Royalties:
As small businesses, independent record labels need all the money they can get to put back into their business. Royalties detract from profits but are necessary when creating a contract with artists/bands. Artists will not work for free and labels should ensure that the artist will continue doing business with them.
How Does It 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.
Recording Contracts:
Why Does My Label Need 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.
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.
https://www.soundonsound.com/music-business/recording-contracts-explained
https://entertainment.howstuffworks.com/recording-contract2.htm
https://entertainment.howstuffworks.com/music-royalties6.htm
https://www.taxi.com/music-business-faq/music-business/money-record-companies.html
http://www.mccormicks.com.au/blogs/record-deals-how-music-royalties-are-calculated-on-record-sales
http://smallbusiness.chron.com/divide-percentages-record-label-39258.html
Hello!
Nice post. I think this is helpful for artists to realize just how quickly their royalties can disappear among other charges and fees. Also, I wasn’t aware of a bunch of this information, so I found it interesting in general. It’s nice that you point out a few different options in addition to the standard royalty approach.
Tyler Beaston
Hey Devon,
I really enjoyed the “Provisions” portion of your article. I had no idea that things like costs and expenses for recording the album were potential points of contention for record deals, or that could be at cost to the artist. Similarly, I also never imagined that creating a new album could cost as much as $15,000. Every so often you hear stories about artists feuding with their record labels, I hope this can give aspiring artists a bit more insight into what they could expect. Great post!
Cheers,
Paul
Understanding contracts is incredibly important for small businesses, and this post does a great job of running through what recording contracts need. I appreciated that you began with a ‘normal’, big company recording contract but moved onto alternative contracting ideas for independent record labels. My favorite thing about contracts is the flexibility with which they can be written, and I’m glad that you pointed that out and offered some interesting contracting ideas. Great job.
Devon,
Great post. I found the entire thing very interesting. The music industry can be so complicated for artists to navigate, and I’m sure the same goes for independent record labels. After reading the bit about royalties, I can imagine why so many artists are unhappy with their record labels. There really isn’t a lot of money in this aspect of the music industry, especially if your splitting your 20% with band members. I really enjoyed all of the advice you gave as far as contracting options are concerned. The freedom to create unique contracts is a beautiful thing and it should be more heavily utilized by the music industry. Fantastic job!
– Cameron