8th CLASS - RECORDING CONTRACTS
Finding a Recording Contract with a reputable company is the most difficult task for a new artist. Since the cost of recording a demo is practically zero, Record companies today get huge volumes of submissions – far more than they can handle. Some record companies claim they will only accept submissions from attorneys. Most likely this is just a ploy to discourage people from sending in more material for them to evaluate, and not really to protect the Company.
With all the large record companies merging and downsizing, there are even fewer opportunities for new artists to be signed. Combine this fact with the worldwide access of the internet, and it is obvious that increasingly artists are chosing, mostly by necessity, to record their own material, form their own labels and distribute their own product rather than wait for a record company riding a white horse to snatch them up and carry them to stardom.
Nevertheless, it is true that small independent labels are still taking chances on new artists, although with somewhat diminished resources due to the drop in CD sales. For those Artists who do land a recording contract, with a small, medium, or even large company, an appreciation of the nature of the contractual commitment involved is essential if they are to compare the benefits and detriments of signing with a label as opposed to distributing their own material.
A. How Do You Get A Recording Contract?
This is usually the job of the Manager. You don't have to be licensed as a talent agent to find a recording deal for someone. Just great contacts and a good track record for knowing what is commercial music. The process of taking an Artist’s material to different companies is called “shopping”.
B. Finders
There are individuals who offer their services in assisting artists to find a record deal. These “Finders” sometimes prey on unsuspecting artists by exacting up front fees of thousands of dollars, and then doing nothing more than mailing out a few demos to companies. Typical finder's fee agreements with reputable individuals will call for the finder to be paid only a percentage of what artist receives based on a deal that they have secured and which is accepted by the artist. Artists should be wary of up front flat fee compensation requests from Finders as there is no way to predict what services they will actually render after the money is paid. When the compensation is a percentage, it is usually of the first album advance (10-20%), although some finders want a percentage of the income from every album recorded.
C. General Observations about Recording Contracts
The artist-label recording contract typically provides for the exclusive recording services of the artist for a number of albums and/or years. Recording contracts can range from 3 pages to 100 pages in length. No company should release a record without a signed agreement from the artist. California law (Civil Code Sec. 3344) makes it unlawful to use a person's name, voice, or likeness to market a commercial product without their written consent. That consent is given in the recording contract.
In addition, the contract should state which party owns the copyright to any master recordings and compositions recorded by the Artist. Usually, the Label will insist on owning the copyrights to the Masters. Alternatively, the Masters can be licensed to the Label, with the copyright staying with the Artist.
As a general rule, the Record Label will present the recording contract to the Artist. Usually this is preceeded by a deal memo that contains all of the most important terms. All such deal memos and recording agreements should be negotiated by the artist’s experienced representative and not signed as they are. If the artist cannot afford experienced legal representation, it is common for the artist to request the record company provide a cash advance that the artist can use to hire representation.
In terms of negotiating leverage, the best leverage an artist can hope to have is for two companies to be interested at the same time. Otherwise, leverage is usually with the Company. The only leverage that the Artist has in the negotiations is to threaten to walk away from the agreement, which is often a difficult position for the Artist to take since most artists have such difficulty in getting offers in the first place.
It is most important for the Artist to research as much as possible about the history and reputation of any company, and the people behind it, that presents a recording contract. What good is a great looking contract with a poorly funded, mismanaged company with a dishonest reputation and horrible track record?
D. Key Terms in Recording Contracts
1. Exclusivity
It is normally required that the Artist sign exclusively to the record label for a period of time or albums. However, if a contract is for one album or one project only, the artist may not be required to sign exclusively. It may be limited to that one album. If a series of albums are contemplated by the artist, the relationship normally has to be exclusive. However, the contract should give artist right to perform as a sideman or background performer with other artists under certain agreed conditions.
2. Territory
Usually the world, but can be for USA only, USA and Canada, or even just one particular foreign country. From the artist’s perspective, foreign rights should only be granted if the company has the ability to exploit them.
3. Term
The term is the length of time that the Artist is to be under and exclusive contract. This is usually defined by one album in first 12 or 18 months with company having option to request from 2 to 4 more albums, one at a time. The artist should always try for as few options as possible with financial and release commitments for each album (specific advances and recording funds).
The artist should always insist that company have the obligation to record at least one album’s worth of masters during each period of the contract, pay the recording expenses, and release the album commercially both physically and digitally within 4-6 months after delivery. If either condition is not met, artist can notify company and terminate the contract if company does not perform the requested commitment after notice.
California Labor Code Section 2855 that states that personal service contracts cannot last longer than seven years. However, if the artist fails to deliver the agreed number of albums during that time, the company can sue the artist for damages due to the undelivered albums. Today, recording contracts are usually shorter in duration than they were historically.
4. Creative Issues
The Record Company usually grants itself the right to approve of producers and material to be recorded. There can be no live albums without Company’s consent. If the recorded material is not commercial in the company’s sole judgment, they can refuse to release it and request that the artist re-record.
5. Copyright ownership
As mentioned above, the Record Company will insist on owning copyright to sound recordings, but the artist can and should negotiate payment for masters they have recorded on their own before contract was offered. If company will not pay for the Masters, the artist should retain ownership and license the Masters to the record company rather than assign them without any such payment.
6. Right to use artist's name, likeness, and biography
Record Company must have the right to use the artists name and likeness. The artist bio and pictures are usually subject to artist’s reasonable approval
7. Artist Advances and Recording Funds
Artist advances can be either a separate payment to the Artist or, the artist Advance can be part of an overall "recording fund". A ‘recording fund’ is an agreed amount of money put up by the Record Company to cover the expenses of recording the album. Typically, anything that is left over becomes an advance to the Artist, which is an incentive to record within budget.
8. Royalties
(a) Royalties for Physical Sales of CD’s
Artist royalty rates are based on either the wholesale or retail price paid for the record. The range is from 10%- 18% of retail or 20% to 36% of wholesale price, which is usually half of the retail price.
The following is a sample royalty calculation based on wholesale price of $7.50, a 20% royalty, and a 25% packaging deduction, on 90% of sales. Record companies often try to reduce the number of records they will pay on to less than 100%. A packaging deduction is a historic technique used by record companies to reduce royalties which actually has nothing to do with the cost of packaging:
$7.50 (wholesale) x 90% = $6.75 - $1.87 ( 25% packaging) = $4.87
20% of $4.87 = .97 cents per CD royalty
The earned royalties are first applied by the Record Company to recoup the artist advance and recording costs. Once recoupment of those costs occurs, the artist finally gets paid, unless they have incurred more recording expenses by the time recoupment occurs.
Producers are normally paid from the artist royalty. They receive 2-4% of retail royalty, and an advance against that royalty for each song produced.
Foreign royalty rates are lower than those for US sales, often 50% to 75% of the US royalty rate.
Royalties are pro-rated where more than one artist is on the same record, or songs from other artists are mixed with the artist's masters as in a compilation record
Royalties are not paid on promotional records and free goods. Free goods are records given to entice retailers to purchase the Artists records by not charging them for 10-15% of the records in the box.
Container deductions = just another way to reduce the royalty paid to the artist: Traditional container deductions are 12% deduction from the base royalty for LP'S to 25% for CD'S.
Royalty statements - usually twice a year
“Reserves” against future returns are liquidated over two years. Distributors give their customers the right to return the records for credit if they doesn’t sell. For royalty purposes, since Record companies generally treat record shipments to the customer as a “sale”, they must set aside a ‘reserve’ for possible future returns to avoid over-paying their artists. If the records are not returned, all the reserves are paid during the two year period.
Recording costs can be charged at any time they are incurred and are used to reduce the amount of the current royalties due.
Artist should have right to audit statements for accuracy once a year
(b) Royalties for Digital and related sales
In 2013, 55% of total music sales were represented by physical goods and 45% were represented by digital sales, i.e.:
- internet downloads
- internet streaming
- ringtones (mastertones, voicetones, and ringbacks)
- digital performance income
Streaming seems to be increasingly popular compared to digital downloads which are dropping yearly.
Many labels are still using forms with outdated royalty clauses that are used for physical CD’s which are not appropriate or fair when calculating royalties from digital sources. There are, for instance, no returns in the digital world. Therefore there is no need for reserves.
The fairest arrangement to the artist is to treat digital sales income as licensing income which is split 50/50 after the expense of the transaction between the label and artist.
9. Mechanical Payments and Controlled Compositions
As we have seen in the discussion under “Producer Agreements” a “Controlled Composition” is defined in the recording contract as any song written by the artist or by a producer hired by the artist.
“Mechanical Payments” are the legally required payments to the owners of the compositions that are recorded and sold by the record company. Currently the rate is 9.1 cents per recorded composition of 5 minutes or less for each copy sold. The record company typically limits it's obligation to pay mechanicals on physical CD's (copyright law now requires a full rate on on digital sales) at 75% (3/4 of the 9.1 cents rate) on the first 10 or 12 songs on each album to reduce costs. This “cap” applies regardless of how many songs are on the album. The higher the number of songs the record company will pay for, the better for the artist. Here is why;
Lets assume the mechanical “cap” is 10 songs X 3/4 of .091 cents (2014 statutory rate) which equals = 6.82 cents. Multiply the per song rate of 6.82 cents per record time 10 = 68.2 cents cap on total mechanicals, no matter how many songs are on the album. Any compositions that are NOT controlled compositions, such as covers or samples of other recordings that are owned by other publishers, must be paid at the full mechanical rate. After those songs are deducted from the “cap” the amount payable to the “controlled songs” is calculated, which could be very low depending on how much had to be paid to ‘outside’ publishers.
Record Companies will often by contract elect not to treat a song less than a minute as a song for mechanical royalty payment purposes to the artist/writer. This clause needs to be reviewed to insure that income derived from songs used in ringtones is not excluded from mechanical or artist royalties, because the use is less than a minute.
Note that with regard to single digital downloads, only one song is sold at a time and not an entire album, so the mechanical rate per single download is a straight statutory rate as required by the copyright act. If the publisher is a member of the Harry Fox Agency, in the US they will collect from the Label and pay the publisher after deducting their percentage.
Note that most controlled composition clauses will state that the effective date for of the statutory rate for the release is the date of the CONTRACT or DELIVERY of the sound recordings. This treatment is most favorable to the Label, unless the rate goes down in the future. A more artist-favorable method of determining the effective date for determining the applicable statutory rate is to use the date of commercial RELEASE of the sound recording. Since historically these type of rates have increased over time, if the Label re-releases the material in the future, the rate in effect at that time should be higher than it was at the time of the original contract or the delivery of the material.
10. Warranty of Originality and Indemnification
This is important. The artist must warrant that he or she created the material they are delivering to the company, and if samples are used, must disclose it. If the artist breaches the warranty of originality by using material which they did not create and which is owned by someone else, there may be a lawsuit. If there is a lawsuit or claim, the artist has to bear the costs or any damages that occur, whether to the record company or someone else associated with the distribution of the record. This concept is called “indemnification”. When someone else makes a claim against the company due to sampling or copyright infringement the Record company relies on artist's warranty and indemnification language in their recording contract to hold up enough money to satisfy the claim if they lose. This is what is known as “indemnifying the claim”.
11. Video Rights
Audiovisual rights for the company to have to option to film and tape the artist for promotion are very important. Budgets for videos range from $5,000 to $200,000. A free synchronization license is requested from the artist if they wrote the song so that the record company can make a video of its performance.
12. Artwork budget
Usually the Record company pays for artwork used on the CD cover and Digital promotion and retains ownership rights to the artwork. If the artwork cost exceeds a certain amount, the label will sometimes require the artist to recoup the difference against their record royalties.
13. Minimum Annual Compensation
California law requires a minimum of $9,000 per year to be paid to an artist rendering exclusive services under a personal services agreement such as a recording contract. The theory is that if the artist is unable to work for any other company during the term of the exclusive agreement, they should at least be guaranteed a minimum amount by law.
The second year of the contract the minimum amount increases to $12,000 and the third and each succeeding year, it is $15,000. If the required amount is not paid, the contract is still valid and enforceable, but the company loses its right to go into court and seek an injunction to prevent the artist from recording for another company in breach of their agreement. Most often, other companies do not want to get involved with an artist that is still under contract to someone else, whether or not the other company has paid the required minimum statutory amount. Companies feel that there are too many potential problems with going forward.
14. Group Provisions
If the artist is a group, each member must sign and is bound by the recording agreement. Royalties are paid to the group and divided according to their partnership agreement. If a group member leaves, the record company usually has the right to do the following:
- sign the leaving member to a solo deal
- terminate the contract of the entire group
- approve of any replacement member
15. Independent Radio Promotion
Radio Promotion, the art of inducing radio stations to play new recordings, is very expensive. It could cost $50k to $100k for a song to be promoted nationally, depending on the reputation of who is used and the cities covered. Historically, the record company will agree to only charge half of this expense to the artist and often they will agree to give the artist some control over how much is spent. Historically, this item was referred to as “Independent Promotion” on record contracts.
16. Publishing Right/ The Right to Match any Publishing Offer
If record company does not ask for outright grant of artist's publishing rights, often they will ask for a matching right in case artist receives and entertains other offers.
17. Definitions:
Each Recording Contract has a section in the back titled “Definitions”. It is very important to read the ‘definitions’ part of the contract. An Artist might find that "Net Sales" are defined as 90% of records sold for example, which reduces your royalty rate by 10%.
E. Current Trends in Recording Contracts: The “360” Recording Contract
The current and continuing decline in revenues from the sale of CD’s has resulted in more and more record companies insisting on new artists signing to ‘360’ deals as a condition of their signing. In brief, a ‘360’ deal is simply a recording contract that requires the Artist to share with the Record company all income streams that might result from that Artist’s success in the music industry. Those income streams are as follows:
Sales and Licensing of Artist’s Recordings
Music Publishing
Merchandising Sales
Touring
Acting
Commercial Endorsements and Sponsorships
Book Publishing
Fan Clubs
Typically the record companies seek a passive share of the gross income from activities that ranges from 10% to 30%. They do not offer to provide any additional services in exchange for the income participation. They justify the demand solely on the fact that if the company is successful in breaking the artist, they deserve to participate in all entertainment income that the artist earns due to that success.
While the new artist typically does not have the leverage to eliminate the 360 income participation altogether, there are a number of negotiation techniques that can be employed which, if successful, can mitigate its financial impact.
1. Negotiate the Participation Rate
Always try to reduce the percentage of participation as much as possible, particularly if the request is 20% or more. 10 to 15% would be a fair compromise.
2. Apply the Participation Rate to an “Adjusted Gross” wherever possible
Income streams such as touring, merchandise, and fan clubs, endorsements, and books have associated costs. Touring for example has many costs including transportation, and manager’s fees. Always seek to have all costs that the artist has to bear in order to generate the income deducted before applying the percentage. Otherwise, the percentage may end up being equal to or greater than what the Artist receives.
3. Create a Minimum Threshold before Participations Apply
Since the rationale behind participations is based on the success of the record company in breaking the artist, it is wise to seek the attainment of a minimum threshold of unit sales (or income earned from record sales) before the participation becomes operative. This will insure that the record company is not participating in income that it had no real hand in enhancing because the anticipated record sales never occurred.
Another variation on this principle would be to create minimum income thresholds in each area which have to be exceeded before the percentage applies. For example, shows which are paid less than $2,000 a night are excluded or merchandise sales that gross less than $2,500 per night.
4. Exclude Income Streams in Areas that the Artist has Already Developed
If the Artist is already a successful Actor or Author, then it makes sense to eliminate the income participation on those income streams since they are pre-existing and not created by reason of the Artist’s recording success.
5. Make Sure that the Percentage of Participation Does not Increase Due to the Signing of a Distribution Deal with a Major
Often independent labels will enter into 360 recording contract with artists, and then the label signs 360 distribution deals with a major for that artist. Under the worse case scenario, the distributor also wants a percentage of the Artists’ various income streams which ends up doubling the original percentage that the artist was subject to when it is added to the independent label’s percentage. To prevent this, it is important to provide in the artist’s original agreement with the label that any participation demanded by a distributor is to be taken from the label’s share of the participation only.
6. Avoid ‘Double Dipping’
If an artist signs a 360 deal with a major distributor, and that distributor also has a merchandising division that enters a separate agreement with the artist to exploit their merchandising rights, the distributor’s income participation from income derived from that merchandising deal should be excluded from their participation since they are already making a profit on that income through their merchandising subsidiary.
7. Resist Total Assignment of Music Publishing Rights
Many independent labels insist on assignment of music publishing rights from artists who write their own material regardless of how little experience they have in the administration of music publishing rights. Even if the artist is entitled to 75% of the income from his publishing, the label will end up being entitled to receive 100% of the income and then must pay the artist/writer their percentage. Given the unreliability of many labels in accounting and payment, it may be better to offer the record label 25% of the copyright to any compositions written by the artist which they release and allow both parties to administer and exploit their own shares separately. This arrangement permits the artist/writer to receive their share of the publishing income directly and retain the ability to enter lucrative publishing deals with major publishers which would not be possible otherwise.
8. Request Advances for the Additional Income Streams
If valuable publishing, touring and merchandising income streams are sought , it may be possible to seek and obtain additional advances against those income streams as a condition of agreeing to them in the contract.
9. Resist Cross-collateralization
Cross-collateralization refers to a clause often found in record contracts that give the record company the ability to off-set income earned from publishing and merchandising against unrecouped recording expenses. The effect of this practice is to deprive the artist of any income from these other sources until the recording expenses recoup - which may never happen. Without this clause, an artist would still be entitled to receive publishing and merchandising income even though his recording expenses account was still unrecouped.
Artist Concerns
Aside from the amount of the record company percentage, a major issue is whether or not the record company is going to provide any services in the areas in which they are participating or are simply seeking to create an additional income stream from the artist without providing the service. Some larger record companies are buying management companies which presumably would provide management services to the artists who are signed to the record label. However, this will create conflicts of interest for the managers insofar as it will make it impossible for them to take aggressive positions respect to the record company on behalf of their artist-clients.
If the artists have outside managers, and they are already in a 360 recording contract deal giving up 10-20% or more of their income from touring and merchandising to the record company, the artist will end up having their net income reduced even further after their manager’s commissions are tacked on to the same income streams if those commissions are not deducted before calculating the participation.
(b) Artist Benefits
If the Artist guaranteed an advance big enough to accomplish some major goals that the Artist cannot otherwise achieve without signing, it has to be considered. A Company that makes a large advance to an Artist (and hence a sizable investment into the Artist’s career) stands to benefit from all aspects of it under a 360 deal. That company therefore should be highly motivated to make that Artist successful during the term.
Every contract has an end. If the Artist can walk away from the deal in a few years as a bigger commodity than when they began the deal, they are free to re-negotiate. This of course assumes that the Artist controls their own name, which in some 360 deals, belongs to the Company. Failure of the Artists to control their group performing name would handicap the leverage of the Artists in negotiating for increased benefits.
