In "The Six Potential Traps in a Recording Contract" I covered in summary form some of the issues dealing with royalty calculations. This article will expand upon some of those points.
Most often, labels pay artists a percentage of the suggested retail selling price ("SRP") of the recording in the particular format, such as CD, cassette or videogram. This is an easier basis for calculating royalties since the SRP is more readily determined and so eliminates the need to calculate the wholesale price, which often as not varies considerably from customer to customer.
The artist's royalty rate will of course vary depending upon the relative bargaining positions of the parties. Deal making is, after all, about who wants who more. However, generally speaking the artist's royalty rate will run anywhere from 6% to 10% or perhaps a bit higher, all based upon the SRP. If the label calculates royalties upon a wholesale basis, the rate is most often twice the retail rate, although this is not carved into stone either. The artist may negotiate for an escalation of these rates as the deal progresses, either based upon sales (i.e. 7% up to x units, 8% for sales in excess of x units and so on), or higher in subsequent years and on subsequent albums. Note that I use the term "royalty rate" since this number is vastly different than the "royalty" the artist actually receives. More on this below.
There are also deals for the artist which include a producer royalty, the so-called "all in deal" in which the label will pay an additional royalty over and above the artist royalty to include a royalty for the producer, generally anywhere from 3% to 5%. Under such a deal, it is the responsibility of the artist to pay the producer out of the all in deal. Unless the producer is the same person as the artist, this all in deal can be tricky for the artist to make since often third party producers wish to be paid from the first record sold after the artist recoups. In such an instance, it may be that the artist is not recouped because the artist has several albums with the label but the producer is entitled to the producer's royalties because the particular album on which the producer worked has recouped its recording costs. The artist is then in a cash flow bind since it owes money to the producer but has no money coming in. And if the artist is in a cash flow bind, likely as not so is the producer. There are ways to handle this in the deal with the label but such approaches are beyond the scope of this article.
However, the artist should be well aware that the royalty rate the artist is being offered is often far from the single determining factor as to how much money the artist actually receives from the sale of records. This is because that rate is applied to a variety of provisions in which the basis for multiplying that rate fluctuates. There are reductions in rates for foreign sales (often half rate but negotiable for specific territories), for club sales (also often at a half rate and frequently on 85% or 90% of records sold with healthy discounts for promotional records, many of which provisions may also be negotiable), for sales at a discount and for "free" goods, which are records "given" away to customers of the label as inducements for purchases. The "free goods" clause is often quite a problem area in negotiations since these goods are often not actually free since the price to the customer is often a factor of these "free" records. This clause can be complex and unless there are firm limits, auditing this provision, which is where lots of money is often discovered, can be quite difficult. There are also reductions for packaging charges levied against the suggested retail list price, often 20%-25% of that price for CD formats and somewhat less for cassette formats.
The above are only some of the many royalty reductions that serve to reduce the amount upon which the royalty rate is calculated. And then, once the actual dollar and cent figure is reached, the label is often allowed to withhold an amount, often undefined except that it must be "reasonable," to cover returns of records. This category is ripe for negotiation since what is "reasonable" is uncertain at best and without firm contractual standards, making a claim for these monies is quite difficult.
There are also provisions regarding the licensing of the master recordings for other uses, such as in films, television shows and commercials. The artist should be very aware of these provisions as this form of exploitation can be very lucrative indeed. Most often, the label and the artist split the income from such licenses equally but the way income is defined in the contract is often quite determinative of how much the artist actually receives.
As with all deal making, there are no firm rules that can be applied. Each deal, like each artist, is unique. What some other band received in its contract is not determinative of what your band might get. Having an attorney who knows the ins and outs of the deal is quite important but in the end, it is the marketing clout of the artist that matters as much. Knowing what to ask for is as important as being able to command what you ask for.
These royalty calculation issues and many more make the negotiation of a recording contract quite complex and this article is not intended to be exhaustive of all these many issues. Since the recording contract is often the single most important agreement an artist or producer will sign during their careers, the artist and producer are well advised not to enter into such an agreement without the negotiation and thorough review of such contract by a qualified attorney very familiar with such deals. An unfavorable contract can spell disaster for the recording artist and producer.
If you need such representation, drop me a line. I've been doing this for over 23 years.
© 1997 Ivan Hoffman
This article is not intended as a substitute for legal advice. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. You should consult with an attorney familiar with the issues and the laws.
No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.
