You constantly hear horror stories of bands that sell millions of albums but end up owing the label hundreds of thousands of dollars. Surely these are tall tales, dreadful nighttime legends that musicians tell their children? It’s impossible to sell so much yet make nothing, right? Actually this ghastly folklore is way too true and unfortunately commonplace. Selling 1,000,000 albums and owing the label $500,000 is easy, typically secured by the thoughtless stroke of a pen. Bands are lured in by the large signing bonus weighed against the hefty fees to hire an attorney, therefore bypassing the legal process all together and jumping on the fast track to financial disaster.
Recording contracts are monsters. Filled with confusing terms, misleading passageways, and big hairy ghoulish language. Somewhere within the 50+ pages you get lost and this doesn’t happen by happenstance rather by contractual design. Before blaming labels for constructing misleading contracts, know that several sections of recording contracts are extremely valid. Labels simply place these sections in contracts as a starting point. If negotiated by the artist, the terms can be shifted to become mutually fair. If they remain untouched and unnoticed, well that’s just smart business practice by a label. The key is to notice the terms, identify the confusing sections in order to find the starting point for negotiation. On that note, in every recording contract you’ll find eight hot button negotiation points hidden deep within the legal language. By no means is this an exhaustive list nor should these elements replace an entertainment attorney. Attorneys will know how to locate these elements, negotiate these elements, and anticipate the counter arguments. This quick list is to serve as a guide to help identify some of the confusing terminology. The eight areas, if gone unnoticed and un-negotiated, can place a successful band that sells 1,000,000 records in a financial hole owing over $500,000. Soak up the sections so you can experience financial success instead of running from the Italian collection goons.
1. Artist Royalty – recording contracts are like partnerships, a partnership in which the band will receive an artist royalty on units sold. As this figure varies pending on the label, it’s important to understand how (and from what) the artist royalty percentage applies.
2. Wholesale / Resale – will the artist royalty percentage apply to the wholesale price of the product or to the resale price of the product? Pending on the negotiated stance, gross earnings can immediately be slashed in half.
3. Breakage Fees – labels will incorporate a breakage fee that’s pawned off to the artist unless negotiated otherwise. For example – a label will incorporate a 10% deduction on all items shipped just in case they are damaged within the shipping process.
4. Uncollected Accounts – because the music business is a giant consignment industry, what happens if a music store goes bankrupt? Where does the product go? Who gets it? As an insurance policy to protect from such circumstance, labels typically incorporate an “uncollected accounts” aspect to the contract.
5. Free Goods – in order to promote a new album the label must send that album to radio stations, venues, and industry movers and shakers. Why should they absorb these costs? Instead, recording contracts deflect these costs onto the artist as a promotional or free goods fee.
6. Container Charge – ever stop to think about what a label invest in? Labels invest in the song and multiple songs make up an album. When a consumer purchases the album other components play a part in the consumer exchanges. For example – the jewel cases, the album booklet, the disc duplication, etc. As far as a label is concerned these are just add on expenses which they shouldn’t be responsible for because their financial investment is in the song, not the jewel case. Guess who’s paying for it then? Here’s a hint – not the label.
7. Reserves – this is a straight monetary amount or a specific number of products that the label will set aside for various purposes. Nonetheless, the artist not the label will absorb the reserves portion.
8. Advance – the advance is the grey ghost to any recording contract. The upfront incentive always looks attractive but there several arms to the advance that people fail to recognize. Any way you cut it, “advance” translates into “a loan which must be paid back.”
Typically the artist royalty (Point #1) doesn’t apply until after all the other elements identified have been deducted first. Because of this, these eight negotiation elements can chop up a hefty gross income into crumbs. As these eight topics can’t be discussed in exhausting detail through an informal blog, the video (below) provides a deeper view into terminology and financial examples. If you want know how each element, if negotiated improperly, can be detrimental to a group even after selling 1,000,000, watch the video. Fifteen minutes of viewing may save you $500,000. WATCH HERE
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