Nigel’s Music Business Blog 8

The subject matter of the blog this week deals with royalties payable under the terms of a recording agreement. As mentioned in the blog last week I plan to look at royalties payable under an old style recording agreement rather than a modern 360 degree deal as it is easier to explain on the basis of an old style recording agreement in a brief blog. In addition I have had to assume for the sake of ease and clarity one or two things which may not exactly reflect how a recording agreement would work in reality. The point of this calculation is to illustrate to you how an artist might believe he is due to be paid royalties of £103,500 whereas in reality at this stage he will only legitimately be paid a royalty of £40,500. 

The blog next week will look at (using an old style recording agreement for the sake of ease and clarity) how the record company as the owner of the copyright in the sound recordings (in all probability having become the owner by taking an assignment of the rights in the sound recordings from the record producer for the full term of copyright plus any extensions or renewals of the copyright term) the many ways a recording company can exploit the recordings and so make money out of their copyright work. 

A Royalty Calculation Assuming (Which Is Unlikely In A Recording Agreement) That The Recordings Will Be Released For Sale On CD Only 

Assume the following:-

(a) the artist has negotiated his first record agreement with a royalty rate for CDs of 12% of the fictional retail price. (Note: Some recordings agreements use the published dealer price as the base price instead of the fictional retail price. Where the published dealer price is used as the base price the royalty rate will be a higher number than that used in a fictional retail price calculation as the published dealer price is a lower figure than the fictional retail price.) (For those of you in the know about modern recording deals being paid on a split of “net” income I could have done the calculation based on a “net” deal but thought the calculation based on the fictional retail price which I am using here illustrates what I want to achieve just as well if not better. The only thing I want to say about “net” deals is the word “net” will need to be tightly defined to ensure that only the right things are deducted from the gross record sales figure.)

(b) the artist receives an advance from the record company of £10,000.
(c) (for the purposes of this example) the fictional retail price of a CD is £10. (This figure has been reached by taking the wholesale price excluding VAT and multiplying it by 129%).
 
(d) (for the purposes of this example) the first album will only be released on CD on the record company’s top line full price label. (Note: an album is usually released at first on the record company’s top line full price label then will in due course once it has exhausted its sales potential as a top line label album will then be released by the record company on their mid price label and subsequently on their budget price label.)
(e) there is a packaging deduction of 25%. (This is really a scam by the record company to reduce the royalty payable as the cost of packaging a CD is nowhere near 25%. This should be negotiated down or out of the agreement if possible.) Any such clause in a recording agreement should be negotiated out of the agreement although the record company will as with any reduction in the breakages clause (see (k) below) look to reduce the royalty rate by an amount which equals the financial amount this clause has been reduced by.
(f) the producer of the album receives a 2% royalty rate. (The calculation of the producer’s royalty which is set out in the production agreement contains the same deductions (eg: for
packaging, free copies and promos) as are in the artist’s record agreement (although obviously there are no deductions for any advances given to the artist nor for recording
costs.)) (Assume for the purposes of this calculation that the record company has agreed to pay the producer’s royalty and also agreed that it would not be recoupable from the artist. It should be noted that in real life the agreement would provide for the artist to be ultimately responsible for paying the producer’s royalty. This unusual provision has been included in order to make the calculation easier to follow. Note: If the calculation was based on the ususal situation whereby the producer’s royalty is recoupable from the artist’s royalty in all probability the artist would at this stage not only in all probability be receiving at this stage nothing from the record company but would also be in a negative financial situation.)
(g) recording costs are £100,000.
(h) video recording costs come to £100,000 but only half of this sum (£50,000) is recoupable from record royalties. The other half is recoupable out of video royalties.
(i) an independent promotion company is used to promote the album and they have charged £40,000, of which only half (£20,000) is recoupable from record royalties.
(j) free copies and promos total 10% of sales (which was the limit agreed upon by the artist and the record company in the record agreement).
(k) there is no deduction for breakages in the agreement. (If there are deductions for breakages in the agreement again this is a really a scam by the record company to reduce the royalty payable as breakages are almost nil. The reason why this clause used to have validity in a recording agreement was because historically in the days of the old 78 rpm records these records were made of shellac and were liable to easily break when packaged and delivered to the record shops for sale.) Any such clause in a recording agreement should be negotiated out of the agreement although the record company will as with any reduction in the packaging deduction clause (see (e) above) look to reduce the royalty rate by an amount which equals the financial amount this clause has been reduced by.
(l) sales of the CD total 350,000 copies.
(m) the record company will retain 20% as a reserve against returns. (The record company
withhold the reserve based upon the gross royalty total.) The agreement provides that any unused reserve will be liquidated (in other words paid to the artist) two years after the record has been initially distributed. There is no provision in the agreement for any unused reserve to be liquidated (in other words paid to the artist) over four accounting periods during the two year period.
The Calculation
(Fictional Retail) CD Price. £10.00
Minus     –
Packaging (25%). £ 2.50
———————————-
Royalty Base. £ 7.50
———————————-
Royalty Base. £ 7.50
Multiplied by     x
Artist’s Royalty Rate 12%
———————————-
Royalty per CD. £ 0. 90
———————————-
Royalty per CD. £0. 90 p
Multiplied by     x
CD sales. 350,000
———————————-
Gross Royalty Total. £315,000
———————————-
Gross Royalty Total. £315,000
Minus     –
Free Copies and Promos (10%). (£31,500)
Recording Costs. (£100,000)
Video Recording Costs. (50% of £100,000) (£50,000)
Independent Promotion. (50% of £40,000) (£20,000)
Advance Received From The Record Company.(£10,000)
————————————————————————————————————–
Total Royalty Due To The Artist From The Record  Company. £103,500
————————————————————————————————————–
Although the artist appears to be entitled to a royalty of £103,500 on sales of 350,000 copies of the album the record company will not pay the whole £103,500 to the artist as there is a 20% reserve against returns which is withheld against the gross royalty namely £ 63,000 ie: 20% of £315,000. The £63,000 which has been withheld as a reserve against returns by the record company will only be liquidated (in other words paid to the artist) two years after the record has been initially distributed. The artist is only entitled at this stage to be paid a royalty of £40,500.