Nigel’s Music Business Blog 9

The blog this week will look at (using an old style recording agreement for the sake of ease and clarity rather than a modern 360 degree agreement) the many ways a record company can exploit the sound recordings and so make money out of them.  

The royalty rate figure usually quoted by the record company to attract the artist to sign with them will be their top rate royalty payable for recordings released on their top line label and not any of the lower royalty rates payable for uses of the recordings on different formats or on their mid or budget price labels. Likewise the record company will usually tell the artist that they are willing to pay an advance of X but as we have seen in a previous blog the figure X might only be paid if the company exercises all the options in the agreement whereas in reality the advance might in fact turn out to be Y a much lower figure. 

In the blog last week we looked at a royalty computation based on the unlikely scenario that the recordings would only be released on CD. In reality the record company will want to release and exploit the recordings on all commercially viable formats. This would mean that the royalty statements which the artist will receive will show royalties due to him from sales and uses from each of these formats. Each format may well attract a different royalty rate and be calculated on a different royalty base figure. For example the royalty base figure for release on a record company’s top line label will be higher than for their mid price and budget price labels and the royalty rate payable for releasing the recordings on a top line label may be different from that payable for releasing the recordings on different formats. As mentioned above the record company will usually tell the artist that they will pay an advance of X and a royalty rate of Z. We have seen in a previous blog and have mentioned it in the preceding paragraph that the advance might only be that figure if all the options are exercised by the record company. It should also be noted that even when an advance is payable either on signing the recording agreement or when an option is exercised the money will only be paid in stages for example if the record company is actually paying an advance of £20,000 when the agreement is entered into they will only hand over the money in stages such as part payable when the agreement is signed or an option is exercised, part payable when the artist commences recordings, part payable when the artist delivers the recordings to the record company and the final part payable when the record company releases the recordings. 

I should point out (and I do not intend to deal with this in any detail in this blog as I want to keep it all brief and simple so that you can get an overview of the topic) there are many ways to negotiate in the proposed agreement improvements to a proposed flat royalty rate such as using floors and ceilings, escalations based on sales, retrospective escalations when a new improved royalty rate kicks in or when an option is exercised. Likewise there are ways of improving the proposed advance payable on signing or on the exercise of options by the record company. Like any agreement all clauses are open to negotiation between the parties. The proposed agreement is just the first draft and should be used as the tool which the parties will use to shape into something they are both happy with or are prepared to accept.

Having said in the preceding paragraph that I want to keep this blog (like previous blogs) brief I do hold my hands up having read it through prior to publishing it and admit this blog is probably twice the length of previous ones. (You can guess this is an additional paragraph added once I had read the finished article through.) My excuse? I thought you might like to see in a bit more detail how the sound recordings might be exploited and see how what looks like a straightforward offer of X royalty rate to the artist is not always X. Also I thought you might like to see a little bit of the complexity in an important clause in a recording agreement (although I hope I have made it not too complex.) The final excuse is I got carried away and just wrote too much and didn’t want to edit out a lot of this marvellous stuff! You choose the genuine excuse. Hint if you go for the last one I think you may be right! In any event I hope it is of interest to you even though it is quite detailed.

Royalty Rates For Different Formats And Different Types Of Exploitation

As mentioned earlier the royalty rate payable will depend upon the format in which the recording is released eg: different rates may apply to a release of the recording on CD or LP or on an unusual format such as an USB disk. A CD full rate might be say 14% of PDP, whereas a full rate LP might be say 10% of PDP. In addition, if the recording is:-

(a) released on the record company’s mid-price label, the royalty rate will be in the region of  66.6% of the full rate.

(b) released on the record company’s budget label, the royalty rate will be in the region of 50 – 66.6% of the full rate.

(c) sold to the armed forces, the royalty rate will be in the region of 50% of the full rate.

(d) sold to libraries or other educational establishments, the royalty rate will be in the region of 50% of the full rate.

(e) released as a 12″ single, the record company may try to get the artist to accept that a certain number will be royalty free. The artist should try and ensure that all copies will bear a royalty or limit the numbers which are royalty free. The royalty rate will be in the region of 75% of the full rate.

(f) released as a single, the royalty rate will be in the region of 75% of the full rate.

(g) released in territories outside the United Kingdom, the record company will reduce the royalty rate for these territories. The record company may divide the world excluding the United Kingdom into major territories and the rest of the world. For the major territories, which will need to be defined, the record company will pay a royalty rate in the region of 60 – 85% of the full rate. For the rest of the world the royalty rate will be in the region of 50 – 60% of the full rate. The artist’s solicitor should try to get full rate irrespective of where the record is released. However, it is unlikely that the record company will agree to this and the artist’s solicitor should instead try and raise the percentage figure offered, and ensure that all the major territories where records are sold are included within the definition of major territories. Also, the artist’s solicitor should ensure that any territory where the artist is popular is included within the definition of a major territory.

(h) given away as free copies or as promotional copies to radio stations etc, there will be no royalty payable (because the record company have given them away and not sold them). The artist will want to put a limit on the number of promotional copies the record company can give away which are not royalty bearing.

(i) sold using a technology which is not currently used to sell recordings the royalty rate will be in the region of 50 – 90% of the full rate. In addition, the record company will usually require a higher packaging deduction than that charged for CDs. The record company’s attitude is that producing records to sell using a new technology costs more than established formats, the packaging is more expensive for new formats compared to established formats and sales for new formats are negligible compared to established formats.

The artist will not want a royalty deduction for sales of the recordings on new technology. Care should be taken when considering whether to accept a reduced royalty rate for sales on new technology because what is a new format today could become an important way to sell recordings in the future. Who knew in the early 1970s about CDs or in the late 1980s about the internet?

 

The artist’s solicitor should try to obtain the full rate for sales of recordings on new technology, but the record company will usually not agree to this. The artist’s solicitor may as an alternative try to limit the time period for which a reduced rate will be paid on sales on new technology, eg: the artist will be paid a reduced rate on sales on the new format for 3 years after the recording is first released on that format and thereafter he will be paid the full rate, or he may agree to a reduced royalty until the record company starts to pay other performers full rate on sales on that format whereupon the artist will also be paid full rate.

(j) released on a Best Of or Greatest Hits record of the artist, the royalty rate will usually be the full rate. Some record companies may only offer 50% of the full rate and try to justify the reduced rate on the basis that they are reusing existing recordings and not using new recordings and that sales of the recordings were paid at full rate when they were originally released. The artist’s solicitor should resist any such reduction especially as a greatest hits album may be the artist’s best selling record.

The tracks on the greatest hits album will come from various stages of the artist’s career and be taken from albums which may have attracted different royalty rates. The royalty rate  for the greatest hits album will be pro-rata to the albums from which they were taken. For

example, if the greatest hits album contains 12 tracks with 4 tracks from the first album which attracted a 12 % royalty, 2 tracks from the second album which also attracted a 12% royalty, 3 tracks from the third album which attracted a 13% royalty, and 3 tracks from the fourth album which attracted a 15% royalty, the royalty rate for the greatest hits album would be 13%. The recording agreement needs to deal with what royalty rate is payable on tracks used for a greatest hits album where the albums from which the recordings were taken had escalating royalty rates. For example, if the first two albums had a royalty rate of 12% and the rate escalated to 13% for sales over 100,000 copies, and further escalated to 14% for sales over 200,000 copies, if the first album sold 120,000 copies and the second album sold 235,000 copies will the royalty rate for the tracks taken off these albums for the greatest hits album be at the basic 12% rate or at the higher rates of 13% for the tracks taken from the first album and 14% for the tracks taken from the second album? The recording agreement should deal with this point. In addition, the artist’s solicitor should, if possible, get an escalated royalty rate on sales of the greatest hits album.

(k) released on a compilation record alongside recordings by the record company’s other performers and/or or alongside recordings made by performers signed to a related record label, such as on the Now That’s What I Call Music series, the royalty rate is pro-rata to the number of tracks on the album eg: if there are 40 tracks on the album and one of these is by the artist, the royalty rate is 1/40th of the artist’s full royalty rate. If the artist does not want his recordings used in compilations with other artist’s recordings his solicitor should ensure the agreement contains a provision prohibiting such use.

(l) released by a record company under licence from the artist’s record company on a  compilation record with other artist’s recordings, the royalty will usually be in the region of 50% of the money which the artist’s record company receives from the licencee for the use of the artist’s recording.

As in (k) above if the artist does not want his recordings used in compilations with other artist’s recordings his solicitor should ensure the agreement contains a provision prohibiting such use.

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m) released by the record company on a sampler record, with other performers recordings eg: XYZ Record Company’s New Artists Sampler 2009 Volume 1 which is sold to the public at a cheap price of £1.99, there will be no royalty payable. The record company will not pay a royalty as the use of the recording is to get the public interested in the artists and is a way of promoting them to get the public to go out and buy the records by each artist on the sampler.

If the artist does not want his recordings used on a sampler his solicitor should ensure the agreement contains a provision prohibiting such use.

(n) sold to jukebox companies for use in jukeboxes, there will be no royalty payable.

(o) sold as a deletion or sold as a cut-out or sold for scrap, there will be no royalty payable.

The record company will delete an album from its catalogue when they believe the album no longer has any more sales potential as it has been exploited fully at full price, mid-price and  finally at budget price. They will notify record shops of their intention to delete the album from their catalogue from a particular date and the record shops can return any copies they have during this period to get a credit. After this date the record company will not accept returns of the album and it is deleted from their catalogue.

Where there has been an overproduction of the album, the record company may sell the album for whatever price they can get for it, and they will cut the album sleeve with a hole puncher, hence the term “cut out”, to show that it is not a full priced album.

The record company will sell an album at scrap to be melted down and used for some other purpose when they have copies left over which they can not sell as cut-outs.

The artist may want a clause in the record agreement providing that the record company will not cut-out the record for two or three years after it has been initially released. Cut-outs portray the album as a failure and if the artist can ensure an album will not be cut-out at all or it will not be cut-out for a reasonable period of time after it has been initially released, it will help to maintain his public reputation as a successful selling artist. In addition to seeking a clause which provides the album will not be cut-out or will not be cut-out for a reasonable period of time, the artist will usually be able to obtain a clause in the record agreement which will allow him, should he so wish, to buy all the cut-outs from the record company at the best price that the record company have been offered for them.

(p) licensed by the record company for use in a television advert or for inclusion in a film or  television programme, the artist will be paid a royalty in the region of 50% of the net  money received by the record company. The word “net” will need to be defined to ensure that only valid deductions from gross are made.

(q) promoted by the record company in a way that they would not normally use, eg: they run a national radio and/or television campaign, the record company may deduct half of these costs from the gross royalty payable and /or they may reduce the royalty rate payable to the artist to something in the region of 50 to 66.6% of the full rate. If the royalty rate is reduced it should only be reduced for records sold in the territory(ies) where the promotion took place during the time of the special promotional campaign.

 

The artist will not want to be responsible for half of the special promotional campaign costs and also have the royalty rate on the records sold reduced during the time of a special promotional campaign. If the artist pays half of the special promotional campaign costs he should ensure, if at all possible, that his royalty is not decreased on the records sold during the time of the special campaign. If the record company want to do a special campaign at their own expense then it may be acceptable for the royalty rate to be reduced on sales of those recordings for a period of time.

(r) released as a double or triple CD album, the royalty rate is a percentage of the full rate calculated as the percentage that the selling price of the double or triple CD album bears to two or three times the selling price of a single CD album. For example, if a single CD album sells for £13.99 (£14 for round figures) and the artist releases a double CD album and it is sells for £15.99 (£16 for round figures), the royalty rate on the double CD album is 8/14ths of the full rate ie: £16 (for the double CD album) over £28 (twice the price of a single CD album). The reason why the royalty rate is reduced for a multiple CD is that they usually do not sell in such quantities as a single CD album and the selling price of a double CD album is less than the two or three times the selling price of a single CD album so the record company’s profit margin will be less.

(s) used as a premium, the royalty will be in the region of 50% of the net amount received by the record company from the company wanting to use the recording. The word “net” will need to be defined to ensure that only valid deductions from gross are made.

A premium is a record which is used to promote another product eg: send in 5 ring pulls from a fizzy drink can and for the cost of a stamped addressed envelope the drinks company will send out a CD containing three tracks by the artist.

Many artists do not want their recordings used in such a way. As premiums are only a small source of income for the record company, they will usually agree to a clause in the record agreement prohibiting such use of the artist’s recordings.

(t) packaged at the artist’s request in a way that is not how the record would normally be packaged, the record company will if they agree to the artist’s packaging request charge a higher packaging deduction and/or may also seek to reduce the royalty rate for the record. Although the recording agreement will detail the normal packaging deductions it will not set out the special packaging deductions, as the record company are not able to calculate the cost of the special packaging at the time of the agreement as they will not know what type of packaging the artist requires, and the artist will not know what he wants until a much later date, which is usually about the time he records the single or album which he wants specially packaged. The deductions for special packaging will therefore have to be negotiated between the parties at a later date. The artist’s solicitor should try to avoid there being any extra packaging deduction in addition to a reduction in the royalty rate. Some recording agreements allow the artist to have some extras over and above the normal packaging specification, so he can for example, have a couple of extra pages inserted in the CD booklet accompanying his album to enable him to include extra photos of him in the booklet and to allow him more space to thank everybody for their help in making the record.

(u) discounted in price by the record company to shop chains or others who buy records in bulk quantities, the record company will either want to alter the definition of sale proceeds to take into account the discount offered by the record company thereby reducing the royalty payable (see above for the definition of sale proceeds), or will want to reduce the royalty to reflect the amount of the discount given to the record company. The artist’s solicitor should resist any clause which allows the record company to reduce the artist’s royalty where the record company have given a discount on record sales to bulk buyers of the record.