Record companies are trying to adapt their business models to the new
realities facing the music business. CD sales are decreasing, and neither digital
distribution of singles nor streaming is proving to be as profitable as traditional
album sales. Established artists are making a larger percentage of their money
from touring, and some feel no need to re-sign with a major label once their
existing contracts expire. Established artists are already well known to the pub-
lic. Their “brand” already exists.
New artists, or less established ones who wish to make it big in the music
business, still need record labels almost as much as ever. As profits decline, la-
bels have sought to find other ways to make money from their investments in
building an artist’s brand. For the most part, labels now seek to make deals
whereby they profit from all sources of an artist’s income — not only from the
recordings, but also from non-record sources as well — publishing (income
made by an artist as a songwriter), concerts, merchandising, endorsements and
all else. These so-called “360 deals” may or may not be the dominant contrac-
tual form of the future because it’s too soon to tell how these deals will work
out, and what the push back from talented artists might be.
Nevertheless, if a new artist wants a record deal today, he or she typically
must agree to a 360 deal. In most of these deals, the record company takes
20% to 30% of artist’s net income from all non-record sources of income. In
most instances, the artist makes his or her own deals with a publishing com-
pany, merchandiser, tour promoter, or other entity. The record company will
not take ownership rights from the artist or the other companies; it just takes its
cut of the income.
The contractual negotiation is not only about the percentage the record
company should take of non-record income, but also what is considered net in-
come. Just as record companies try to make all of their costs recoupable (i.e., charged to the artist), in the case of net income from non-record sources, the
artist’s attorney will try to lessen the net income dollars that must be shared
with the record company. Quite a dance.
1) ROYALTY RATES AND CALCULATIONS
As mentioned, an artist makes money from a record company by receiving
royalties and other payments from the company. The more records you sell, the
higher your royalty should be. Hopefully, I have given you a good under-
standing of how this works. Note that some independent labels will offer an
artist a share of the profits instead of royalties if the artist is willing to forego an
advance, or takes only a small advance.
Also, do carefully review any provision that calls for reduced royalty rates
on “new format” records or technologies. For those who will not accept the
limitations of getting music from the cloud, there will inevitably be a new for-
mat that replaces the CD as the most popular way to physically purchase music.
Also, watch out for reduced royalty rate contract language on “new format” dig-
ital distribution. Don’t rely on the iTunes model to always be the dominant way
music is shared digitally.
2) LENGTH OF CONTRACT/OPTIONS
Generally, major labels insist that a new artist sign a contract that lasts nine
months after the artist has delivered one completed album. Major label record
companies also insist on receiving anywhere from three to five consecutive op-
tions to extend the term of the contract. As an artist, these options may require
you to make many albums at a reduced royalty rate. Every effort should be made
to limit the number of options the record company has to extend the term of
your contract. The original contract should contain a clause that states the roy-
alty payments due for each album recorded under subsequent option periods.
The artist’s attorney should negotiate for higher royalty rates for each new
3) RELEASE OF THE RECORD
Just because an artist signs a record deal and makes an album does not
mean that the album will be released or distributed unless the artist negotiates
this into his or her contract with the record company. The release of the album
should be guaranteed by the record company, or, at the very least, the contract
should allow the artist to go elsewhere if the album is not released. Also, in the
case of a major label, the artist will want the album released on the record
company’s main label, not on a smaller label that the record company just ac-
quired or is starting.
4) PROMOTION, MARKETING & INITIAL RUN OF THE RECORD
It is critical that your record receives adequate promotion, or it will die. You
should attempt to get the record company to commit to a certain dollar amount
that will be spent on the promotion of your records to radio stations and music
streaming services, and on the marketing of your records to stores — tradi-
tional and online. If the record company will not do so, you must question its
commitment to you.
Additionally, if there is a bidding war for your services, you should attempt
to get the record company to commit to hire independent promotion people on
your behalf. These people are well connected with radio station programmers,
but are not part of the record company’s promotions department. You also
want to limit how much of what a record company pays to an independent pro-
moter is considered an advance to you, and therefore recoupable. Finally, the
initial run of the record (before a record company is allowed to make the record
a mid-line item) should be at least twelve months.
5) TOUR SUPPORT
Record companies want you to tour because doing so sells records (and in
360 deals, the record company participates in any profit). Unfortunately, many
tours are actually money losers. “On Tour.” If your tour is a money loser, generally 100% of the costs advanced by the record company for the tour are recoupable by the record company. Try to get the record company to guarantee tour support, at least for your first tour.
As part of the 360 deals that record companies are asking new artists to
sign, record companies insist on the right to sell merchandise (T-shirts, caps)
with your likeness or logo on it. If you grant the record company this right (ei-
ther directly, or through one of its affiliates), make sure that you actually get
paid a royalty from the sale of merchandise, and that your share of the profits
are not used to offset any loss the record company claims you have from record
Today, almost all record related music videos cost more money to make
than they ultimately bring in, but having a video is one aspect of achieving high
record sales. Videos appear less frequently on television than a few years ago,
but they appear all over the internet. If you enter into a deal with a major label, it
is imperative that the label provides the funds to make a good video. Exposure on YouTube is important and possibly profitable. Typically, a record company
will agree to charge only 50% of the cost of making a video as recoupable
against the audio (i.e., the record), but they will charge 100% of the cost of
making a video as recoupable against video streaming income and the sales of
videos, should there be any.
8) LIMITATIONS ON COUPLING AND COMPILATIONS
Try to limit the record company’s ability to force you to participate in these
arrangements. They may be good for the record company in the short run and
bad for your career in the long run. You should have final control over your
image, not the record company.
9) LIMITS ON MULTIMEDIA EXPLOITATION
Try to limit the record company’s ability to license your performances with-
out your approval. Whether it’s on the internet or in the movies, you want final
control over your art and image.
10) ALBUM COVER ARTWORK
Speaking of image, within the bounds of decency, whether you or the
record company controls the album artwork is negotiable. This can be
important for your image, and perhaps in determining to what extent you, or the
record company, profit from merchandising associated with the artwork.
For less established artists, a record company’s territory is usually defined
as the entire “universe.” This means that the record company can sell your
records anywhere. Limit a record company’s territory if they are unable to effec-
tively market your album somewhere. For instance, if you expect your music to
be especially popular in Japan, it is important that the record company can
effectively sell your music in Japan. As more and more records are sold outside
of the U.S. and Canada, the size of a record company’s territory, and your roy-
alty rates from those territories, must be negotiated more seriously than ever
12) RESERVE LIMITATIONS
For physical record sales, try to negotiate the reserve percentage down.
Also, try to limit the amount of time a record company can hold on to the re-
serve once it knows that your records were actually sold to the public. With the
widespread use of Soundscan®, which tracks record sales by scanning the
UPC code on the back of each record, the record companies have a pretty good idea of which albums are selling. If your records have already sold, the reserve
should be reduced accordingly.
13) CONTROLLED COMPOSITION CLAUSE
In a typical record contract, the money you earn for writing songs that ap-
pear on a record is reduced if you are the artist on the record. This limitation is
contained in the controlled composition clause of the contract. I will explain this
clause in the next part of this book. You need to understand how songwriters
get paid in order to fully understand it. For now, know that it is a critically
important part of the artist’s record deal.
14) OWNERSHIP OF THE MASTERS
Ownership of your master recordings allows your record company to ex-
ploit them. Hence, record companies wage legal wars against “free” websites. If
you are a major star, you can probably insist that ownership of your masters re-
vert to you at some point in the future. But if you are a new artist, having all
your master recordings revert to you is more difficult to successfully negotiate.
Because you never know if, or when, the record company might drop you
from its roster, try to negotiate to obtain ownership of all the masters you
recorded should you and the company part ways (including masters that were
never released). This way, should you be dropped from the label, you will be able
to exploit the masters, or, at the very least, not be haunted by them when the
label that dropped you releases “The Early Years” album, which will surface two
years after you become a star, and will no doubt be a collection of unfinished
15) OWNERSHIP OF YOUR WEBSITE
Most record companies insist on the exclusive right to set up the artist’s
official website. Make sure the rights associated with the website revert to you
when the term of the record contract ends.
16) ACCOUNTING AND AUDITING RIGHTS
Be sure that your contract requires a periodic accounting from the record
company that details your record sales, expenses charged to your account, and
royalty payments. Also, insist that the contract allows you to conduct a detailed
audit of the record company’s numbers. The more rights you have, the better.
This can help prevent the record company from becoming sloppy with your ac-
17) EXCLUSIVE RECORDING
For contracts with record companies in California, note Civil Code §3423(e)
and Code of Civil Procedure §526(5), both of which deal with personal service
contracts. Essentially, these code provisions deny a record company the right to
obtain an injunction to stop you from recording for another company (even if
you agreed to provide the record company with your exclusive services), unless
the record company pays you a minimum compensation of $9,000 in the first
year, $12,000 in the second year, $15,000 in the third year, and substantially
more in years four through seven.
Record labels are still looking for the right pricing model, and the right use allowance formula, to maximize profits from the internet. Today, singles down- loads and music streaming are much less profitable than traditional album sales. The search for the right model is likely to play out over many years. For now, make sure at the very least, that your record company applies the same percentage royalty rate payable on your singles downloaded from the internet, as are payable on your regular album sales. In other words, your full base rate. Unfortunately, most pre- internet contracts didn’t contemplate the revival of singles as a profit center, so artists with these older contracts may be paid royalties on sales of internet singles at a reduced rate.
Strive to make sure that your record contract calls for you to receive your full royalty from any new source of income that the record company receives, unless another split or royalty rate is specifically set by legal statute. Because new unforeseen sources of artist income are inevitable from the ongoing digital revolution, make sure your lawyer covers future looking royalty and other income opportunities. Who would have expected to make money from cell phone ringtones twenty-five years ago? No one even had cell phones back then.