Independent Promotion
And now, the coup de grâce.
What hasn’t been said about independent promotion? It has been the subject of books, exposés, television reports, and documentaries, not to mention a multitude of conversations and debates within the record industry and on Capitol Hill. An entire chapter of this book (chapter 9) has been dedicated to marketing and promotion, including independent promotion. For purposes of this chapter, though, suffice it to say that record companies now require artists to pay for what the companies used to provide via their own personnel as an ordinary part of their overhead. They do this by stipulating that part or all of promotional expenses, including the costs of promotional TV campaigns (see below), are recoupable out of royalties. And, as with other recoupable costs, they are considered advances and must be repaid before the artist’s royalty payments begin to kick in.
Television and Radio Campaigns
Paragraph 7.07(b) of the Universal Records standard recording artist agreement (and, regrettably, most other record companies’ contracts as well) provides that if the record company spends money on a TV campaign, the otherwise applicable royalty due the artist will be reduced (by as much as 50%) during the semiannual period when the campaign initially took place through, to, and including, the semiannual period when the campaign was concluded. (Sometimes they will agree to limit the reduction to the four-month period following the commencement of the campaign. However, since royalty departments do their accounting on a semiannual basis, the actual reduction usually ends up being taken over a six-month period—if they even remember to reinstate the basic rate.) Upon the expiration of the latter period, the royalty due the artist is reinstated—but prospectively only. This means that not only is the artist ultimately paying much of the cost of independent promotion, as we have seen, but is also subject to having his or her royalty rate reduced for the duration of a television or radio campaign.
In order for these provisions to take effect, there is no requirement that the record company spend a substantial amount of money on the campaign. A modest expenditure is sufficient to set the royalty reduction clause in motion—and what a furious reduction in earnings can result!
Things are different in Europe because a far greater percentage of record sales are generated there by TV advertising than are generated in the United States. But then it seems fair that the reduction in royalty should apply only to those territories in which the TV campaign is actually employed—not all foreign territories.
Now if it is appropriate or effective for expenditures to be incurred in furtherance of a common cause (that is, the sale of records), fine. But there is no rational defense I can think of for arbitrarily reducing the royalty rate for whatever number of records are sold during a period of TV advertising. And note that there is usually no cap on the number of records that can be affected by the royalty reduction. As we have seen, it does not take a lot of record sales to return to the record company a lot of money. At a minimum, the applicability of the reduction should be limited to a definite number of records sold during the TV campaign period. The practice has other implications as well. For example, if a bonus or royalty escalation is dependent on achieving a certain level of unit sales, the calculation of these sales is usually based on US sales through normal retail channels. Sales resulting from TV promotions are often exempted from the calculations.
PREPAYMENT OF ROYALTIES
In some cases, a record (or music publishing) company will voluntarily prepay royalties. A prepayment of royalties constitutes an advance, allowing a company to recoup the advance from royalties that were otherwise earned and would become payable but for the passage of time between the end of a royalty period and the date on which the royalties are due to be paid.
Let’s take a common example. A company is required to pay you advances of $10,000 on the first of January of each year—and does. Meanwhile, as of December 31 of the prior year, royalties in some amount are payable, previous advances and chargeable costs having been recouped. But wait. They are not actually payable until the accounting statement is required to be prepared and sent out—usually three months later. Do you receive the royalties along with the statement submitted on March 31? Or does the company “recoup” the recently paid January advance out of the royalties that had already been earned, but were simply not yet due? In other words, are you actually being paid your advances out of your own earned royalties? In this example, if the earned royalties as of December 31 were $10,000, you could receive either $10,000 (the advance) on January 1 and no royalties come March 31, or $20,000 ($10,000 for the advance and $10,000 for the earned royalties). There’s a big difference.
Now consider the following two situations: (1) you (the artist) need money in January and ask the record company to “lend” it to you; (2) the record company decides that since earned royalties are likely to become due come March 31, it is now time to spend some of that money in a hurry so that it can be deemed an advance, recoupable out of the very royalties that are coming due. In either case, the money being spent—advanced—is yours. Let’s say that you have earned $50,000 in royalties as of the close of an accounting period (let’s stick to December 31). You usually do not know how much, if anything, you will receive at the time the accounting is submitted three months later, at the end of March. But the record company does. What a good time to finance another video, or album, or tour, or spend some money on the release of a new single and the independent promotion services that naturally accompany the release. By March 31, that newly charged debt vacuums up money that would otherwise have been payable to you. At this point, you may justifiably wonder how it came to pass that you have just financed your own video, album, or tour—ahead of time! As if it isn’t bad enough that you have to pay for these expenditures out of future royalties: now you are paying them out of past royalties.
In cases like the above, the contract language (or lack of it) either permits the chain of events or it does not, and your representatives and the record company’s representatives can either address the issue or not. Therefore, a provision should be negotiated by your attorney to be added to the agreement providing that royalties earned as of the end of an accounting period cannot be recouped out of advances paid subsequent to the date on which such royalties were actually earned, even though not yet payable because the accounting is not yet officially due. We refer to this particular gambit as forward recoupment. And once the agreement is signed, it is too late to deal with any such problems.
THE MYTH OF ROYALTY ESCALATIONS
The term royalty escalation (or royalty acceleration) refers to the situation in which an artist’s or producer’s royalty rates rise incrementally from year to year, or from album to album, or from sales level to sales level, or sometimes a combination of these. For example, a royalty rate of 12% may rise to 12.5% on units of records in excess of 500,000 copies and to 13% on units of records in excess of 1 million copies. Customarily, the increase is limited to album sales in the United States through customary retail channels (excluding budget records, midpriced records, record club sales, records sold in conjunction with TV campaigns, etc.), and so right away, the presumed escalation does not apply to anything close to the total number of albums sold. It is also rarely applied retroactively.
In addition, the conditions giving rise to royalty escalations are customarily required to be met from album to album. In other words, if your first album achieves sales of 5 million copies, don’t expect your next album to start at 13%. It won’t. The whole story begins again. In fairness, there is some justification for this in that the second album may require no less a financial commitment from the record company than the first—and perhaps more. But if the prior album sells enormous quantities, the rationale is no longer valid. And, since record companies cross-collateralize album costs and royalties back and forth among albums, it is disingenuous to argue that each album “stands on its own” when it comes to escalations. (Cross-collateralization refers to t
he record company practice of recouping expenses payable according to one agreement with an artist or producers from monies received as a result of any other agreement with that same artist or producer. It also refers to the universal practice of charging costs incurred with respect to one specific product—for example, an album—against earnings generated by another.)
In the digital age, the concept of royalty escalation has taken on a new twist. What if there are no “units” in the traditional sense of the word? What if the sale occurs in cyberspace? For the purpose of determining the applicability of royalty escalations, “cybersales” do not count. Obviously, as time goes on, the trend toward instant downloading of music or sharing of music tracks will become more and more commonplace and the income generated from such exploitations will increase accordingly, and the record companies will have to adjust the definition of what is and is not a sale through normal channels. Theoretically, sales subscription services will be dealt with the same way as long as the number of actual downloads can be identified and tracked.
FREE GOODS
Practically all products are discounted from time to time, except for those that are truly in demand. (You will never see an Elsa Peretti gold pendant at Tiffany & Co. on sale; nor do NARS nor Estée Lauder allow their cosmetics and fragrance lines to be sold in stores that customarily discount products.) Yet in the record business, all records are discounted to retailers all the time. Everyone gets a break from the published wholesale price. This allows some price variations at record stores. But one way in which record companies discount—the distribution of free goods, or freebies, to avoid paying the royalty costs that accompany the sale of records—is unique.
Let’s see how the free goods policy works.
First, free goods are not free, nor, in the case of digital downloads, are they even “goods” in the traditional sense of the word. Free goods are a fiction created by record companies in order to reduce their obligation to pay artist royalties, music publishing royalties, and union royalties. Furthermore, they don’t count in calculating record sales for royalty escalation purposes.
Suppose a record company wants to discount a shipment to a retailer for any one of the following reasons:
• as a reward for a long and profitable relationship, giving the dealer a little advantage over other dealers
• so the dealer can sell the record company’s record at a price that is more attractive to customers than other records
• as encouragement to purchase a sufficient number of records so that when the record receives radio play, there will be lots of inventory available to respond to consumer demand
As we have said, discounted records are still susceptible to the record company’s having to pay royalties. So, instead of selling 1,000 records at 15% off the wholesale price, the record company “gives away” 150 records. It ships 1,150 records, but charges only for 1,000 records. In this way, it has eliminated the mechanical, artist, and union royalties on the 150 “free” records.
All music publishers, and in particular, the powerful and vocal Harry Fox Agency, abhor this practice and resist it. However, they often have no choice but to acquiesce because free-goods no-royalty provisions are written into most artist–record company agreements. For the same reason, unions (most often, the American Federation of Musicians and the American Federation of Television and Radio Artists) acquiesce in this practice as publishers do with the three-fourths mechanical royalties clauses. Were the union or the music publisher to successfully object, the record companies would simply take the excess cost out of the artist’s royalty, and their right to do so is usually provided for in the recording contract.
By the way, in the case of free goods, members of the “family” of artists on a record label are treated less favorably than the record label treats strangers. Record companies will typically pay royalties on free goods to outside songwriters, and often producers with negotiating leverage, whereas it is rare for record companies to pay royalties on free goods to their own artists or to the music publishers that control their artists’ songs.
Let us revisit our earlier example of how many records must be sold before an artist recoups a $100,000 recording cost. You will remember that at an $0.80 royalty rate, 125,000 records need to be sold to reach this level. Except for what I am about to describe, the producer will at the moment of recoupment be due a check for $31,250 ($0.25 per record) and the artist will be due zero. Now we see that even if 125,000 records are sold, only 85% of them really count. The remaining 15% were given away for free and do not bear any artist (or producer) royalty at all. Thus 147,059 records will have to be sold to net 125,000 royalty-bearing records, at which point royalties will begin to accrue to the artist.
In addition, all record companies establish what they call “special programs” for a limited time period (such as the period of initial release, or the release of a subsequent album in order to stimulate interest in the catalogue). These are referred to as “special frees,” and they have to be considered as well. Typically, they amount to yet another 5% of records shipped to dealers. Thus, we are not talking about a 15% free-goods policy, but a 20% free-goods policy during what may well be the most significant sales period or periods in the album’s history. And the effect of this on the artist? Figure it out: In order to get to 125,000 royalty-bearing records, 156,250 have to be shipped and sold. Someone is doing quite well here. Certainly not the artist. And probably not the producer, as the producer customarily abides by the same royalty provisions as those that apply to the artist (with the exception, of course, of the artist’s contribution to such costs as the cost of recording).
LOST OR MISPLACED ROYALTIES
Each year, millions of dollars of royalty monies that might be paid to artists are not collected because the US music industry has failed to keep abreast of developments in international copyright legislation and to take advantage of opportunities that have opened up as a result of technological developments. An important example of the former is a neighboring rights law passed in Germany that recognizes the rights of producers whose work has made a significant contribution to the success of specific recordings. With regard to the latter, two important sources of potential income are (1) royalties that are collected in a growing number of countries for home taping and rental uses and (2) royalties generated by the use of audio recordings on the World Wide Web and via satellite and cable services.
For a discussion of the various sources of income that that are outside of the mainstream and out of many industry professionals’ consciousnesses, see chapter 17, this page.
CHIPPING AWAY AT POST-TERM ROYALTIES: SYNCHRONIZATION LICENSES
Even after an artist’s recording career is essentially over, not only will the artist’s records continue to sell, but his or her recorded tracks may very well find themselves in a movie or a commercial. The use of recorded music to accompany visual images—for a theatrical-release film, a DVD-only release, a for-TV film, a commercial, or a video game—requires two synchronization licenses. One synchronization, or synch, license is granted by the music publisher. A separate license—referred to as a master license or a master synch license—is required to use a particular recorded performance of the music. Unlike mechanical license rates, which are set by law, synch licenses are granted on a case-by-case basis and are broadly negotiable. Although lucrative film licenses mostly occur in conjunction with films produced in the United States, uses in commercials and TV films represent a robust—and growing—worldwide business.
Traditionally, publishers remitted to their songwriters 50% of synch license receipts. Latter-day songwriters, especially those who were responsible for recording their own songs, entered into copublishing deals under which they would receive, essentially, 75% of receipts. A songwriter who owns his or her own copyrights, of course, will retain 100% of receipts. The financial splits between artists and their record companies are quite different. While record companies traditionally have shared with their artists r
eceipts from synchronization licenses equally, in recent years, as profitability in the record industry has declined due to the diminution in record sales, certain record companies have reduced the artist’s share of master synch fees to as little as 20% of receipts. In some cases, they have sought to pay a royalty as if the synchronization were a record. They ignore the fact that a synch fee is derived from a passive license—most often emanating from the label’s business affairs lawyers; a record sale requires far more effort on the part of the record company. This is how that scenario works: Say an artist’s royalty rate is 12% and the record company licenses a track for an IBM commercial for $1 million. In this situation, the artist will receive only 12% of the money while the record company will retain as much as 88%.
The manner in which synchronization fees are handled is important. Not only are the amounts involved usually pretty significant, but income derived from synch licenses is often received well after the heyday of the artist—when his account is “in the black.” The best argument for a more generous split between record labels and artists is that the record company often has no role in obtaining, or even negotiating, the synch license, which might well have originated with the music publisher or simply “flew in the window.” Therefore, whatever deal was in place at the time the artist initially recorded his or her master recordings, the artist’s representative should keep in mind that at some point—probably a point well into the future—the traditional 50/50 split might no longer be appropriate. This might occur, for example, once the term of the exclusive recording agreement has expired, provided that the artist’s account is in the “black,” the percentages could change prospectively. If you wait too long to deal with this problem, or if you do not address it at all, your only leverage down the road is the tracks.
What They'll Never Tell You About the Music Business Page 9