Bar Bulletin

November, 2004

 Bar Bulletin Focus

Entertainment/Sports Law    

Slamming a Revolving Door?
~The (im)possibilities in negotiating a recording contract~
By Paul Gardner

In his seminal work on entertainment law, All You Need to Know About the Music Business, Don Passman recounted a call that he received from a television producer.

“She was doing a special about the music business and had stopped people on the street to ask how much they thought an artist made from a gold album (sales of 500,000 units),” he wrote. “The guesses ranged from $500,000 to over $2 million, and the producer wanted to know the real answer.”

Passman based his response on an example of a new artist with “an all-in royalty of 14 percent, an 85 percent rate on CDs, a 3 percent producer, recording costs of $300,000, and tour support of $50,000.” In this case, subtracting $4.74 for packaging from the suggested $18.98 retail price of a compact disc leaves a royalty base of $14.24. Multiply the royalty base (14 percent, less the producer’s 3 percent) by the royalty rate (85 percent for CD) and the royalty becomes $1.33 per unit. Multiply that by the number of album sales (500,000) and the royalties come to $665,000. But subtract the 15 percent “free goods factor” (-$99,750), recording costs (-$300,000); 50 percent of the independent promotional budget (-$100,000); 50 percent of the music video costs (-$75,000); and tour support (-$50,000) and congratulations – that royalty check is now worth a whopping $40,250. It is here that an experienced entertainment attorney can boost the client’s chance of getting a better deal.

Typically, a new artist receives what’s commonly referred to as a 10-point deal; in other words, the artist is to receive 10 percent of the list retail price of net sales of full-price albums sold in the United States. This is the artist royalty rate. But in the realm of regular, everyday clients, the industry term artist royalty rate opens the door for numerous loopholes and exclusions.

Right off the top, the label first deducts a packaging charge from the suggested retail price. The amount left after calculating the packaging charge is called the royalty base. The industry norm is 25 percent for CDs, 20 percent for analog cassettes and 10 percent for vinyl. Because CDs are the industry norm, this automatic deduction usually gives the artist the standard 16-page CD booklet. However, more pages or special inserts will require negotiating an additional loss of royalties in the range of five and 10 cents per unit. (One band started off demanding a 72-page booklet; once they discovered the resulting royalty base, however, the booklet was cut down to just 12 pages.)

Now to configure the actual royalty rate. The “all-in” term means that the artist’s money is lumped all in with the record producer’s money and the mixer’s money. Thus, once the record label pays the artist’s royalty, the artist must pay the record producer (project administrator) and the mixer (musical engineer). Record producers usually accept between 2 percent and 4 percent of the artist’s original 10 percent, while the mixer usually accepts 1-2 percent of the same original 10 percent. Naturally, it is in the artist’s best interest to negotiate a contract in which the record company pays the producer and mixer out of its own account. However, as this will probably not happen, the artist’s attorney should at the very least negotiate for the record company to pay the producer and the mixer upfront and treat such payments as additional advances under the deal. This way, if the artist’s record “flops”, the artist simply owes the record label and not third parties.

The royalty rate is also calculated according to albums sold. Most labels calculate the net royalty rate on just 85 percent of all records sold. There is no need to try to understand this quirk in the system; just know that it is there and that there is nothing that can really be done about it.

Now to reveal the artist’s royalty and multiply it by the number of units sold. A gold album is any album that the Recording Industry Association of America (RIAA) certifies has sold 500,000 units in the United States; sales of 1,000,000 units in the United States render the album platinum. Thus, according to Passman’s illustration, the client achieving gold status will receive $665,000.

But wait – there are more deductions. Record labels induce wholesalers to purchase the artist’s music by giving away free goods. Record executives quickly figured out that selling 1,000 records at 85 cents apiece was the same as selling 850 records at $1 apiece, giving the wholesaler 250 records for “free.” After all, the retailer still receives 1,000 records and the label still receives $850. However, the artist at the center of the deal only gets paid on retail pricing, not wholesale, and so the label saves royalties on 250 records out of every 1,000 records while earning the same money (whew – talk about “fuzzy math!”).

In order to understand the next series of deductions, it is necessary to understand the concepts of advances and recoupment. In the recording industry, the record label will pay the artist a sum of money and then withhold the artist’s royalties until that sum of money is repaid. The sum paid to the artist is called an advance, and the process of withholding money is called recoupment.

Recording costs are recoupable by the record label. The artist’s attorney should negotiate a range between $5,000-$125,000 for a new artist signing to an independent label; $175,000-$300,000 for a new artist signing to a major or mini-major label; $300,000-$600,000 for an established artist; and $1,500,000 and up for a superstar client. Be prepared for the record label to insert a clause requiring their approval of the recording cost budget. This clause is okay as it protects the artist, too, but the artist’s attorney should be sure to sit down at the negotiating table with a budget already prepared and negotiate that amount.

Independent promotion can also be a recoupable cost. Independent promotion companies often have great relationships with radio station programmers and can get the artist’s record played on air. The record label usually negotiates for the artist to agree to pay for 50 percent of independent promotion, with the label paying the remaining 50 percent. The artist’s attorney should never agree to the artist paying 100 percent of this cost as record labels are not as fiscally frugal when they do not have to pay some portion. In fact, try to negotiate a dollar figure maximum limit on how much the label can charge the artist for independent promotion; otherwise, the artist might as well issue the label a blank check.

Music videos have little profit, but they help sell records. Thus, if the label agrees to make a video of the artist’s song, they will usually negotiate to recoup 50 percent of the costs from royalties. The artist’s attorney should negotiate a range of $50,000-$100,000 for a new artist signing to an independent label; $250,000-$500,000 for a new artist signing to a major or mini-major label; and $500,000-$1,000,000 for a superstar client. However, be prepared to give up creative control (little to no approval of the story line, director or producer) and watch the recoupment clause closely on this section of the recording agreement to prevent double-dipping.

Much like attempting to slam a revolving door, it is next to impossible for a new artist to go on tour and make money. Therefore, the artist may need tour support. Most record labels really do not want to commit to tour support in the recording agreement, but the artist’s attorney should try to negotiate an amount therein, usually around $50,000.

Without skillful negotiation, the artist could become a modern-day sharecropper – never truly paying down “past debts” – especially when labels start thinking cross-collateralization. Beware that some things just may be impossible, like slamming that revolving door or trying to negotiate a favorable recording deal without specific knowledge of this particular area of the law. Always call upon an entertainment or sports attorney when the situation arises.


Paul Gardner is managing partner of the Gardner Law Group. He focuses his practice on entertainment and business law matters.
 

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