Week 10 - Recording and Music Publishing Royalties

Class 10 Notes

ROYALTY STATEMENTS: RECORDING AND MUSIC PUBLISHING

Mechanical Publishing Statements and royalty calculation exercise

Financial Aspects of record deals and publishing deals; Royalty Accounting and

Understanding of Statements; Treatment of Advances;

Handout: Sample of Royalty Clauses from Long Form Recording Agreement

Sample Artist Recording Royalty Clause

Accounting statements for royalties for sales of sound recordings and publishing statements for musical compositions are notoriously obtuse in the music industry. Some say that it is done purposely so that it becomes harder for the lay royalty recipient to determine how the royalties are actually computed. While experienced accountants well versed in the music industry can be hired to review them, their time is expensive. Unless significant amounts of money are involved, their costs may be prohibitive.

Despite the hurdles, all royalty recipients should learn how to examine royalty statements to at least get a basic understanding of how the royalties shown are being computed and whether the data used to make those calculations seems accurate. Naturally, the process will have a steep learning curve at first as it will take time to become familiar with the format of each company. But once that format is understood, the royalty recipient will then be able to focus on the financial data itself to determine whether it seems in the ballpark based on their independent knowledge of expenses, advances, and sales units.

The best source of information about the royalty statement is from the accounting department of the company who issued it. The phone numbers of the key individuals you need to speak with are usually a well kept secret. However, as a royalty recipient, you have every right to speak with them, so persistence pays off. Don’t stop until you find someone who is knowledgeable about the statements. And once you do, ask every question necessary until you understand the information on the statement, the financial data, and how it was computed.

You would be surprised at how often basic mistakes are made by companies which are easily caught once you understand this information. For example, expenses which have nothing to do with your account may end up being charged to you thereby reducing your royalty.

Although a thorough treatment of the diverse types of royalty statements is beyond this course, some basic aspects of record royalty accounting are offered below to at least get you acquainted with this area. Practices in royalty accounting for digital sales and physical sales are different so, those differences will be noted below.

I. Physical Record Royalty Statements from Record Companies Based on a retail or wholesale price

A. Royalty Payment Intervals

- Usually issued twice a year, 90 days after December 30th and June 30th

B. Full Royalty Sales:

- Full Priced U.S. Sales 10-14% of retail or 20-28% of wholesale

C. Royalty Escalations Upon Reaching Sales Targets

- ½ percentage point at pre-agreed levels of sales

D. Reduced Royalty Categories

- Mid Priced or Reduced Price

- Armed Forces Sales (PX)

- Record Club Sales

- Foreign Sales (as high as 50%)

- Different types of recorded products such as CD’s, Vinyl, etc

E. Deductions from Royalties

- Packaging Deductions - 25%

- Payment on less than 100% of sales by contract 

  for  physical goods

- Free Goods 15-20%

- Reserves against returns 20-25%

- Producer Royalties 2-4%
- Sample Royalty Payments

F. Recoupment of Recording Costs and Personal Advances

- Usually recouped at the Artist’s royalty rate

- Be careful of the definition of “recoupable recording costs”. No overhead costs should be included

G. Audits of Royalties

- Once a year at your expense

- Can only go back two years usually- Must object to statement in writing within two years from date of statement. Usually have two years to file suit from date of objection

II. Digital Master Download Royalty Statements

Due to the efficiency of the computer, digital statements are typically available from digital distributors in much shorter intervals, usually paid electronically every month, 45 days after the end of the month.

A. Royalty:

Label Receives:

The Label is typically paid 70% of what the customer pays to the retail download website. The digital distributor will subtract any distribution fee and remit payment to the label who will deduct and pay artist royalties and digital mechanicals to the publishers of the compositions sold.

Artist Receives:

This is negotiable and depends on the terms in the Artist’s recording contract. At the low end, it would be the same rate as the Artist is paid on physical royalties. At the high end, it would be 50% of what the label receives, after publishing payments. See Eminem case where Eminem's record label sued for the 50% treatment and eventually won. eminem royalties case article

B. Deductions from Royalties

Distribution fees, Digital Mechanical License Fees;

No deduction of “reserves” for ‘returns’ since there are no physical goods to be returned

C. Audits of Royalties

- Once a year at your expense

- Can only go back two years usually

III. Music Publishing Statements

Mechanicals Payable to Publishers from Record Labels

A. Usually payable quarterly

Rate is either the full 9.1 cents statutory rate (as of 2016) or a reduced negotiated rate down to 75% of that amount for physical sales if the publisher has agreed to make that concession. If the song is longer than 5 minutes, the mechanical rate is 1.75 cents per minute.

Under the digital copyright act, artists masters recorded after 1995 are entitled to a full mechanical rate for digital downloads of songs containing their composition regardless of any reduced rate controlled composition clause in their recording contract (US Copyright Act 115(c)(3))

B. Statements from Publishers to Songwriters

Usually twice a year

C. Audit Rights

D. Deductions from Royalties

Songwriters: Administration fees and permitted costs in contract