RECORD CONTRACT DEFINITIONS AND APPLICATIONSMUM2700 - Music Business 1Dr. Calle

RECORD

• Since the 1960s, record contracts define a record as an audio or audio-visual device. • Elvis Presley, The Beatles, The Monkeys, The Partridge

Family, Frank Sinatra, Doris Day, and many modern artists including Madonna, J-Lo, Beyoncé, and the great comedian and banjo virtuoso Steve Martin, are known for both their music and acting on film and television.

ARTIST AND REPERTOIRE (A&R)

•Make decisions about artists, producers, and the songs to be recorded. • They are the final arbiters when selecting producers

and writers.

MASTER(S)

• A record contains as many masters as it has songs. In other words, 10 songs are equal to 10 masters. A master can come in different formats:• DAT, CD, DVD, flash drive, vinyl record, 45 rpm single, and many more

containing a final mix ready for duplication.• Two inch 24-track tape, half inch digital 48-track tape, Super-VHS

ADAT tape, Tascam DA-88 super 8 tape, raw sound file data on a variety of formats including CD, DVD, hard drive, DVD-ram and DDS-3 tape. These formats will contain the data for digital audio recording formats such as Pro Tools, Logic Pro X, Digital Performer, Nuendo, Reason, Ableton, Cakewalk, Cubase, Radar, Tascam, etc.

TERM

• Term refers to the length of the record contract.• Most record contracts specify terms by album cycles or how long it takes to

deliver one complete album.• Some artists and labels are very efficient and produce one or more albums

yearly.• Others are much less productive due to a myriad of reasons including:

• Success of previous album demands an extended tour• Writer’s block• Financial shortfalls• Health issues• Unexpected events including pandemics

SUGGESTED RETAIL LIST PRICE (SRLP)

• As a result of the velocity pricing effort by Universal Records (the largest record company), the SRLP was lowered to $9.99 for most releases, $12.99 for premium releases, and lower prices ranging down to $6.99 for less popular titles or musical formats. This $9.99 pricing reflects the album pricing on iTunes.• Note: For those watching the Chinese takeover of American media,

record, and movie industries, this Wall Street Journal article may be of interest. • Prior to the velocity pricing program, SRLP ranged between $16.98

and $18.98 for many releases.

https://www.reuters.com/article/us-universal/universal-betting-on-lower-prices-to-boost-cd-sales-idUSTRE62J04Z20100320https://www.wsj.com/articles/tencent-in-talks-to-buy-stake-in-universal-music-group-11565078272

PACKAGING DEDUCTIONS

•CDs – 25% $9.99 - $2.50 = $7.49•Cassettes – 20% $9.99 - $2.00 = $7.99•Vinyl – 10% $18.95 - $1.90 = $17.05•Vinyl manufacturing costs are higher. Don’t worry, the label will deduct those.

ARTIST ROYALTY BASE

• SRLP – (25%) packaging deduction• For a record selling for $9.99, the artist royalty base is $9.99 - $2.50 =

$7.49• Know that record companies are masters of subtraction:

• Free goods• Returns• Breakage• Recording costs• Promotion costs• Marketing• Video costs• And much more (or less J)

RECOUPABLE

•Recoup – to earn back the money advanced and spent by the company on behalf of the artist at the artists net or combined royalty rate.

MINI-MAJOR RECORD COMPANY

• Does everything a major record company does except distribution. • Note that distribution is no longer an issue in the digital age

thanks to a myriad of services including:• www.amuse.io• www.distrokid.com• www.spotify.com• www.cdbaby.com

http://www.amuse.io/http://www.distrokid.com/http://www.spotify.com/http://www.cdbaby.com/

INDIE RECORD COMPANY

• Two types: • Truly independent has no attachment to a major. • That would make each of you unsigned artists

releasing music indie record companies.• Semi-independent is associated with and or distributed by a major.• That is Dr. Calle’s current relationship with his label,

The Orchard (distributor), and an affiliated major.

POINTS

•One point = 1%

•Ten points = 10%

RECORDING ADVANCE

• Artist or producer is allotted an amount of money and expected to turn in a completed and satisfactory master. • Sometimes, the producer or artist keeps any money not

spent on the recording. • In many cases, the artist and producer are issued advance

monies – think of a signing bonus in sports – so the recording budget remains untouched. • In either case, artists must recoup almost all monies invested

in the effort by the record company.

RECORDING ADVANCE –CONTINUED

•Advances must be recouped but, you will not have to pay those back in cash or check. • If the artist does not recoup, the label made an investment that did not work out. This will be a tax deduction for the label.

TECHNICALLY SATISFACTORY

•The album or track submitted is of the highest professional musical and sonic quality.•This may include videos and would thus require high-quality professional audio and visual production.

COMMERCIALLY SATISFACTORY

• The product submitted is reflective of the artist’s brand, style, or genre. • In the company’s opinion – and they are the boss – it may be commercially satisfactory for Taylor Swift to record pop and country albums. • The same may not be the case for KISS or a gangster rapper.

RECORDING FUND OR BUDGET

•Artist or producer is allotted a fixed amount of money managed by the label and is expected to turn in a completed and satisfactory master. • In this case, the record company pays all the bills from this fund and any money not used does not have to be recouped by the artist.•Picture a pre-loaded debit card for production costs.

FREE GOODS DEDUCTION

• The free goods deduction is typically 10%. • These free goods are used for promotion. •As Passman (2013) teaches, “free goods are

essentially a discount of the price. The record company doesn’t get paid for them, so they don’t bear royalties.”

• Excerpt From: Donald S. Passman. “All You Need to Know About the Music Business.” iBooks.

PROFIT & LOSS

• Every artist has a profit and loss sheet detailing the amount of money spent by the label and the amount of money recouped.• Black position: Black means you are profitable.• Red position: Red means you are losing money. • The black and red terms come from accounting practices that use black and red ink to denote profit and loss respectively.

CROSS-COLLATERALIZATION

•All advances or recoupable monies for any-and-all albums under one record deal are considered an ongoing total.

CROSS-COLLATERALIZATION EXAMPLE

• Record 1: Recoupable total $50,000. Recouped amount $30,000. Artist’s balance: -$20,000 ($20,000)

• Record 2: Recoupable total $75,000. Recouped amount $30,000. Artist’s balance for record #2: -$45,000 ($45,000)

• Cross-collateralized artist balance: -($20,000 + $45,000) = -$20,000 - $45,000 = -$65,000 ($65,000)

• [Math is our friend. Well, not in this case.]• * Given this scenario, it is unlikely that the record company will pick-up any

options and the artist will be looking to create independent projects or seek another label.

RESERVES

• Reserves, money held in escrow, are typically 30% or more. • This amount is held back by the label in order to

account for returns.• As more and more record stores disappear and

streaming reigns supreme, this clause is likely to remain in the language but, will likely be irrelevant. • If laptops and computers no longer feature CD/DVD

players, we can predict that the sale of CDs is likely to trend towards zero.

STANDARD RETURN PRIVILEGE

• In the past, returns could be 100% of shipment. •Currently, retail stores can return 20% of the stock. •Any amount over 20% is charged a restocking fee.

STANDARD BREAKAGE DEDUCTION

• 10%. •A&M records still computes this deduction on

contracts even though CDs don’t break as often as vinyl records.•Note that vinyl record sales have and continue to

increase once again.• Rarely do products disappear. Instead, they

become less popular and find a baseline fanbase.

ARTISTS’ NEGOTIATING POWER

•New artist: Sold less than 250,000 records.•Mid-level artist: Sold between 250,000 and 500,000

records.• Superstars: Sold upwards of two-million copies. •While these numbers appear large, the costs for

production, promotion, and marketing are often staggering and require enormous sales to generate profit for everyone involved.

RIAA – RECORDING INDUSTRY ASSOCIATION OF AMERICA

• Gold album: An album selling 500,000 or more.• Platinum album: An album selling one million copies or more.• Multi-Platinum: More than 2 million copies sold.• Diamond: More than 10 million copies sold. • Digital Gold: More than 100,000 paid downloads.• Digital Platinum: More than 200,000 paid downloads.• Digital Multi-Platinum: More than 400,000 paid downloads and then

awarded 2x, 3x, and so on for each sales increment of an additional 200,000 copies.This link provides a detailed breakdown of digital sales awards.

https://www.riaa.com/about-riaa/https://www.whereseric.com/the-vault/awards/gold-platinum-diamond-record-awards-certification-process

FLOORS AND CEILINGS

• Also called minimums and maximums (min/max)• Floor: The smallest advance amount stipulated in an artist’s record contract.• Ceiling: The largest advance amount stipulated in an artist’s record contract.

• An excellent chart is shown by Passman (2013), page 204.• “Album No. Floor Ceiling

• 1 $175,000 (no formula)• 2 $175,000 $400,000• 3 $200,000 $450,000• 4 $200,000 $550,000• 5 $250,000 $700,000• 6 $300,000 $800,000”

• Excerpt From: Donald S. Passman. “All You Need to Know About the Music Business.” iBooks.

CONTROLLED COMPOSITION

•Any composition in which the artist has a financial stake. • The term control refers to the artist’s control to make

decisions about the mechanical rate of the song because he/she has ownership via copyright, or a financial interest/benefit in the composition.

STANDARD CONTROLLED COMPOSITION REDUCTION

• This is now standard in record contracts and is a 25% reduction. Therefore, your mechanical royalty is reduced from $0.091 (9.1) cents to $0.06825 (6.825 cents)• Imagine you are a singer-songwriter who composes

all 10 songs on a record (CD or digital). Each of the songs is of length 5-minutes or less.

CONTROLLED COMP TABLE• Statutory and Controlled Composition Mechanical Royalty Earnings for

Physical/Digital Sales

Total songs

Statutory Mechanical Royalty Rate

Controlled Composition Clause Rate (75% of statutory)

Physical or digital albums sold

Total Statutory Mechanical royalties

Total Controlled Composition Mechanical Royalties

Record Company Savings via Controlled Composition Clause

10 $0.091000 $0.068250 1,000 $910.00 $682.50 $227.50

10 $0.091000 $0.068250 10,000 $9,100.00 $6,825.00 $2,275.00

10 $0.091000 $0.068250 100,000 $91,000.00 $68,250.00 $22,750.00

10 $0.091000 $0.068250 1,000,000 $910,000.00 $682,500.00 $227,500.00

10 $0.091000 $0.068250 10,000,000 $9,100,000.00 $6,825,000.00 $2,275,000.00

PROSPECTIVE ESCALATION

•A bump up in your royalty rate based upon reaching a certain sales quota goal. • This escalation happens after the artist has reached

the specified sales figure. • There is no change in rate for any units sold prior to

achieving the negotiated sales figure.

PROSPECTIVE ESCALATION EXAMPLE

• Tier 1: Artist point rate for sales of units between 1 and 250,000 is 11 points (11%)• Tier 2: Artist point rate for sales of units between

250,001 and 500,000 is 11.5 points (11.5%)• Tier 3: Artist point rate for sales of units above 500,000

is 12 points (12%)• In this case, each tier is paid at a different point rate.

RETROACTIVE ESCALATION

• If a contract states that the royalty rate retroactively increases with the number of CDs sold, then the artist would be paid the higher rate after reaching the stipulated amount and would be paid the higher rate from record #1.

• In other words, if your contract stipulates a 16-point royalty rate that increases retroactively to 17 points after the sale of 500,000 CDs, the artist would be paid 16 points for all CDs up to 500,000.

• Upon selling 500,000, the artist would be paid 17 points for all future CDs and one extra point (16 +1) for the CDs from 1 to 499,999.

• The term retroactive means “from the beginning.”• This is the escalation everyone wants in their contracts.

RETROACTIVE ESCALATION EXAMPLE

• Tier 1: Artist point rate for sales of units between 1 and 250,000 is 11 points (11%)• Tier 2: Artist point rate for sales of units over 250,000 the rate for all

sales is 11.5 points (11.5%)• Tier 3: Artist point rate for sales of units above 500,000 is 12 points

(12%) for all unit sales starting with the very first sale.In this case, each tier is paid at the higher point rate once a sales quota is achieved.Note: Artists’ attorneys should always seek to make royalties retroactive.

CONTRACT ESCALATION COMPARISON

Tier Points Royalty base Sales TotalUp to 250k 11.00% $4.50 150,000 $74,250.00250k - 500k 11.50% $4.50 375,000 $194,062.50More than 500k 12.00% $4.50 600,000 $324,000.00

Total RoyaltiesRoyalties based on a prospective escalation $592,312.50Royalties based on a retroactive escalation $607,500.00

ALL-IN RATE

• This refers to a situation where the artist’s points include the amount for producer’s points.

• For example, if your producer receives 3 points and your artist deal is for 16 points, then you are really earning 13 points and the producer is earning the other 3 points.

• The artist’s point rate is called the net rate.• When being credited for both the artist’s and producer’s points, the rate is

called the combined rate. • The all-in (combined) rate helps the artist recoup faster. Think of it as a higher

hourly pay rate.

OPTIONS

• The record company’s way of keeping successful artists by extending their contracts. • The number options or additional records is spelled out in

the contract and is at the whim of the record company. • If you sell, the record company has the right to “exercise the

option” and make you record another CD. • If you don’t sell, they have the right to “not exercise the

option.”• It’s all about the money. Sell or get fired.

OPTIONS TABLE

• A six-album deal is typically written as one mandatory album with five optional albums at the discretion of the label.

• Record Floor Ceiling• 1 $175,000 (no formula)• 2 $175,000 $400,000• 3 $200,000 $450,000• 4 $200,000 $550,000• 5 $250,000 $700,000• 6 $300,000 $800,000”• Excerpt From: Donald S. Passman. “All You Need to Know About the Music Business.” iBooks.

PARTY TALK

•At a dinner party, two artists with the identical deal in the previous table could present their situations very differently. •A humble artist might announce they signed an

album deal worth $175k. • The other artist may announce they signed a six-

album deal worth $2.4 million. • In fact, both are the same deal.

MECHANICAL ROYALTIES

• This money is paid to the publisher at the time of pressing. • This money is not recoupable and is due when records are printed, not

when records are sold. • This money is upfront money and, because it is not recoupable,

companies invented the controlled composition clause in order to cut down on upfront expenses. • Song File is a service provided via www.harryfox.com that provides a

way to pay for mechanical royalties for up to 2,500 physical and digital downloads, and up to 10,000 interactive streams. For more information, please visit: http://www.songfile.com

http://www.harryfox.com/http://www.songfile.com/

STATUTORY MECHANICAL ROYALTY RATES

•Maximum statutory mechanical royalty rate for a song up to 5:00 in length: 9.1 cents ($0.091).• For songs longer than 5:00, the mechanical royalty

rate is $0.0175 cents for every minute or fraction thereof.•A song of length one-second to 5:00 (five-minutes)

earns the writer/publisher $.091 or 9.1 cents per physical or download copy sold.

STATUTORY RATE OVER 5 MINUTES

•A song of length 5:01 to 6:00 minutes earns the writer/publisher 6 * $.0175 = $.105 or 10.5 cents per physical or download copy sold. A song of length 6:01 to 7:00 minutes earn the writer/publisher 7 X $0.0175 = $0.1225 or 12.25 cents. This link to the Dash Book mechanical royalty calculator provides a wonderful resource for computing mechanical royalties to be collected or paid for physical and download sales.

http://www.dashbook.com/CalculatorMechanical.aspx

STREAMING MECHANICAL RATES

• For streaming mechanical royalty calculations, please visit the site by Rafa Selase at https://rafaselase.com/blogs/music-blog/music-streaming-royalties-calculator• For the Audiam Spotify (US) streaming mechanical

royalty calculator, visit:http://resources.audiam.com/rates/

https://rafaselase.com/blogs/music-blog/music-streaming-royalties-calculatorhttp://www.audiam.com/http://resources.audiam.com/rates/

THE FUTURE IS NOW

• It is important to note that streaming is not the future of the record industry, it is the present of the music industry. •Given more than 7-billion people on the earth, many

with streaming capabilities, the percentage of music industry revenues earned via streaming is exploding. According to Tech Crunch, streaming services generated nearly 80% of total 2019 music revenues.

https://techcrunch.com/2020/02/26/streaming-services-accounted-for-nearly-80-of-all-music-revenue-in-2019/

RECOUPABLE MONEYS

•Moneys the artist needs to earn before they are paid royalties. These include and are not limited to:•Demo costs•Recording costs•Production costs•Rehearsals•Equipment rentals and purchases

AND THE LIST GOES ON

• Image and makeover costs•Wardrobe•Music lessons•Dance lessons•Physical trainers•Chefs

AND ON

•Marketing•Promotion•Manufacturing•Promotional tours• Travel costs•Meals

AND ON, AND ON

•Yacht rentals•Video costs•Anything and everything spent in the effort to record, promote, and sell the music.

• It’s a lot like paying off an enormous loan –while earning a low hourly wage.

APPLIED KNOWLEDGE IS POWER AND FREEDOM

• The recoupable paradigm is a lot like paying off an enormous loan while earning a low hourly wage.

• MDC students who successfully complete the Music Business degree have been taught and learned the tools necessary to become entrepreneurs in the form of independent artists, indie record companies, managers, promoters, business owners, and much more.

• Applying the skills garnered via your learning will ensure that you are never placed in a position of servitude.

• By becoming a successful independent, you will create excellent negotiating positions when the labels come knocking.

• For those who are successful, a myriad of offers will come your way.