Music Business/Law Tips - "Free Goods" (Part 2)

Record Club. It is quite common for a record club to offer records for free as an incentive for a new member to join. The problem is, since new members are given a choice of which artist's record they want for free, there is no way to really control how many copies will be given away. The only way to handle this dilemma is for the artist to restrict the number of free records which can be given away without paying a royalty. The protective language included in the record contract should provide that the number of free records given away through record clubs will not exceed the number of records sold (i.e., royalty shall be payable on not less than 50% of records distributed through record clubs).

Promos. A promotional record, or "promo", is often lumped together with the free goods because it is, in essence, also a free good since there is no royalty paid. A promo is generally a record given away to a radio station to promote airplay. It is not meant to be sold in stores and will contain a stamp on the record that reads: "not for sale". A big problem with promos is that they often ultimately wind up being sold in used record stores anyway, with the artist not being paid a royalty. Since airplay is so important to the success of a record, there generally are not restrictions placed on the number of promos sent to radio stations, etc. because in theory they are not intended for sale.

Since the number of free goods given away can substantially lower the royalty payable to the artist, the artist needs to be keenly aware of a label's policy and make sure this area is well defined in the contract.

Ben McLane Esq
benmclane.com

Music Business/Law Tips - "Free Goods" (Part 1)

This article will discuss the concept of "free goods" as it relates to the sale of records. Whether an artist is signed to a label, or is putting out an independent release for sale to the public, free goods is an important issue to understand because it affects the artist's bottom line. This is because royalties are paid only for records sold. As the name implies, there are no royalties payable on free goods. The information herein is applicable to both the signed and the independent artist.

In theory, the stated purpose of free goods is to help establish an artist, which hopefully translates to the sale of more records. Actually, free goods exist on a few different levels, all of which need to be understood. The three main types are set forth below:

Normal Sales. Generally, these are free goods that exist when a label is trying to push a record. In order to get the stores to stock the record, the label agrees to give away (i.e., not charge a wholesale price) 10% to 20% of all the records shipped to the store. For example, if the label ships 100 records by an artist, it will only charge the store for 85. This is to encourage the stores to buy the record. It often works, too, because the store can then turn around and sell the 15 free goods for 100% profit. For protection, the artist needs to put a restriction in the record contract that fixes a limit on the number of records considered free goods. Most labels will agree to a limit of 15% on albums and 30% on singles, with the artist to be paid a royalty on any excess given away for free. A major issue associated with free goods sold in stores is what are known as "returns". Returns are simply physical records which have been sent back to the label by the stores because they did not sell. The problem arises because royalties are only paid on records sold, not records returned. Many labels will wrongly lump the free goods in with the real returns, and then subtract the full returns from the total records sold, which is what the royalty is based upon. Since the free goods were never "sold" by the label in the first place, is unfair to deduct them later. For protection, the artist needs to have language in the record contract that the artist will receive a "credit" against returns for free goods.

[part 2 next week]

Ben McLane Esq
benmclane.com

Music Business/Law Tips - "Compilation Album Royalty"

Under a standard record deal, most artist royalty deals with a label are about 15%-20% of the retail price (i.e., in general if a record sells for $10 that's about $1.50 to the band) - its the same for a compilation, but instead of a solo act/band getting all 15-20%, its 12-15 acts splitting that royalty on what they call a pro-rata (fractional) basis - so in a compilation deal, the artist needs to ask for:

(1) A pro-rata royalty of 20% (and hopefully no less than 14-15%), and also if the artist can get whats called a "most favored nations" rate it means the artist gets paid the same royalty (pennies per sale) as all the other acts on the comp (even if there is a big name;

(2) That the label lists the artist's credit on the package (name and website);

(3) That the label can only use the artist's track for the compilation (i.e., nothing else like licensing to film/tv) without artist's permission.

Ben McLane Esq
benmclane.com

Music Business/Law Tips - "Foreign Performance Income" (Part 2)

The money earned by a songwriter from the societies (the "performance royalty") is proportionate to the volume of airplay of the songwriter's songs. Performance royalties are based on complicated formulas. Basically, however, the societies monitor radio and television airplay to determine how often a song is heard and by how many people. The larger the audience and the more times a song is played, the more the income. Since it is impossible to cover all media outlets, the societies rely on estimates based upon samples. After deducting operating expenses, the societies divide the fees up and pay it to their affiliated writers and publishers. Societies pay quarterly. All major foreign countries also have a performance rights society. All of the U.S. societies have "reciprocal agreements" with the major performance rights societies throughout the world. Based upon their own individual rules and procedures, these foreign societies log and (after deducting an operating fee) pay the U.S. societies for performances in the foreign territories of the works that are in the U.S. societies' catalog. The U.S. societies (after deducting their own processing fee to analyze the foreign performance monies) in turn pay the songwriter the foreign performance money earned. If there is a separate publisher of the song, societies pay 50% to the writer and 50% to the publisher.

Now, and in the future, there is great potential for money to be earned outside the U.S. Hence, songwriters must position themselves to be able to collect all that is owed them. Joining a performance rights society is the key.

Ben McLane Esq
benmclane.com

Music Business/Law Tips - "Foreign Performance Income" (Part 1)

If a songwriter composes a hit song, it is quite possible that the song will receive airplay in foreign countries. If so, there will be what is called "performance money" due that songwriter from the foreign countries playing the song. This article will explain the process of distributing "foreign performance" monies to the songwriter.

Any serious songwriter should first become a member of one of the United States performance rights societies: BMI, ASCAP or SESAC ("societies"). The songwriter will enter into a contract with the society chosen, giving that society the right to license the public performance of that songwriter's songs. The societies have arrangements with the parties (radio, television, concert venues, restaurants, etc.) who want to use the songs in the societies' respective catalogs. For a licensing fee, the societies will grant to that user what is called a "blanket license", which means that the user can play any song, by any songwriter or publisher affiliated with that society, any number of times. Publishing companies enter into a similar agreement with the societies.

[part 2 next week]

Ben McLane Esq
benmclane.com

Music Business/Law Tips - "Foreign Licensing Deal" (Part 2)

Money. The company will make payments to the artist in the form of royalties and advances. The royalty will usually be a percentage of the suggested retail list price in the licensed territory on records sold, or, if there is no such list price, the equivalent in that territory. Sometimes, the royalty will simply be a certain number of the company's country's currency for each CD sold (e.g., three German marks for each copy sold). The artist could request that royalties be paid in U.S. dollars. The artist should also expect an advance against royalties (i.e., recoupable). Here, unlike domestic recording agreements, the company generally will absorb the costs to manufacture and sell the CDs and not charge these costs back to the artist.

Guaranteed Release. The artist should insist that the company commence manufacturing and selling the CD (and online) within a few months after the deal is signed, or else the rights granted will terminate and revert back to the artist. Logically, the company wants to release the CD because it bears all the costs of manufacturing and selling; each record sold results in a payment to the company.

Payments. Royalty payments are generally due to the artist semiannually within 30-90 days following June and December of each year. Such payment will be accompanied by a statement setting forth the amount of records sold, if any, and the royalty computation.

Copyright. The copyright to the master(s) remains with the artist. The artist is only granting to the company the right to make reproductions of the master. The artist should make sure that the company puts the proper "notice of copyright" on the CDs manufactured (i.e., © [name of artist]).

Termination. Once the term ends, the company is usually allowed a sell-off period of six months for the CDs already manufactured (with royalties still payable).

Ben McLane Esq
benmclane.com

Music Business/Law Tips - "Foreign Licensing Deal" (Part 1)

Foreign licensing deals are becoming quite common today as the appetite for American acts grows internationally. Further, they are an excellent avenue for an artist to sell product worldwide without having an actual record contract. Although such an agreement is similar to a domestic recording contract, the essence of the foreign licensing deal is that the artist is licensing the master to a foreign company ("company") to manufacture and distribute the music. This article will briefly discuss some of the main deal points which are incorporated into a foreign licensing agreement.

Territory. The territory is defined to be only specific continents or countries. It is important that the territory not be stated as being for the "entire world". It is best to limit the territory to the areas that the artist feels the company can sell music. The licensed territory should be spelled out (e.g., UK, Japan, etc.)

Product. The licensed music should be defined by title(s) so that the company does not infer that it is being granted the right to release the artist's entire catalogue.

Rights. The artist will normally grant to the company the right to (1) manufacture and sell the music in CD and digital form; (2) use of the name and likeness of the artist in connection with advertising and sales; and (3) the right to publicly perform and broadcast.

[part 2 next week]

Ben McLane Esq
benmclane.com