By: Paul Gardner, Esq.

Someone once said that nothing is impossible. Oh yeah? Well, try slamming a revolving door. Or, try and navigate the crushing burdens of a recording contract without specific knowledge of this particular area of the law.

Don Passman recount the following passage in his seminal work on entertainment law – “All You Need To Know About The Music Business.” 4th Ed. Simon & Schuster.

“A few years ago, I got a call from a television producer. She was doing a special about the music business, and had stopped people on the street to ask how much they thought an artist made from a gold album (sales of 500,000 units). The guesses ranged from $500,000 to over $2 million, and the producer wanted to know the real answer.”

Here is what Don told her.

“If a new artist has an all-in royalty of 14%, an 85% rate on CD’s, a 3% producer, recording costs of $300,000, and tour support of $50,000, his or her royalty for sales of 500,000 albums looks something like this.”

The suggested retail price of a compact disk is $18.98. Subtract $4.74 for packaging. That leaves a royalty base of $14.24. Multiply the royalty base by your royalty rate (14% all-in, less 3% for the producer [11%] x 85% for CD = [9.35%]) and your royalty becomes $1.33 per unit. Multiply your royalty of $1.33 by the number of album sales (500,000) and your royalties are $665,000. But, subtract the 15% “free goods factor,” which comes out to be -$99,750 and you are left with $565,250. Also subtract the recording costs (-$300,000); subtract 50% of the independent promotional budget (-$100,000); subtract 50% of the music video costs (-$75,000); and subtract tour support (-$50,000). Congratulations, your royalty check is now worth a whopping $40,250.

Do you or your client still want that recording contract? Probably not - but wait a minute before you answer in the negative because here is where an experienced entertainment attorney can boost your chance of getting a better deal.

For the “green” folks, here’s a quick introduction on the many twists and turns of an industry-standard recording contract:

Typically, a new artist is to receive what’s commonly referred to as a 10-point deal. In other words, the artist is to receive 10% of the list retail price of net sales of full price albums sold in the United States. This is the Artist Royalty Rate. But do not take that unless you have a new artist signing to an independent label. If your client is a new artist signing to a major or mini-major label, you should be able to push that closer to 13% - 16%. If your client is somewhat established then negotiate 15% - 17%, and if your client is a superstar, negotiate 18% - 20%.

But, back to everyday regular clients. 10% of the list retail price of net sales of full price albums sold in the United States sounds like a pretty decent way to earn a living. Today’s list price averages about $18.98, per CD. Thus, if we follow the math that our client’s often engage in, the artist believes that they will be paid about $1.80 for every CD sold. Sell a million records, become a millionaire, correct? Wrong, because the industry phrase “Artist Royalty Rate,” opens the door for more loopholes and exclusions than some of the documents coming from your local House of Representatives.

Now let us see what really happens in a recording contract (along with negotiation pointers).

Right off the top, the label first deducts a packaging charge from the suggested retail price. The amount left after calculating the packaging charge is called the royalty base. The industry norm is 25% for CD’s, 20% for analog cassettes, and 10% for vinyl. Because CD’s are the industry norm, this automatic deduction usually gives you the standard sixteen-page CD booklet. However, if your client wants more pages or special inserts then you will be negotiating an additional loss of royalties in the range of 5¢ - 10¢ per unit. I know of one band that started off demanding a 72-page booklet, but once they discovered the resulting royalty base, the booklet was cut down to just 12 pages.

Now we get to configure the actual royalty rate. The “all-in” term means that your client’s money is lumped all in with the record producer’s money and the mixer’s money. Thus, once the record label pays your client’s royalty, your client must pay the record producer (project administrator) and the mixer (musical engineer). When you negotiate a deal with a record producer, you should know that they usually accept 2% - 4% of the artists original 10%, and the mixer usually accepts 1% - 2% of the artists same original 10%. However, if you represent the artist, then you want to negotiate where the record company pays the producer and mixer out of its own account. As this will probably not happen, at the very least negotiate that the record company will pay the producer and the mixer upfront and treat such payments as additional advances under your deal. This way if your client’s record flops (not the political definition or basketball definition) the artist simply owes the record label and not third parties.

Your royalty rate is also calculated according to albums sold. Most labels calculate the net royalty rate on just 85% of all records sold. No need to try and understand this quirk in the system, just know that it is there and that there is nothing you can really do about it.

Now you are ready to reveal your client’s royalty and multiply it by the number of units sold. If the Recording Industry Association of America (“RIAA”) certifies that you have sold 500,000 units in the United States, you have a gold album. If the RIAA certifies that you have sold 1,000,000 units in the United States then you have reached a platinum album. Thus, according to Don’s illustration your client reached gold status and will receive $665,000. Not the millionaire status that you once hoped to achieve, but your client still finds the figure palatable.

But wait. There are more deductions.

The next deduction, 15% for free goods, is my favorite because it is pure genius. Record labels induce wholesalers to purchase your client’s music by giving away free goods. Record executives soon figured out that selling 1,000 records at 85¢ apiece was the same as selling 850 records at $1 apiece and giving the wholesaler 250 records for “free.” After all, the retailer still receives 1,000 records and the label still receives $850. However, your client – the artist at the center of the deal, only gets paid on retail pricing, not wholesale, and so the label saves royalties on 250 records out of every 1,000 records while earning the same money. Whew, talk about “fuzzy math.”

In order to understand the next series of deductions, we need to talk about advances and recoupment. In the recording industry, the record label will pay your client a sum of money and then withhold your client’s royalties until that sum of money is repaid. The sum paid to your client is called an advance and the process of withholding money is called recoupment.

Recording costs are recoupable by the record label. You should negotiate a range between $5,000 - $125,000 for a new artist signing to an independent label; $175,000 - $300,000 for a new artist signing to a major or mini-major label; $300,000 - $600,000 for an established artist; and $1,500,000 and up for a superstar client. Be prepared for the record label to insert a clause requiring their approval of your recording cost budget. This clause is ok; it protects your client too, but be sure to sit down at the negotiating table with a budget already prepared and negotiate that amount.

Independent promotion can also be a recoupable cost. Independent promotion companies often have great relationships with radio station programmers and can get your client’s record played on air. The record label usually negotiates that your client agrees to pay for 50% of independent promotion, with the label paying the remaining 50%. Never agree to your client paying 100% of this cost because record labels are not as fiscally frugal when they do not have to pay some portion. In fact, try and negotiate a dollar figure maximum limit on how much the label can charge your client for independent promotion or you might as well issue them a blank check.

Music videos have little profit, but help sell records. So, if the label agrees to make a video of your client’s song, they will usually negotiate to recoup 50% of the costs from royalties. You should negotiate a range between $50,000 - $100,000 for a new artist signing to an independent label; $250,000 - $500,000 for a new artist signing to a major or mini-major label; and $500,000 - $1,000,000 for a superstar client. However, be prepared to give up creative control (little to no approval of the story line, director, or producer) and watch the recoupment clause closely on this section of the recording agreement to prevent double dipping.

Much like attempting to slam that revolving door again, it is next to impossible for a new artist to go on tour and make money. Therefore, your client may need tour support. Most record labels really do not want to commit to tour support in the recording agreement, but you should try and negotiate an amount therein, usually around $50,000.

Whew. Now you know to monitor your recoupment obligations carefully. If you do not negotiate skillfully, then your client could become a modern day sharecropper, never truly paying down “past debts.” Especially when labels start thinking cross-collateralization. So, beware that some things just may be impossible, like slamming a revolving door, or trying to negotiate a favorable recording deal without specific knowledge of this particular area of the law. Always call upon an entertainment or sports attorney when the situation arises.