What They'll Never Tell You About the Music Business

by Peter M Thall

  TWO DIABOLICAL DEDUCTION DEVICES

  Do you think that the previous examples of royalty reduction methods are egregious? Perhaps. But diabolical? That adjective must surely be reserved for the following two particularly odious devices by which record companies reduce your royalties: packaging deductions and reduced mechanical royalties on controlled compositions.

  Packaging Deductions

  Record companies decided long ago that while they did not object to paying a royalty per record sold, they did not see why they should have to pay a royalty on the packaging. This makes some sense. When a 78 sold for $1 and four 78s in a box sold for $5, the extra dollar was obviously attributable to the cost of the package. Or was it? Perhaps the bundling of the four records constituting a concert performance or an opera simply made the entire package more valuable in the eyes of the record company and the customer. Nevertheless, it was this logic that resulted in the birth of the first packaging deduction. Clearly, the majority of the cost of a record is for the intellectual property (that is, the songs and the masters—the music) of which it is composed. But some of the cost is contained in the disc (or tape) itself and in the packaging surrounding it, and record companies have succeeded in persuading artists and their representatives that they should not pay a royalty on those components.

  The packaging deduction is customarily worded in terms of a percentage of the record’s royalty base price. A 25% packaging deduction means that for a record retailing at $16.98, $4.25 is deducted before the artist’s royalty rate is applied. (The 10% packaging deduction is a thing of the past; the current going deduction for CDs, and other new technologies, is 25%.)

  Let’s return to our earlier example to see exactly how I got the $0.80 per-unit royalty. Suggested retail ($16.98 CD) × 90% (10% breakage deduction) × 75%

  (25% new technology deduction) × 75% (25% packaging deduction) × 9% royalty rate (12% less 3% for producer’s royalty) = $0.77 net artist’s royalty per sale

  $16.98 × 90% = $15.28

  $15.28 × 75% = $11.46

  $11.46 × 75% = $8.60

  $8.60 × 9% = $0.77 (rounded up to $0.80, the figure cited on this page, the net artist’s royalty per sale)

  And, as we have seen, the net royalty will be further reduced for singles, record club sales, midpriced and budget records, and other ancillary sales.

  Now there are always variations on the theme. As we have seen, the 10% breakage deduction is inching up to 15%, whereas the CD concession and new technology rate may be reduced from 25% to 20%, or even to 12.5%. If 20%, the resultant royalty will be $0.82, rather than $0.77. Furthermore, the royalty rate for a sought-after artist may be 15% to 18% rather than 12%. At the same time, many producers charge 4% (and even 5%) rather than 3%, and their royalties often escalate, based on sales achievements, by 1%. Then again, with most record companies you may be able to rid yourself of the breakage reduction. If you cannot, then the only way to ratchet up your net (that is, final) royalty is to increase the gross royalty rate from 12% (in this example) to 13% or 14%. It is all rather fungible. The bottom line is that one way or the other, when your gross royalty rate is 12% of retail, your ultimate (net) royalty will be somewhere around $0.80 on a $16.98 CD. Further, you will not see any royalties at all until the company has sold enough records to recoup all recoupable expenses, and, as we have seen, the number of records that constitute “enough” is invariably much higher than you might imagine.

  How Is a DPD Packaged?

  Yes, there is an ultimate excess to point out to you. The record companies have decided to apply the standard packaging deduction of 25% to DPDs—which, in case you haven’t noticed, do not even have a package! What better evidence do we need that the deduction game is just a screen for the record companies’ attempts to fix a per-unit royalty to every sale—one that fits into their overall scheme, a scheme which presupposes very few hits and very many failures. I think we would all be happier if they were just a little bit more direct; it would save us the inconvenience and the cost of having to negotiate all of these intermediate provisions whose sole purpose is to get the royalty down to X dollars (cents?) anyway. See this page to learn how record companies have concocted a “new technology concession” deduction to replace the insidious packaging deduction (which amounts to the same “diabolical” deduction there used to be).

  REDUCING MECHANICAL ROYALTIES

  Every song included on a CD, other than songs in the public domain,*1 is subject to a mechanical license fee: a payment to the holder of the copyright, usually a music publisher, for the right to use the song. The amount of the fee depends on the length of the song and the current rate as established by the US copyright law, the statutory rate. Most artist–record company agreements include a provision stating that the record company will pay the mechanical license fees up to but not exceeding three-fourths of the minimum statutory rate without regard to length. This discounted rate is known in the business simply as a rate. (The “minimum” bit is important: songs over five minutes long command a higher license fee than songs less than five minutes in length.) In addition, record companies usually include a provision stipulating that no matter how many compositions are on a CD, they will pay only ten times three-fourths of the minimum rate. The amount in excess of three-fourths of the minimum rate is charged against the artist’s royalties. This is true whether the composition in question is a controlled composition—a composition written by the artist or the artist’s producer—or is not a controlled composition.

  Let’s say that you record eleven songs. Two are “outside” songs owned by other music publishers; the others are your own compositions. One of the outside songs is six minutes long. First of all, you or your producer will have the unpleasant task of requesting that both outside publishers grant a rate to your record company for the compositions being used, including the six-minute song, which would normally command a higher fee than the other one. Also, since the record company has agreed to pay the fees for only ten songs, the effect is that you have to license the nine songs you have written for a total royalty of eight times the three-fourths rate, not nine.

  To the extent the owners of the two outside songs refuse to license their songs at three-fourths of the minimum rate, your mechanical royalties with respect to your nine songs will be further reduced. To the extent they demand payment at the so-called “long rate” for the six-minute song, your royalties will be even further cut. If your own publisher does not care about the way your record agreement is written and insists on being paid the full rates established by the Copyright Act, the excess the record company has to pay over three-fourths of ten times the minimum rate will be charged against your record royalties and any other monies the company may have to pay you contractually. (And if you cowrote any of these songs with another writer—often the producer, but just as often a totally unaffiliated writer—you would have to get that other writer’s permission to license the song at this reduced rate as well.) So, while you are trying to do your thing, your manager or lawyer is spending valuable time, and eventually your money, trying to clear these rights, just to save you from an unconscionable result. And it can be enormously expensive.

  Finally, the applicable minimum statutory rate provided for in the contract is customarily the one in effect at the time the record was supposed to have been delivered, not the one in effect when the record is released, or even recorded. Let me show you how sinister this tidbit in recording agreements can be. In a recent case, an artist died before he could complete the recording of his new album and deliver it to his record company. Consequently, he could not, of course, deliver the record “when due.” When his recording was finally ready for posthumous release, the record company reminded the lawyers for his estate that the mechanical rate at which all of the compositions on the album (including those of the now-raging publisher of the artist’s song) would be licensed was the rate that had been in effect years earlier, when the rate was considerably lower than on the date the CD was
actually released. So it goes.

  SPECIAL ISSUES REGARDING CONTROLLED COMPOSITIONS

  But for the controlled-compositions clause, record companies claim, they could not make budget records (as stated previously, usually priced at about one-half of the suggested retail price of so-called top-line releases) available to the public; the same applies to developing new music platforms whose sales volume does not justify the expenditure of what would be acceptable for a top-line release. There has been considerable talk in recent years about replacing the statutory mechanical rate with a rate which would be calculated by a percentage of retail. This would be welcomed by record companies; they would always know what their mechanical royalty costs would be, freeing them to determine the content of releases without regard to “nonartistic” issues such as length or number of songs. On the other hand, music publishers do not like this concept. For a start, they do not know what the percentage would be, and they probably would want a guaranteed minimum rate in any event, putting us back where we started! They also feel that, while a percentage controlled-compositions rate would spread the cost risk, they should not have to bear it all. They also wonder whether, if the record is successful, they will ever get back what they discounted. Not likely.

  In addition to this current controversy, the impact of the mechanical royalty cap has devastated elements of the music industry. As noted earlier, the cap affects all of the songs on the album, not just those that the artist controls. It is in the EDM (electronic dance music), hip-hop, and reggae areas that the disaster is most visible. An artist who writes (not even cowrites) every song on the album can end up receiving nothing if the cost of the samples he incorporates into the tracks causes the total mechanical royalty costs to exceed the cap. For the sample owners are copyright owners, too, and their demands for mechanical royalties are usually made after the fact of the recording and they have all the leverage. The owners of the samples (often the producers of the tracks) do not have to honor the cap and often will charge a full statutory rate for their miniscule contribution to the song. Guess why we never hear medleys anymore? That’s right: the mechanical royalty cap. The record company’s business affairs lawyers will say that it is up to the artists to control what goes on their records. (Clive Davis would respectfully disagree, but then, he is in the creative tower, not in the royalty department.) That is like telling Beethoven to forgo the choral part of his Ninth Symphony. Easier said than done.

  As this book is being published, Congress and the Copyright Office are looking into the mechanical royalty clause in the Copyright Act and will likely rethink it in a way that will soften the blow of contractual modifications of the clause, such as is evidenced by the mechanical cap. In the meantime, I guess it is up to the artist to control what goes on the record.

  THE BEAT GOES ON: OTHER IMPORTANT DEDUCTIONS

  Just when you think you’ve heard enough, there’s more. There are a vast number of additional charges that must be paid out of your royalties before you see a dollar. It is notable that none of these is applied against either your producer or your cowriters or their music publishers. While they enjoy the success of the effort of all involved in making the record, only you are expected to pay back these costs.

  Promotional Videos

  Prior to the early 1980s, there were no promotional videos to speak of. Video promotion and outlets for video broadcast—such as MTV and VH-1—were minimal. After 1983, however, things changed dramatically, and costs for promotional videos incurred by record companies increased geometrically. Video clips lasting fewer than four minutes can cost anywhere from hundreds of dollars to hundreds of thousands of dollars: $150,000 per video is not unusual. By the 21st century, the definition of the once-straightforward entity—“promotional video”—had expanded to include full-length DVDs, which cost upward of $400,000, as well as varieties of video “clips” for use on everything from video ringtones to MP3 players such as Apple’s iPod. An artist should be concerned with several important issues affecting videos: Who pays for the costs of making them? How many videos, and of what configurations, should be made? How are royalties on the eventual commercial exploitation of videos shared?

  It didn’t take the record companies long to figure out how to cover these costs. An answer came from on high (or at least from the chief financial officer’s floor). Charge the artist! Currently, most record agreements stipulate that one-half of promotional video expenditures be borne by the record company and one-half be paid out of the artist’s audio-only record royalties. The half borne by the record company is maintained on the record company’s books, and is eventually repaid to the record company out of 100% of the artist’s share of video royalties, if any, derived from the exploitation of the video itself. These royalties are calculated at essentially the same rate as are the artist’s record royalties; however, the price on which the royalty rate is applied differs from company to company. Escalations such as those that apply to audio-only record royalties are rarely applied to audiovisual royalties. But many record companies are so fearful of a market with which they have little experience (and even less interest) that they try to protect themselves by establishing, in contract provisions referring to audiovisual royalties, an arbitrary suggested retail selling price and then fiddling with it. Here’s an example from a major Sony BMG affiliate’s form agreement:

  With respect to United States sales through normal retail channels at a base price which is less than a top-line price, Company shall accrue to the artist’s account a royalty of 10% of the applicable royalty base multiplied by a fraction, the numerator of which is the suggested retail list price that equates to the applicable base price and the denominator of which is $19.95. [Note the weasel words “accrue to the artist’s account” rather than “pay to the artist”!]

  One further observation: Record companies are so skittish about video production that they try to maintain a very tight rein on costs. After all, a fabulous video by a major pop star could cost in excess of a small movie—$1 million or more. (U2’s recent video, designed for IMAX theaters, cost more than $5 million. Scary!) So, the companies trump the artist one more time by providing that even if they are the ones who have mismanaged or incorrectly estimated the budget, once the budget hits a certain number (for example, $200,000), all of the excess over the original budget is recoupable from the artist’s audio-only record royalties.

  For years, it was common to make two or three videos to promote an album, but as outlets for video presentation have diminished, record companies in general have become more expensive to operate, record sales have tanked, and record returns from dealers have become more problematical due to the advent of MP3/Internet distribution, most companies will commit to no more than one video per album, if that. They would rather commit to spending an equivalent amount on other kinds of promotion, at their option, if they feel that paying for video production is of negligible value.

  A new wrinkle affecting promotional videos appeared in 2015. Artists—and their record labels—began to claim a share of income derived from these videos which, on their creation, had solely a promotional purpose. They were offered to MTV and later to YouTube for free until the rights owners realized that “free” is no longer appropriate or necessary.

  Tour Support

  Artists who seek to reach their audience have to tour. Touring increases artist awareness among the broadcast industry and eventual consumers and fans, with the ultimate benefit of increased sales of records and increased interest in that artist and, down the road, a successful subsequent tour. But touring is enormously expensive. The cost of travel, food, and lodging alone can bankrupt any baby band. Individual artists have it much tougher, since they may not be able to function at all without hiring backup musicians. These backup musicians, or sidemen, may themselves make their living only by providing their services to other artists’ recording sessions and they may be unwilling to travel without being paid an amount of money equivalent to that which they might have made had th
ey remained in their own cities. The benefit of a band sharing various costs (for example, a van to transport the musicians and the equipment) is not available to an artist using sidemen.

  The record company does not directly share in the earnings from tours (neither from concert fees nor, usually, from merchandising sales), except in the sense that celebrity and success help all involved. However, once artists are signed, the record company usually foots the bill for its artists’ tours at the beginnings of their careers. As with most of the items listed in this section, the costs incurred are ultimately borne largely, if not solely, by the artists. While record companies risk the loss, 100% of the tour support is recouped out of the artist’s royalties.

  Equipment Loans

  Quite simply, artists need equipment (for example, instruments, amps, speakers, tuners, computers, etc.) with which to perform. They also need equipment with which to write and demo their songs. The record company once again is the source of aid to needy artists and lends them the money they need to rent the equipment. The total cost, of course, is an advance charged against their royalties, even though the record company may ultimately be the principal beneficiary of the expenditure. In lieu of asking for equipment advances on a per-recording basis, artists should seriously consider purchasing some of the equipment they need for preproduction or even production of their recordings (for example, for a Pro-Tools kit, which is extremely expensive to rent). Many artists tell me that ownership is power. I believe it. Once you own a piece of equipment, you don’t have to hit up the record company every time you want to rent a bass rig or an ADAT machine.