreements > Overview > Recording Agreements Demystified

  • Now this lesson is going to be very interesting because it’s going to deal with something that is very important not only to record companies but to artists as well.
  • So you can have an artist, a musician that can create his own record, his own video, access it through iTunes as far as sales, for streaming purposes through YouTube, go through a major aggregator like CD Baby, or Nimbit, or TuneCore to have all of the tunes placed in various digital outlets.
  • So it’s important for even that individual musician to be able to have a contract that really explains the rights and obligations of his company to himself, if he’s his own artist.
  • Suppose I decided to record a song, and I could do that on my laptop.
  • It’s important then for that individual artist to sign a contract with his company.
  • Why? Because contracts convey certain rights and obligations that are very, very important to the business.
  • So it’s very important to understand the terms.
  • I remember when I first started practicing law and I had my first recording agreement.
  • So I’m going to try to break down some of the terms.
  • What you need to be a part of lobbying to make sure that artists, and companies, and creators are fairly compensated for these works as the digital age is exploding and as these works are being used in so many different fashions.

Lesson 2: Recording Agreements > Importance of Recording Agreements > Importance of Recording Agreements

  • When I first started practicing law over 30 years ago, recording agreements were pretty simple documents, maybe 10 or 12 pages, which basically talked about the advance that the artist would receive, the royalties that they received.
  • The predominant configuration of the sale of recordings at that time consisted of vinyl records and cassettes.
  • The recording agreements have evolved over the years.
  • So we’re going to talk about two of the things that I think create value for a record company and for an artist in an exclusive recording artist agreement.
  • In speaking about the exclusive recording artist agreement, it’s important to note that record companies want the rights to the copyrights in the sound recordings.
  • Record companies are concerned about the sound recording copyright.
  • What is the sound recording copyright? What is a sound recording? That is a recording of a composition, and the composition is another copyright that we’re going to deal with in the next lesson.
  • The sound recording is the fixation of sounds that make up the recording of a composition.
  • Record companies want to own the rights to the copyrights in the sound recording.
  • So an artist that performs on a recording- for instance, I recorded with the group Cameo.
  • The artist and everyone involved in the process of creating the sounds that are fixed on that sound recording need to be transferred to the record company, because the record company wants to own those rights in the sound recording.
  • So if I record and produce my own song in my home studio, and I’m ready to release it, and I want to release it through my company, John Kellogg Music, then I’m going to transfer my copyright interest to my company, John Kellogg Music.
  • Nobody else can use that sound recording without getting your permission during the life of copyright.
  • Record companies don’t require you to assign your interest in copyright over to them for nothing.
  • The record company is saying, assign that copyright interest over to us, and in exchange for you assigning the copyright interest over to us, we are going to pay you royalties for you assigning that interest.
  • Record companies want to own those sound recordings because over the life of copyright, those sound recordings can be used in a number of ways.
  • So the record company is in position by owning that copyright to negotiate with the people that want to use those recordings.
  • Streaming services, Spotify, iRadio, and others, they have to get the permission from the owners of the sound recordings to stream those sound recordings.
  • What do I mean by synchronize? That means, in time sequence, taking a recording and putting it in maybe a commercial, a movie, the background in a movie, or a TV show, or a video on the internet.
  • Very, very important right, why? Because the people that want to use and sign these synchronization licenses so that they can use the sound recordings in these various mediums usually have to pay a fee.
  • It’s a very important revenue source for record companies.
  • So the transfer of copyright interest is one of the things of value in having a recording agreement.
  • Why, as an artist, should you have your own record company? Because at some point, you might want to do a deal with a major label, an internet distributor.
  • You might want to license your recordings to other people.
  • One of the most remarkable companies in the history of the current music industry is Motown Records.
  • Motown’s master recordings are very, very valuable because you’ll hear them in commercials all the time.
  • So the exclusive recording artist agreement, one, transfers the sound recording copyright interest to the company, which is very important.
  • Well, it’s important for me to say, well, I have my own company, John Kellogg Music, and I have a contract with my company where I am going to record five albums.
  • Now I’ve recorded the first one and released it, and that’s the one that generated all the heat and the reason for you wanting to sign me.
  • Now what do I mean by exclusive recording services? Well, that means that I can’t record for anyone else, any other company, during that period of time.
  • We talk about the evolving nature of recording agreements.
  • I think it’s important to talk about the fact that record companies back in the early ’80s enforced that provision, the exclusivity provision, in contracts pretty severely.
  • They went into the studio, and Stevie recorded a song called “All I Do.” “All I Do,” great record, by the way, great, great record.
  • The O’Jays not only provided background vocals for him, but during some point in the recording, the O’Jays did what is called in the industry, they stepped out.
  • Wow, the O’Jays are recording with Stevie Wonder.
  • Well, as it turns out, at that time, record companies were really concerned about allowing their artists to record on other artists’ tracks because they thought that it would cannibalize the sale of their own artist’s recordings, to the point that the O’Jays’ record company did not agree to allow the step-out vocals of the O’Jays to be used.
  • It’s important for you to know that if you sign with a record company, you just can’t go record with anyone and everyone without getting the permission of the record company that you’re signed with.
  • As you got into the rap genre really gaining significant prominence in the ’90s and the first part of the century and currently, you started to have artists provide guest vocals, step-out vocals, on a number of recordings.
  • Record companies started to loosen their restrictiveness on the exclusivity provisions.
  • The transfer of the sound recording copyrights, two, the providing of the exclusive recording services of the artist to the record company are very important things that build the asset value of the record company.

Lesson 2: Recording Agreements > Contract Provisions > Contract Provisions

  • Now, it’s time for us to talk about and examine some key provisions in the exclusive recording artist agreement.
  • Be sure to read through the text exclusive recording artist agreement, and be sure to at least read the right side, the annotated side of each page of that agreement, so it gives you an understanding.
  • Of course, if you’re an artist or if you’re just starting your own record company or have the desire to start your own record company, you always have to have an experienced entertainment lawyer review the agreement for you.
  • Now, there’s been some significant changes that have occurred in recording agreements even since the beginning of this century.
  • As you can imagine, artists, and it’s no secret, songwriters, producers, and other creative talent were tremendously ripped off in the early parts from the ’20s through the ’50s and ’60s. It wasn’t until the 1970s that there was even an entertainment law profession, to some degree for entertainment lawyers that represented artists to help them gain greater rights in their recordings and in their copyrighted works.
  • We’re going to talk about the various types of royalties that artists are entitled to under exclusive recording artist agreements.
  • Artists pay certain dollar amounts that are deemed advances against royalties, which means that when the artist starts earning royalties, those royalties are kept by the record company until the advances are recouped or recovered.
  • The first thing you need to know is that in the current market today, many artists who are discovered by record companies and have had no recording experience whatsoever, sometimes are signed to development deals or even singles deals.
  • If the artist’s material does sell, then at that point, the record company has provisions that allow them to pick up options for various albums, and we’re going to talk about that a little later.
  • Let’s talk about the term, the term of the recording agreement.
  • How long does the recording agreement last? In the ’60s and ’70s, artists signed recording agreements with terms that were described in a term of years, for example.
  • If the record company likes what the artist is doing and their product is selling in great numbers, then the record company has the option to pick up the second year.
  • The record company doesn’t have to pick up the second year.
  • Even though the contract said that it was one year, the term was one year with four one-year options, what the artist might not have seen in the following pages was a provision that stated that during that contract year, the record company had the right to record one album on the artist, but they also had an option within that first year to ask the artist to record a second album.
  • Because when MTV came out and videos became very popular, record companies didn’t want an artist to release an album but every two or three years.
  • As it turns out, the record company might have decided to record two albums during each year, and the year was extended until the second album was delivered.
  • The contract didn’t end until he negotiated a settlement of the contract in 1995 or ’96 with Warner Brothers Records.
  • Now, I do want to say that record companies, and as a result of certain lawsuits that were brought and certain court decisions that were rendered, the record companies in the ’80s and ’90s started to change that provision.
  • They would have multiple periods to the contract, which means the first period would be the time that it took to record and release an album plus maybe seven months after that for the record company to see how the album did in the marketplace, at which time they could pick up the option for the second period.
  • During each period, the artist is required to record one album.
  • So things have evolved in exclusive recording agreements.
  • Part of his point was that he felt that record companies had signed you to such long agreements were treating you like a slave.
  • Because they had the exclusive rights to your recording services for such an extended period of time, to him, it really didn’t make- that kind of ignited the artist community at the end of the ’90s to really start advocating for more fairness, more transparency with exclusive recording artist agreements.
  • At the beginning of this century, there were certain actions taken by the California legislature, which kind of questioned these agreements and threaten the recording industry with legislation that would make the contracts more transparent.
  • As a result of that, record companies got the point.
  • Of course, the record company is going to count on maybe five and eventually they might agree to four.
  • So it depends on you leverage as to how many albums you’re going to end up recording under the exclusive recording artist agreement.
  • Of course, the record label will want you to record as many as possible.
  • Of course, you’re going to try to as an artist, you want to record as few as possible so that if you’re successful during that four-album or five-album period, you will have the opportunity to test out the market and to see if there is other companies that are interested in recording you under a new recording agreement.
  • How long the agreement lasts, is an evolving provision of the exclusive recording artist agreement.
  • You’ll remember what I said earlier that the contracts of the ’60s and ’70s had one year plus four one-year options and during each contract year, the artist might have to record two albums, a potential 10 albums.
  • Now, who has the option? Who has the option? Who has the right to pick up the option? Usually the record company will have the right to pick up the option.
  • Record companies say that they need to have the right to pick up the options because they’ve invested a lot of money in the artist in recording, producing, marketing, distributing the record.
  • If you have sold a lot of product, if you become very popular and become a very important asset to the record company, you’re in a position to negotiate better terms.
  • In 1994, he was a little perturbed with his record company in releasing singles, and it was a song that he really want to devote least on his own.
  • As a result of Prince being Prince, being a multi-million selling artist, he was able to release one single, “The Most Beautiful Girl in the World,” independently through an independent distributor, Al Bell’s Bellmark Records.
  • After he ended his contract with Warner Brothers Records, Prince became known as being the one artist who could have one-offs with various major record labels.
  • If you have a number of millions of YouTube views, if you have a very strong presence with your Instagram account, if you have a number of Facebook likes, you could have one of your recordings used in a television commercial, or in the background of a movie scene, or TV show.

Lesson 2: Recording Agreements > Royalties > Royalties

  • The artist assigns their copyright to the record company, and in exchange for that assignment, they receive royalties from various uses of those sound recordings.
  • The norm for royalty rates for a new artist for albums is between 13% and 16%. Now, many contracts will have provisions stating that royalty rates for singles are 3/4 of the album rate, which means if you have a 16% royalty, your royalty for singles might be 12%. I personally have problems with that, but we’re going to talk about it, particularly for digital singles.
  • In years past, some major labels would apply that percentage to the retail price, and some labels would apply it to the wholesale price.
  • Now, what is the wholesale price? Record companies create configurations of sound recordings.
  • Multiple sound recordings are on a CD. They sell those to retailers for what is called the wholesale price, which is usually a few dollars less than the price that the retailer sells to the consumer.
  • When record companies would base their calculation of royalties on retail prices, it usually caused confusion.
  • Record companies suggest retail list prices to retailers to sell the product for.
  • That’s a price that the record company suggests the retailers sell it for.
  • Retailers don’t have to sell it for that price.
  • That suggested retail list price would be the initial price for determining how that royalty rate would be applied.
  • In the early part of the contract, the royalty provision would say that the royalty rate will be applied to the retail royalty base price.
  • Artists would assume that to be the suggested retail list price- in this case, $15.98 or $16. But further on in the contract, there would be a provision defining what the retail royalty base price is, and that wouldn’t be the suggested retail list price.
  • There would be certain deductions taken from that suggested retail list price before that royalty rate was applied.
  • So the definition of the retail royalty base price would state that it is the suggested retail list price minus a packaging deduction.
  • So they felt that from that suggested retail list price they should take a certain amount off of that to account for them paying for the artwork that helped sell the album.
  • So when cassettes came into the marketplace, the packaging deduction for cassettes was 20%. And then in the ’80s, the packaging deduction was 25%. So what does this all mean? Let’s go back to our example with Jay Z. Suggested retail list price back in the ’90s might have been $15.98, $16. That was a suggested retail list price.
  • The retail royalty base price included a 25% deduction from that $16 price, which reduced that royalty base price from $16 to $12. It’s kind of discounting the artist royalties so that the record company has to pay less for that.
  • They’ve taken a deduction of $4 off the suggested retail list price to get to the retail royalty base price.
  • You find a lot of contracts that are still couched in terms of the retail price today.
  • Royalties for major labels aren’t calculated on the retail price.
  • What is the wholesale price? The wholesale price is sometimes called the Published Price per Dealer, or PPD. So let’s take an example here.
  • Well, if you apply the royalty rate of 15% for that album, you’ll find that that leaves the artist with a royalty of about $1.12 per album.
  • I mentioned earlier traditionally, singles royalty rates many times are only 3/4 of the album royalty rate.
  • So the single is becoming important again, just like it was back in the ’50s, ’60s, and ’70s. So the packaging deduction created confusion, particularly when you deal with royalties being paid on the retail list price.
  • Once again, some contracts you’ll find out there today still state that they’re paying royalties on the retail list price and will impose a packaging deduction.

Lesson 2: Recording Agreements > Royalties > Royalties: Third Party Licensing

  • We talked about the royalty rate for sales of recordings.
  • In most labeled agreements when the sound recordings are used in other types of situations, where the record company licenses the recordings for other uses, the record companies usually split whatever they make 50-50 with the artist.
  • When sound recordings are used in commercials, in TV shows, in the background scene of a movie, those are third party uses.
  • Usually record companies charge a pretty sizable fee for that use based on how long the song is used in the movie, or what the context of the use is, what the budget of the movie production is.
  • It’s a very, very valuable source of revenue for record companies.
  • You might have bought a greeting card recently that when you open it up it had a recording that played.
  • The record companies license those recordings to American Greetings and the Hallmark Card company, so that they can insert them in the cards, so that they can play in the cards.
  • Another third party use of recordings are licensing the recordings to one record company to put together a compilation, like the now series of albums that have become so popular over the past 15 or 20 years.
  • One label licenses those recordings from all of the other labels and put it on one CD, and sell it.
  • Those record companies agree to a royalty split for licensing those recordings to that particular company.
  • The record company and the artist split those royalties 50/50.
  • Is a digital download a sale of a recording or is it a third party license? Is the record company actually selling that product to iTunes when they deliver that file for iTunes to put on their server and then sale? Or are they licensing that recording to iTunes to sell? The difference between licensing and sale is very significant.
  • So what’s the difference between a sale and a third party license? Well, usually in the sales situation the record company is bearing all the costs of the production, the manufacturing, the distribution, the marketing of that product.
  • Delivers the sound recording to which ever company Hallmark Cards, who makes the cards, who distributes the cards, who markets those cards, and bears all of that expense to that record company that puts together the now series.
  • What does a record company do? With the digital download, the record company basically delivers that sound recordings to Amazon, to iTunes.
  • Now, the record company still does a little marketing.
  • The record company on a digital download through iTunes or Amazon, they don’t manufacture a CD, they don’t distribute it, they don’t bear the cost of putting it in a warehouse, they don’t have all of those cost associated with a sale.
  • So should record companies apply a sale royalty of 13% to 16% for digital downloads? Or should they pay the 50% third party license? Well, that’s been a big dispute over the years.

Lesson 2: Recording Agreements > Royalties > Royalties: Breakage Deductions

  • Here’s a deduction that’s based on the number of records sold.
  • The breakage deduction really started and was inserted into contracts in the ’40s and ’50s when records, at that time, primarily 78s, were made of shellac.
  • Well, record companies legitimately had a concern that the number of records that they manufactured in the plant and shipped out to distributors that were sold to retailers could be broken doing that shipment process.
  • Basically, the retailers didn’t have to pay for the broken records.
  • They could send them back to the record company and say, look, these broke, I’m not paying for them.
  • So record companies could count on about 10% to 15% percent of the records that they shipped out breaking doing that process.
  • These provisions have stayed in record contracts well into the turn of this century.
  • The breakage deduction basically says that the record company doesn’t have to pay you for broken records.
  • It got to the point that record companies just decided that since about 10% to 15% of the records were breaking doing this shipment process, the contract would say, we only have to pay you four 85% of the records that we ship, or 90% of the records that we ship.
  • So in other words, if the record company would ship 1,000 records, they only had to pay you royalties on 850.
  • The music industry evolved to records being made on vinyl, not on shellac.
  • Did record companies take that breakage provision out of the contract in the ’60s and ’70s as albums and 45s that were made out of vinyl were shipped and became the predominant configuration? No. What about cassettes? Did cassettes break? Because some cassettes could break.
  • So the record companies came up with this marketing scheme for CDs, saying that this disk will never break, it will never warp, it will never scratch.
  • Did record companies take the breakage deduction out of contracts in the ’80s and ’90s? No. And they were very adamant about it.
  • The record companies decided to keep the breakage deduction [INAUDIBLE] in.
  • Now all of the major labels pay on 100% of records sold.
  • Well, the major labels aren’t the only companies that sign you to exclusive recording agreements.

Lesson 2: Recording Agreements > Royalties > Royalties: Reserve

  • The packaging deduction, the breakage deduction, the free goods deduction.
  • I’m going to deal with one other deduction that’s significant to artists as far as the payment of royalties and when their royalties are paid.
  • It is a reserve deduction, a deduction for reserves.
  • Record companies will say, alright, I’m going to show you what your royalties are for selling 1,000 CDs. And this is the amount of royalties that we owe you for selling 1,000 CDs. However, the record company is going to hold a certain percentage of those royalties in reserve for returns.
  • There are certain deductions or discounts taken from the royalties.
  • What are the discounts that we talked about? The packaging deduction, the breakage deduction, the free goods deduction, reserves.
  • Now let’s talk about how recording contracts are evolving as we move into the digital age.
  • Are those deductions relevant? The same deductions that we’re taking for physical copies of recording CDs. Are they are relevant to what’s happening in the digital age? Well, I would say that there’s a concern regarding whether or not they’re relevant.
  • Is there any packaging for a digital album? Yes, they do do artwork, but there’s no package for a digital download. As a matter of fact, at the turn of the century, as digital downloads were just starting to develop- not at the turn of the century, 2003, 2004- I had a conversation with a business affairs person at a major record label because I saw a packaging deduction in regards to digital downloads.
  • You have a packaging deduction for digital download? How do you have a package- that’s ridiculous.
  • Packaging deductions clearly aren’t relevant to digital downloads.
  • Once again, major labels don’t apply the breakage deduction.
  • If they have a breakage deduction in there, you’re going to get paid on a lesser number then the albums or singles that were actually sold.
  • Can there be any breakage of a digital download? Absolutely not.
  • The records are delivered in digital fashion to the digital distributor.
  • There’s no breakage deduction in the digital world.
  • Once again, in a digital world, the file is delivered to iTunes, to Amazon.
  • The file is delivered to the digital distributor who sells it directly to the consumer.
  • The digital distributor only accounts for the number that they actually sell.
  • If you’re a record company owner in this new digital age, recognize that these are provisions that may not be relevant anymore and you want to have a fair and inequitable conduct with the artists to move forward to develop your business.

Lesson 2: Recording Agreements > Royalties > Royalties: Free Goods

  • The free goods deduction, in the physical market, with CDs, record companies sell these products to retailers.
  • The sales people, at the record companies, job is to sell as many of the CDs to retailers as possible.
  • Usually, record company sales people are in a position to say, wait a minute, I’m going to offer you a deal.
  • Record companies don’t pay royalties to the artist for free goods.
  • Now, record companies had a legitimate concern in that they’re trying to get the retailer to buy more.
  • So record companies routinely have provisions stating that they don’t have to pay royalties for these three goods.
  • Usually, the artist’s attorney will try to limit the percentage of free goods that they give to maybe 10% or 15%. So in other words, they don’t want them to give 25 more, or 30 more on an order of 100, but maybe just 15 more.

Lesson 2: Recording Agreements > Royalties > Royalties: Streaming Services

  • In addition to record companies and artists making money from all of those valuable areas such as sales- both in stores, physical sales of CDs, sale of digital copies on iTunes and Amazon and other areas- there’s another very important source of revenue for record companies and artists that’s starting to grow- internet streaming, internet streaming.
  • Any time a recording is digitally transmitted- a digital transmission could occur either through cable, satellite radio, or webcasting- the record company and artist are entitled to be compensated for those uses.
  • So the amount that you receive- both the record company and the artist will receive- for these types of services depend on the types of uses.
  • You punch in, or you put in, the artist that you like.
  • Pandora will kind of program a radio station with other songs that sound similar to this artist.
  • Many artists are very concerned with the low amount of royalties that they’re receiving at this point.
  • As new services, as new entrepreneurs, as new innovative services are being developed, you’re going to find different types of deals that are being struck by the record companies and these internet service providers.
  • While Pandora pays a specific amount for each stream, some of the new internet services are entering into deals with major record labels where they will not only pay a per stream rate, but they will pay a portion of their advertising and subscription money that they make from their various subscribers.
  • A lot of the record labels are entering into special deals licensing their entire catalogs to these internet services- iRadio, Spotify- and they’re receiving a percentage of the advertising and subscription revenue generated by these new services.
  • Many of them use what are called aggregators like Nimbit, TuneCore, or CD Baby who act as middle people who aggregate or put together a number of independent artists and license their music to these internet services.
  • As a matter of fact, a number of artists have refused to allow their music to be streamed because of the low royalties.
  • Artists, songwriters, and record companies will receive a fairer share of that income.
  • Now, who accounts to the record company and the artist for the revenue generated from streaming services? Well, the RIAA, the Recording Industry Association of America, established a specific performance rights organization to handle these types of royalties.
  • I’m always interested in artists receiving their fair share from the use of their recordings.
  • I’m happy to say that the recording labels, recording artists, and SoundExchange came to an agreement years ago making sure that the royalties generated from the digital transmission of recordings would be split between the artist and the record company in a fair and equal way.
  • The breakdown is 50% to the record company, 45% to the featured artist, and 5% to the non-featured or session musicians or vocalists.
  • A major label might license their entire catalog of recordings to an internet service provider in exchange for being paid that 50% of the royalty directly to them while allowing the 45% to the featured artist and 5% to the non-featured artist to be paid through SoundExchange.
  • In some contracts with major labels, they’ll be a provision stating that any licensing of the record label’s entire catalog of sound recordings and even videos may not require them to pay a royalty at all to the artist.
  • It’s a great time to be an independent artist and to own the rights to the sound recording yourself so that you can license either to aggregators like Nimbit, or TuneCore or others.
  • You can receive the record company royalties as well as the artist royalties.
  • Build a team of people that can help you build your own independent company, owning and developing the recordings, both audio and video.

Lesson 2: Recording Agreements > Advances > Advances and Recording Budgets

  • Another important provision of the recording artist agreement is the provision dealing with advances.
  • On a major label level, a new artist might receive an album funded advance of $50,000 to $100,000.
  • For a mid-level artist it might be $100,000 to $200,000.
  • In the case of superstar artists, they might receive an album fund advance of $300,000 to $1 million.
  • A part of the fund might be used for personal expenses of the artist.
  • So let’s say a new artist has $100,000 album fund.
  • Out of that, the record company might designate $20,000 to be a personal advance to the artist.
  • Then an album fund basis if there’s anything left after the payment of all of the recording cost, that will also go to the artist.
  • So the artist might have a designated $20,000, $80,000 for the recording cost.
  • If the recording cost only come to $60,000, that’s an additional $20,000 left over that might also go to the artist.
  • Well usually the artist then has to pay that difference or the record company has the right to terminate the contract.
  • So it’s very important for artists to stay within their recording budget.
  • Here’s the next very important point, all advances are recouped from the artist royalties.
  • Now, many people think that the record company is loaning money to the artists to record their album.
  • That isn’t the case in a recording agreement were advances are made to the artist.
  • Because that’s only recouple from the artist royalties.
  • If the artist doesn’t generate enough in royalties to pay that back, then the record company has to live with that.
  • They can’t pursue the artist personally for unrecouped royalties.
  • It’s more important now than ever for artists to try to get an advance upfront because unfortunately it’s unlikely that they’re going to be in a position of recouping all of the cost.
  • Why do I say that? Well in addition to the album fund advances to produce the album, over the course of the last 20 or 30 years record companies have added other costs that they consider to be advances against the artist royalties.
  • The cost of producing videos are considered advances against the artist royalties.
  • If your contract is well negotiated by your attorney, only 50% of video costs will be recoupable from your artist royalties.
  • 50% of your video cost recoupable from artist royalties.
  • You’ll find for each album, artist will produce maybe three or four videos for three or four singles.
  • So video costs are now recoupable from artist royalties.
  • Here’s another point, independent promotion costs are also recoupable from artist royalties.
  • Let’s say it’s $50,000 per single and let’s say that an artist has a video that cost $50,000, usually independent promotion costs if you press the record company can be recouped only at a 50% rate.
  • So let’s say that an artist has four singles off of their album, they cut four videos at $50,000 each for each single an independent promoter has hired at $50,000 per single.
  • So you have $400,000 in cost, half of that is recoupable from your artist royalties.
  • Let’s say, the artist had $100,000 recording fund.
  • You have to also factor in the video cost and the independent promotion cost.
  • So you can see it becomes pretty difficult for artist to be able to generate royalties beyond that initial advance.
  • Here’s the thing with independent labels, remember how I talked about sometimes independent labels enter into 50-50 profit sharing relationships with their artist? Well when they enter into that 50-50 profit sharing artist, they recoup all of the costs.
  • Not 50% of the cost like major labels do for video cost and independent promotion cost.
  • So in today’s music industry, it’s kind of tough for an artist to ever be in a totally recouped position to be entitled to royalties beyond the initial advance.
  • So even though that unrecouped account will transfer over to the second album, that’s called cross collateralization, from one album to the next the artist still would’ve made money from that advance for the second album.
  • Most artists now generate royalties through advances.

Lesson 2: Recording Agreements > 360 Degree Deals > 360 Degree or “All-In” Deals

  • Lastly, let’s deal with the topic of 360 degree deals.
  • In the last century, record companies signed artists to recording agreements and primarily earned income strictly from the sale or use of the artist’s recordings.
  • That’s how a record company made its money, from selling or licensing out the use of those sound recordings.
  • As a result of CD sales and record and album sales increasing from the ’70s all the way through the end of the ’90s, that’s all the money the record company wanted.
  • They made a tidy profit off of just selling and using recordings.
  • Then what happened? Napster, right? Peer to peer file sharing, an immediate decrease in CD album sales, and a lot of the profit that the record company was making started to evaporate.
  • So the record companies had to look around for other sources of income to try to make up for that deficit.
  • I remember maybe 2002, 2003, that I called a record company that had an agreement with my client, and I was arguing for a percentage interest in the copyrights in the compositions.
  • Now, the company that I was dealing with was made up of creative people as well, producers who were also songwriters.
  • In other words, the record company doesn’t just participate in the income generated from the use and sale of those sound recordings, but they participate in the entire circle, 360 degrees, of income that the artist generates.
  • In most instances, artists are going to sign 360 degree deals, which means that the record company is at least going to have options to pick up contracts for merchandising with the artist so that they’ll participate in a certain amount of the merchandising income, sponsorship income, endorsement income, live performance.
  • That’s been done for years, for the past 20 or 30 years, under deals called across the board deal.
  • Across the board deal was a deal where the production company would sign an artist, unknown artist, to not only a recording agreement, but they would sign them to a co-publishing agreement to participate in their songwriters’ royalties.
  • We talk about do it yourself, and now I see it’s more and more important for artists to do it ourselves, have a team surrounding them, that’s going to help them generate income from a number of different sources.
  • All of these things, where artists are morphing into other types of careers, the record label feels like they started that.
  • So record companies want to be a part of that and feel that they have the right to participate.
  • So the question always has been, even dealing with across the board deals as well as the 360 degree deals, are the companies capable to do it themselves? Do they have the people involved that understand live performance, that understand merchandising, that understand sponsorships and endorsements? Well, the fact of the matter is that over the past 10-year period since these deals have become popular at major labels, major labels are themselves starting to morph into general entertainment companies that go way beyond just producing recordings.
  • They’re affiliating with merchandising, sometimes partnering with those companies, in order to create opportunities for their artists to generate the income.
  • Motown always had an artists’ development department, but over the past 30 years, record companies really got out of that business, but they’re back in that business right now.
  • They’re trying to develop their artists to be able to expand their careers beyond just recording and even performing live on stage.

Lesson 2: Recording Agreements > Recap > Lesson 2 Recap

  • Royalties being paid on 3rd party licenses, when recordings are used in commercials, TV shows or movies.
  • Streaming royalties, although small now, becoming a more important revenue stream as time goes on.
  • It’s important for record companies to understand how much they should pay in advances.
  • Lastly, this is the most important time, as this digital age evolves, it’s a great time for artists to build their own assets, own their own assets, own their sound recordings, own their video recordings, exploit them through all of the various internet sources they can to build that audience and grow the value of the assets of their company.
  • Get a team that can help you build and own your own company and own your own assets.

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