Royalties & Recording Contracts: How to Make Money and Keep Artists Happy

How Do Royalties Work?

Artists are paid a percentage of each album sold, which is determined, and negotiated, by the artist and the label in the recording agreement. Typically, the percentage ranges between 10% and 20%, with newer artists seeing the lower end of the range. The artist or band may receive an advance in royalties prior to the label making money from CD sales, with this advance being returned to the label, a process called “recoupment.” When the time comes for the artist to receive royalty payments, the band manager also takes a percentage, and the remaining money is divided among any band members.

This system can be problematic to artists whose albums do not go “gold” (500,000 albums sold) or “platinum” (1,000,000 albums sold), and labels only have a 1-in-20 chance of producing a gold or platinum album. So, when deciding on how to calculate royalties, a record label owner needs to consider: the percentage, how this percentage is calculated (wholesale or retail), any recording expenses imposed on the artists, and any advances paid as well as if they want the artist to stay with them.

If this royalty system does not sound right for your label, you might consider a mutually beneficial approach. Independent labels sometimes split the net profits of an album (either 50/50 or otherwise) with the artist. To determine net profits, the label takes the gross sales of albums sold and deducts its direct costs which include production costs, packaging and shipping, marketing, storage, legal, taxes, and personnel costs.

Another thing to remember is that royalties are paid to the recording artist as well as the songwriter. If these artists are separate people, then the royalties are going to be smaller for both individuals. The recording artist and songwriter are paid royalties from CD sales, but only the songwriter receives royalties when the recording artist gives a public performance.

Royalties is a key provision in the recording agreement and artists in the music industry are typically unhappy with the traditional system which favors the label’s success over the artist’s. If you are in the business to make money as well as build relationships, then it may be in the label’s best interest to negotiate fairly.

Why Does My Label Need Recording Contracts?

Recording contracts between the label and the artist are extremely important because they establish the professional relationship between the two parties and are legally binding. While it may be tempting to find a contract template online to use for your label, it is crucial to understand what every provision in the agreement means. It is also important to understand that contracts are between the artist and the label as a company, not between the artist and the label owner. Labels also need to realize that these agreements create specific obligations for both parties. Basically, artists agree to record an album in exchange for royalties.

Arguably, the most important clause in the contract is “exclusivity,” which requires the artist to sign to your label only. The label has exclusive rights to the artist’s music, name, merchandising, image, and likeness for the entirety of the contract. If an artist wants to appear on another artist’s track (who is signed to another label), then the artist should negotiate what is known as a “sideman” provision.

Other provisions of the agreement include: the territory; the length of the agreement; rights granted; advances and royalties; recording costs; warranties; and termination, to name a few.

Contract Provisions

Usually, recording agreements are for year-terms which allow the label to extend the contract if the artist does well after the release of an album. Artists may be contractually required to release a certain number of albums in a particular period of time. For example, the first term of the contract might be for the first album, the second term for the second album, and so on. As a new and small business, it might be a better idea to give your label this type of flexibility when creating recording agreements with new artists.

Artists also assign the copyright in their music to the label. The label will own the copyright in the sound recording once the track/album is recorded. The label owns this copyright for 50 years from the date of its release, and the same goes for any unreleased recordings. There may also be a contract provision on licensing, allowing the label to license the album or song to others, but it may owe a fee to the artist depending on the contractual language. A label may also want to include what is known as a “lock-out” clause which prevents the artist from re-recording any of the songs on the album, and unreleased tracks, for 5 to 10 years following the end of the contract.

Recording costs can also be a point of contention since it is common for a label to charge artists for a variety of costs associated with the production of an album, such as promotion costs, music video production, and touring expenses. The costs may be deducted from the artist’s royalties before they even receive them. Keep in mind that independent labels typically spend around $15,000 when making a record, depending on the associated costs.

As a small business owner, it is up to you how to craft recording agreements and how flexible you want to be with various provisions, such as royalties. Following traditional approaches taken by larger labels will yield more profit, but might scare away potential artists from signing with you. So, it is best to seek advice from outside counsel and ultimately determine what is best for your company.

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*This post was checked for currency on September 7, 2018 and reproduced with permission by author Devon Kenefick. Original post can be found here.

Devon Kenefick, at the time of this post, is a third year law student at Penn State’s Dickinson Law.  Originally from Maryland, she plans to take the bar exam in Maryland. She is interested in Business Law, Intellectual Property Law, and Entertainment Law. She is currently the Student Bar Association Secretary and a member of the Intellectual Property Society. A more complete bio can be found here.

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