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RECORD DEAL ECONOMICS
By, Yocel Alonso ©2000
I. INTRODUCTION. This discussion of music industry economics
focuses on record companies and the deals that they make. We'll do this in two parts. First, we'll discuss recording contract
royalties and, second, explore the anatomy of compact disc and cassette sales.
II. RECORDING
CONTRACT ROYALTIES. After a
limousine ride to soften you up, the first issue in a record deal is usually
the advance and then the royalty rate.
After haggling over these issues
with the record company, many artists are too exhausted (or sometimes too
disinterested) to negotiate the remaining ninety-eight pages of the contract
with equal vigor. They'll regret
this-I'll tell you why after we get the discussion on royalties out of the way.
A. Advances. Artists typically get advances for signing a
contract, walking into a recording studio, or delivering the master recording
to a record company. Advances are
important, and not just for the obvious reason.
M The Obvious Reason. It's always better to have, than to have
not, especially when it's a no interest, non-recourse "loan".
M The Less Obvious Reason. The higher the advance, the higher the
record company's risk and, consequently, the higher its commitment to the
artist. Conversely, the smaller the
advance, the less its interest in the artist, notwithstanding how many "I
love you, man's" are exclaimed in your direction.
M The Practical Reason. Many record companies are slow pays. You definitely want to get paid before the
Spice Girls' next hit song. (It’s been
suggested that these chronic payment problems would be cured if the labels'
royalty departments were merged with their payroll departments).
B. Royalty Rates.
1. Retail vs. Wholesale Rates. Some labels calculate artist royalties as a
percentage of the record's retail price, others use the wholesale price. Still others use a fixed dollar amount for
each sale. The conventional wisdom is
that wholesale rates convert to retail rates on a 2:1 basis with the precision
of a fahrenheit to centigrade conversion.
Not true. This analysis may not take into account the company's "free goods" policy
and other relevant factors. There is no
substitute for learning the company's actual prices and working out each
scenario under the proposed contract.
This will tell you precisely how much the artist will receive from each
unit sold. Of course, your task would
be a lot simpler if the contract specified the dollar amount of royalties to be
paid on each unit sold, and some labels actually do this. Regardless of the rate, it is important that
you understand the royalty basis.
a. Royalty basis.
By this I mean the amount of record sales to which the royalty rate will
be applied. An artist who has never been to Wonderland may think that he or she
will be paid on 100% of actual sales.
While some companies do this, others do not. For example, some companies still pay royalties on 90% of sales
because fifty years ago, before the introduction of vinyl, there was a ten
(10%) percent deduction to compensate for records that broke during shipment. Other companies whack off an additional
fifteen (15%) deduction for "free goods" which they may or may not
give away.
b. Stealth definitions and the fine print. Whatever you do, read every sentence in the recording contract and understand
their interplay. Remember the old
saying, "the big print giveth and the small print taketh away." Question everything and assume nothing-not
even that terms have been defined in a manner consistent with their ordinary
meaning. They probably haven't. And never, ever lose sight of the fact that
your job is to know how much your artist will be paid for every unit sold,
regardless of where or how it is sold.
Alan Siegel's analysis nails this concept dead-center:
"The language is
jargon and it will be cast in a style I have just christened fail-safe convolution. The style is born of paranoia (not
necessarily undeserved) and provides for each unpalatable provision to appear
twice, usually widely separated in the text, once in wolf's clothing and once
in sheep's clothing. The theory is
simple: if the artist's attorney knocks it out once, there is a chance he won't
pick it up the second time and at least there will be an ambiguity that can be
played with later on." Alan H.
Siegel, Breaking in to the Music Business,
(1990).
2. Royalty
Deductions.
a. Free goods.
These are CDs and cassettes which may or may not be "given
away" by record companies for various business reasons, usually without
payment of royalties. The business
reasons may include:
1. purchase volume;
2. reduction of royalty payments; and/or
3.
"cleans,"
payola, and other questionable transactions. Some companies give away fifteen
(15%) percent of their product as free goods.
This practice may be to the artist's detriment when the royalty is based
on a percentage of the retail sales price.
Other companies don't give "free goods" but deduct fifteen
(15%) percent from the artist's royalty base anyway. This practice may be
detrimental to artists working under both retail and wholesale royalty
provisions. Other companies do neither,
relying instead on "special free goods" programs.
b. Special free goods.
These are CDs and cassettes "given away" by record companies
as part of a limited incentive program to increase sales. The amount varies from five (5%) to fifteen
(15%) percent.
c. Promotional free goods. These are promotional records given away to radio stations, the
media, lawyers, and others. Their
distinguishing characteristics are either a mutilated jewel box or the ominous
warning that they are for "promotional use only-not for sale." Of course, you can find them for sale at a
used record shop near you.
d. Packaging.
Some record companies contend that they should not pay artist royalties
on their cost to package a CD or cassette.
However, the actual packaging cost per CD is about ninety ($0.90)
cents. By comparison, the typical
packaging deduction is ten (10%) to fifteen (15%) percent wholesale and twenty
(20%) to twenty five (25%) retail. On a
record that wholesales for $9.00, a fifteen (15%) percent packaging deduction
equals $1.35. This translates into
$45,000.00 over actual costs fees for every 100,000 units sold.
e. Record clubs.
Record contracts may provide for a reduced royalty rate on sales made by
mail order clubs. These sales are
generally governed by a licensing agreement between the record company and the
club which include an extremely liberal "free goods" policy,
typically 100%. Record company
contracts may provide for the artist to be paid one-half of their royalty rate
on sales. Depending on the artist, you
may be able to increase this to two-thirds or, preferably, one-half of the
licensing fee paid to the record company.
You may also be able to negotiate a limitation on the amount of free-goods,
and/or a longer time period between the release of the album and its
availability to record clubs.
f. Foreign sales.
These generally pay a lower royalty rate than U.S. sales. How much lower depends on the 1) artist
2) record company, and 3)
market. The top artists can usually
negotiate a higher royalty based on their high sales. Record companies also have different policies regarding
international sales. Subject to the
first two factors, these are the typical rates for each market, stated as a
percentage of the artist's U.S. rate:
Canada
- 85% to 100 %
Major
markets - 65% to 75%
Iraq,
Cuba and Thunderdome - 50% to 65%
3. "Reasonable" Reserves. Your definition of a reasonable reserve is
probably different from that of some record companies. Most of us believe that a reasonable reserve
should be based on an artist's actual returns.
Some record companies believe that a reasonable reserve is the amount
established by their company policy, regardless of the real numbers. If this issue is important to the artist,
you should deal with it up front.
Otherwise, your only recourse may be a lawsuit to determine
"reasonableness."
4. Synchronization Deals. These are deals for the use of master
recordings in movies and television programs.
The amount paid varies widely depending on the 1) company, 2) project,
3) how badly they want the song, and 4) whether they've already infringed on
your copyright.
III. ANATOMY OF A CD
SALE.
A. Record
Company's Cost (excluding artist royalty).
This is the record company's actual manufacturing and out of pocket
costs. This cost varies, of course, but
it includes:
1. Disc manufacturing cost (including
jewel box and insert): $.90 (or less)
2. "In house" Cost: $.30
3. Composer royalties:
@$.70 (or 3/4 of this amount)
Total: @$1.90
B. Distributor's
Cost. This is the price the record company charges the distributor. Depending on the market, it generally ranges
from about $7.00 to $10.00.
C. Amount
Left for the Record Company and Artist.
This is what's left to carve up.
The amount ranges from $5.15 to $7.15 per CD.
D. Retailer's
Cost. This is the amount paid by
the retailer to the wholesaler. It's
about $10.30 - $11.50.
E. Consumer's
Cost. This is the amount you and I
pay at the record store. It's usually
$11.98 - $18.98 and sometimes more.
Assuming a retail sales price of $18.00, Appendix "A" shows
the flow of money from a CD sale in percentage terms.
IV. ANATOMY OF A CASSETTE
SALE. The comparable numbers for
cassette sales are as follows:
A. Record Company's Cost (excluding
artist royalty):
1. Cassette manufacturing cost: $.60 (or less)
2. "In house" Cost: $.30
3. Composer royalties: @$.70 (or 3/4 of this
amount)
Total: @$1.60
B. Distributor's Cost: @$4.10 to $7.00 (depending on the market)
C. Amount Left for the Record Company
and the Artist: $2.55 to $5.45
D. Retailer's Cost: @$5.25 to $8.00
E. Consumer's
Cost: Generally $6.98 to $12.98.
However, many records are not being released on cassette. Assuming a retail sales price of $11.50,
Appendix "B" shows the flow of money from a cassette sale in
percentage terms.
V. RECOUPMENT. This is technically the term used to
describe the process by which a record company's advance is repaid from the
artist's share of record sales. In
practice, some record companies use the terms "recoupment" and
"profit" interchangeably in conversations with the artist. The obvious implication is that if the
company is not recouped, then the record hasn't made a profit. The label might say, "But Captain
Bucky, how can you expect us to give you 100 promotional CDs when we're not
even recouped?" When Captain Bucky
asks his manager to call you about this, you'll clear up this obfuscation and
explain that the similarities between "recoupment" and
"profit" are limited to the fact that both words end with the letter
"t". Actually, the worse the
deal is for the artist the easier it is for the record company to recoup and
vice versa. Assuming the manager
understands, Bucky will realize that "recoupment" is a bogus issue
and go back to the label for his promotional CDs, this time with conviction.
VI. CROSS-COLLATERAL. This is another favorite term of some record
company executives. They use it more than bankers and some even understand
it. It means simply that the income
from one record will be used to recoup the advance on another record, and vice
versa. Record companies feel naked
without it, whether it's necessary or not, and want it in their contracts.
VII. CONCLUSION. There's plenty of information out there on
music industry economics, some reliable, much of it worthless and, worse,
misleading. It's your job to know the
facts in order to facilitate informed decisions by your clients on proposed
contracts. Otherwise they may be more
susceptible to signing their name to a bad deal or rejecting a good one. On the other hand, when your client has the
facts, these decisions may be no more difficult than fourth grade
arithmetic.
A word of
caution. The perceived economics of the industry may be different from the actual economics, depending on factors
such as hype, confusion, and misperception of market conditions. It's important for you not only to know
both, but also the difference between them.
It's okay to leave something on the table for business and/or personal
reasons, but it's not okay to leave something on the table out of ignorance or
because you rode in a limousine.
Also, just
because you are new to the business, don't assume that everyone knows more than
you. No one else may know what's going
on either. Since the field has no real
entry barriers, anyone can play. I've
met record company executives who started out as stock brokers, insurance
salesmen, and even attorneys. What a
country!
Since the
interests of the label and the artist are not always harmonious, the industry
has seen its fair share of disagreements. But the artist's relationship with
the record company should be collaborative, not adversarial, and the lawyers
should help resolve problems, not create them.
©
2000 by, Yocel Alonso
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