Monday, August 29, 2011

Music Business/Law Tips - "Royalties (computing)" [Part 1]

Once an artist is fortunate enough to obtain a deal from a reputable record company, the artist is probably most interested in how much money will be made on sales of the records which are released. This article will briefly explain some of the elements of an artist royalty clause.

The artist royalty clause determines how much money an artist will receive from the sales of CDS, downloads, etc. In most contracts, the royalty is expressed in terms of a percentage, rather than an actual dollar or cent amount. The percentage is called the "rate".

Generally, for a new artist, the rate will range from 10% to 15% of the selling price. However, some smaller independent labels might offer even a lower percentage (or a net profit split). As with most things in a contract, the rate is negotiable depending on the bargaining power of the artist. A new group with no proven sales record that has never toured will probably not be able to achieve a very high rate. However, if the A&R staff feels that an act has tremendous sales potential and/or there is a bidding war between labels, the rate will tend to increase.

[part 2 next time]

Ben McLane Esq

Thursday, August 18, 2011

Music Business/Law Tip - "Reserves" (Part 2)

Generally, the label does not state any percentage limit on reserves in the contract. Instead, it is common to see that "reasonable" reserves will be held back. If a percentage is stated, it will be lower for established artists and higher for new artists. Additionally, different configurations have different reserves percentages because of the return history for that type of recording. For example, usually more singles and EPs are returned than CDs and cassettes. (Note there are no returns on digital, so reserves should not apply to that configuration.)

An artist needs to be mindful of the reserves percentage because it can substantially reduce the initial royalty payments and it postpones the date that the artist will be paid. An artist can negotiate protections into the contract. First, the artist should have a specific reserves percentage in the contract (25% is common for an album). Second, the artist should limit the amount of time that a label can withhold royalties (i.e., "liquidation period"). Instead of just accepting that reserves will be liquidated within a "reasonable" amount of time, the artist should ask for a specific liquidation period (12 to 24 months is common).

Ben McLane Esq

Friday, August 12, 2011

Music Business/Law Tips - "Reserves" (Part 1)

Every record contract includes a hazy and mysterious concept called "reserves". Since this concept can have such a negative impact on the artist's ability to be paid royalties, it is important that an artist be aware of this clause and know how to limit it.

The language of a record contract generally sets forth that royalties will be paid to the artist only on records that are actually sold to the general public, not on records that are manufactured and shipped but eventually returned because they are unsold (i.e., "returns"). Depending upon the particular artist, the number of records that might be returned can be substantial. For example, if the label ships 300,000 records to the stores, 150,000 might be returned as unsold goods. Imagine what would happen if the label based its royalties payable to the artist only upon the amount of records shipped; it would have paid royalties on 300,000 units instead of 150,000, resulting in an overpayment of 150,000 records. Hence, since the label knows that there will normally be returns, to protect itself it withholds a certain percentage of an artist's royalties in anticipation of such returns. This ensures that the label will not overpay an artist.

[part 2 next time]

Ben McLane Esq

Thursday, August 4, 2011

Music Business/Law Tips - "Record Clubs" (Part 2)

The club giveaway offers can have a dramatic impact on an artist. First, the artist will only receive about 50% of their usual royalty rate on sales through clubs. This is because the royalty payable by the club to the label is very low (less a container deduction), based on 85% of sales. The rationale for the lower royalty is that the marketing costs are higher for record clubs and there are a lot of people who never pay for the records ordered. Moreover, the mechanical royalty to the songwriters is also reduced (usually 75% of 75% of the statutory rate). Finally, there is the unseen factor that the clubs' special offers devalue the product in the eyes of the public. If the public can buy eleven CDs for a penny, how can an artist be worth $25 for a concert? Because of the low monetary rate of return to the labels and acts, some major record companies are no longer licensing their catalogs to the clubs.

When an artist signs a record contract, there is always language that allows for the label to license the artist's product to record clubs, for a reduced royalty to the artist. However, the artist can attempt to negotiate certain provisions into the contract that will lessen the financial hit to the artist from record clubs sales. First, the act can try to exclude record club sales entirely. Second, the artist can ask that the record company agree that the number of royalty free records distributed by the clubs will not exceed the number of records sold. Hence, even if the number of free goods exceeds the number sold, the label still has to pay a royalty on that excess. Third, the act can request to be paid a straight 50% of the company's net licensing receipts.

Record clubs will probably always be around in some form (but are evolving due to the internet). Although they can provide exposure and sales to an artist, it is important for the artist to try and maximize the royalty payable on such club sales.

Ben McLane Esq