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
benmclane.com
Monday, August 29, 2011
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
benmclane.com
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
benmclane.com
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
benmclane.com
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
benmclane.com
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
benmclane.com
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
benmclane.com
Tuesday, July 26, 2011
Music Business/Law Tips - "Record Clubs" (Part 1)
To the consumer, joining a record club might seem like an inexpensive way to obtain some music. However, the recording artist that creates the music should understand how record club sales influence that artist's bottom line.
Record clubs first became popular long ago when there were no major record chain stores. To some in remote areas, a record club would be the only way to buy a certain record. These clubs generally license the entire product catalog (i.e., records) of various record companies. The clubs then manufacture and distribute these records to their club members for very low prices. Unlike product sold at retail stores, clubs have the right to give away one free good for every one sold. They must have the right to do this; otherwise, they would not be able to make offers such as eleven CDs for a penny. This is problematic because an artist receives no royalty on free records distributed by clubs. Also, there is no way for the record club to limit how many copies of one particular artist's records are given away. Hence, a popular artist would be negatively affected.
[part 2 next time]
Ben McLane Esq
benmclane.com
Record clubs first became popular long ago when there were no major record chain stores. To some in remote areas, a record club would be the only way to buy a certain record. These clubs generally license the entire product catalog (i.e., records) of various record companies. The clubs then manufacture and distribute these records to their club members for very low prices. Unlike product sold at retail stores, clubs have the right to give away one free good for every one sold. They must have the right to do this; otherwise, they would not be able to make offers such as eleven CDs for a penny. This is problematic because an artist receives no royalty on free records distributed by clubs. Also, there is no way for the record club to limit how many copies of one particular artist's records are given away. Hence, a popular artist would be negatively affected.
[part 2 next time]
Ben McLane Esq
benmclane.com
Monday, July 11, 2011
Music Business/Law Tips - "Raising Money" (Part 2)
BORROWING
This involves accepting a loan for a fixed sum of money and agreeing to repay the sum plus interest by a certain date. Loans usually must be paid back whether or not the project makes money. There are two basic loan sources:
Commercial Sources. A commercial source of money would include banks, finance companies and credit cards. In particular, banks generally want to secure a loan with collateral, such as a home, auto or equipment. (If the artist is established, copyrights might be acceptable collateral.) Unfortunately, most artists are not in a position to have collateral in place. However, if an artist has some credit cards and has been paying rent consistently, a bank may loan the artist a small sum. Otherwise, if the artist does not qualify for a loan, the artist can ask a relative or friend with a good credit rating to be a co-signer for the loan. Because the co-signer is agreeing to make the payments if the artist does not, a co-signer is accepting a great responsibility.
Family And Friends. Normally, family and friends will lend money at a lower rate of interest with a more flexible repayment schedule. The downside of this type of loan is that there is a strong potential to strain the relationship if repayment becomes a problem. When obtaining this type of loan, the artist can prepare a simple promissory note. For example: "On or before December 31, 20XX, Artist agrees to pay Lender the sum of $2,000.00 plus 8% interest from April 30, 20XX, signed, Artist."
Ben McLane Esq
benmclane.com
This involves accepting a loan for a fixed sum of money and agreeing to repay the sum plus interest by a certain date. Loans usually must be paid back whether or not the project makes money. There are two basic loan sources:
Commercial Sources. A commercial source of money would include banks, finance companies and credit cards. In particular, banks generally want to secure a loan with collateral, such as a home, auto or equipment. (If the artist is established, copyrights might be acceptable collateral.) Unfortunately, most artists are not in a position to have collateral in place. However, if an artist has some credit cards and has been paying rent consistently, a bank may loan the artist a small sum. Otherwise, if the artist does not qualify for a loan, the artist can ask a relative or friend with a good credit rating to be a co-signer for the loan. Because the co-signer is agreeing to make the payments if the artist does not, a co-signer is accepting a great responsibility.
Family And Friends. Normally, family and friends will lend money at a lower rate of interest with a more flexible repayment schedule. The downside of this type of loan is that there is a strong potential to strain the relationship if repayment becomes a problem. When obtaining this type of loan, the artist can prepare a simple promissory note. For example: "On or before December 31, 20XX, Artist agrees to pay Lender the sum of $2,000.00 plus 8% interest from April 30, 20XX, signed, Artist."
Ben McLane Esq
benmclane.com
Monday, July 4, 2011
Music Business/Law Tips - "Raising Money" (Part 1)
Many struggling artists have the need to record some music or finance a tour, only they lack a necessary element: money. This article will explain different ways to raise capital in order to finance a project.
SELF-FINANCING
In this instance, the artist uses his or her own money. On the positive side, the artist will: (1) retain artistic control, (2) be free of financial obligations to a lender, (3) not be bothered with a maze of paperwork, and (4) will reap all of the monetary benefits. On the negative side, the artist will: (1) bear all of the risk, and (2) will have to be solvent enough to finance the project (which is probably not the case).
INVESTMENTS
Another source of money is investment from a financial backer who can be either active or passive. An active investor will put up money and become involved in the management of the project. This type of arrangement includes a general partnership, joint venture or corporation. A passive investor will put up money but have no role in the management of the project. This type of arrangement is usually a limited partnership, and the artist has to be careful when accepting money from a passive investor because there are security law regulations which may apply. Thus, a professional should be consulted before choosing this latter route.
[part 2 next time]
Ben Mclane Esq
benmclane.com
SELF-FINANCING
In this instance, the artist uses his or her own money. On the positive side, the artist will: (1) retain artistic control, (2) be free of financial obligations to a lender, (3) not be bothered with a maze of paperwork, and (4) will reap all of the monetary benefits. On the negative side, the artist will: (1) bear all of the risk, and (2) will have to be solvent enough to finance the project (which is probably not the case).
INVESTMENTS
Another source of money is investment from a financial backer who can be either active or passive. An active investor will put up money and become involved in the management of the project. This type of arrangement includes a general partnership, joint venture or corporation. A passive investor will put up money but have no role in the management of the project. This type of arrangement is usually a limited partnership, and the artist has to be careful when accepting money from a passive investor because there are security law regulations which may apply. Thus, a professional should be consulted before choosing this latter route.
[part 2 next time]
Ben Mclane Esq
benmclane.com
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