What They'll Never Tell You About the Music Business

by Peter M Thall

  The above list is a partial one only. The possible variations are endless. Clearly, any A&R person considering employment must read and understand the consequences of the standard provisions and, hopefully, be able to negotiate changes peculiar to the employee’s own situation, needs, and as always, leverage. What will always make a diffence is the answers to these questions: how much does the label want you and what (particularly which artists) are you bringing with you?

  If the foregoing is not enough to depress the A&R person, there is another truth to deal with in this area: the royalty payable to the A&R person is almost always subject to most, if not all, of the same reductions and limitations as the artist’s royalty is subject to—for example, allowance for reserves; packaging deductions; a reduction for digital mediums such as DVD, CD, DAT; reductions for midprice and budget sales; reductions for military sales; reductions for Internet downloads; and reductions commensurate with how the artist’s royalties are reduced (for example, if the artist is paid on 85% or 90% of records sold, the A&R person’s royalties will be reduced accordingly). One trick used by some companies is to apply these reductions to the employee’s already reduced royalty. For example, let’s say that the A&R person’s royalty rate is reduced by one-half for overseas sales, and the artist’s tracks are also reduced by, say, 25% in the United Kingdom, 40% in France, and 50% in South America (all of which are quite likely, especially for a new artist, whose records are, after all, what the A&R person is “commissioning”). It is not beyond the realm of possibility that the record company might then cut those percentages in half. This is not something that could ever have been intended by the A&R person or his or her attorney, I assure you.

  Finally, it is not unusual for a record company to refuse to allow the A&R person (who is an employee of the company, after all) to audit the books and records of the record company with respect to his or her A&R royalty. The argument given for this is that the auditor would discover information whose confidentiality is of such consequence that the management of the record company’s business would be compromised were the information to be disclosed to the A&R person. Similarly, record companies often resist attorneys’ efforts to obtain for their A&R clients the right to an upward royalty adjustment if the artist’s audit claim results in a settlement with positive implications for the A&R person. For example, if the artist, producer, and A&R person are all accounted to for 400,000 records sold in Australia and it turns out that the record company mysteriously, and erroneously, forgot to account for an additional 200,000 records, while the artist’s royalty account will be adjusted upward, and most likely the producer’s will as well, the A&R person’s account will not be, and there is no way for the A&R person to even know that such an adjustment has taken place.

  Even when the A&R person is permitted to examine the record company’s books while he or she is employed, upon termination of employment, the right to audit may also be terminated, making it difficult if not impossible to verify the amounts owed—that is, amounts earned and payable during the term of employment. After all, it is far more likely that an employee will refrain from auditing during the term of his employment, as audits are often experienced by the party being audited as being aggressive and adversarial. The same reticence is not present after the term has expired. Sometimes profit shares and royalties may be payable only through the end of the contract term, and the language providing for this result may be so obscure as to be easily missed by someone reviewing the contract. However, as noted in the list above, payment responsibilities insofar as A&R royalties and the like are concerned may be extended if the contract has been terminated by the employer without cause or by the employee for good reason.

  EMPLOYMENT AGREEMENTS WITH CELEBRITIES AND OTHERS OTHERWISE ENGAGED

  When negotiating A&R agreements for a person who is also a talent in his or her own right, the attorney representing that person needs to consider carefully what is singular about the person, and whatever exceptions are appropriate to that person should be sought during the employment contract negotiation. It is surprising how many requests for exceptions are likely to be granted—even when the eventual employee’s leverage is not so great. Currently there is a trend, which began, albeit slowly, a few decades ago, toward hiring celebrities for A&R positions. For example, Mitch Miller, head of A&R at Columbia in the 1950s and 1960s, also had his enormously popular television show. And, although Clive Davis has not been seen waving a baton at a chorus lately, few record executives can boast his extraordinary visibility—least of all on the final broadcasts of American Idol. Today L. A. Reid (Island, Def Jam), Rick Rubin (Def American, American Recordings, Columbia), Damon Dash and his colleagues (Roc-A-Fella Records) and, of course, Jay Z (Roc Nation) and other well-known music industry personages are heading up some of the industries’ most visible record labels, or providing consulting services, and are also appearing on television and at high-profile parties.

  Such employees, and others like them, while exclusive for a category of services—for example, A&R person—may wish to pursue other interests, from endorsements to broadcast commercials, to clothing lines, to maintaining their own websites and offering merchandise, to recording or writing for others outside of the exclusive relationship. An employee who is also a songwriter may want to pursue a separate career as a theatrical show writer, or to continue writing for motion picture or television soundtracks.

  An employee who has had a prior career as a producer’s manager or an artist’s manager may want to continue to pursue these interests during the term of his or her employment or at least during a phaseout period during the term of employment. That person may wish to continue to receive financial compensation arising from a prior manager’s agreement with an artist or producer. If so, he or she will have to provide for this in the employment contract to avoid a conflict of interest and a breach resulting from nondisclosure.

  A record company A&R person with a public persona may wish to appear on American Idol or similar programs; to appear as a guest on talk programs and even prime-time situation comedies or specials; even to be, say, the “music minute” reporter on The TODAY show. A&R execs who are also performers may wish to continue to appear in front of live audiences.

  All of these issues should be considered when drafting provisions affecting exclusivity, competition, confidentiality, and ownership-of-ideas provisions and should be considered in the course of the negotiation.

  MAIL

  In certain talent contracts (for example, video jockeys on cable channels or on Internet radio), the issue of fan mail arises. This is a real concern to people who receive it and to the companies whose employees receive it. Certainly, it should be collected and forwarded to the employee. But should it be read? The employer will often claim the right to open it, read it, and even answer it; sometimes the employer will agree to keep it private when it is marked “private” or “personal” and deliver it to the employee directly.

  There are copyright issues to be considered as well. Who owns the letters? Who—the employer or the employee—can benefit from ideas expressed or suggestions offered in the letters? Obviously, fan mail can be very useful to both the employer and employee. The manner in which it is collected, read, categorized, registered in databases, etc., is of real concern to both, and the way in which this is handled can and should be specifically provided for in the employment agreement.

  There are cyberspace issues here, as well. What about email? Most cases dealing with this issue have held that the employers own the email of all employees. Not only do they have the right to access the employees’ email files (including their address lists), but they can snoop on employees’ exchanges. What about emails from fans to the employer’s website? To the employee’s website? To the employee’s website that is managed (and owned?) by the employer? The law in such cases is rapidly evolving, but it will apply only to those situations where the employer and employee have not themselves dealt with the issue in their written contracts.r />
  THE OWNERSHIP OF IDEAS

  It is not unusual for employers to attempt to treat all intellectual property created by an employee during the term of the employment as the property of the company. As such, the company will seek not only to own the results of the employee’s creative thinking—that person’s intellectual property—but also to bind the employee to nondisclosure of such intellectual property.

  As noted in the opening sections of this chapter, uniquely in the music industry many of the very people whose professional services are sought to foster creative development in others are themselves creators. It is anathema to them to be asked to sign an agreement that assigns to the employer all the results of their creative services—including, by definition, their “ideas” and the expression of such ideas (such as songs, artistic approaches to production, arrangements, etc.). While the provision against disclosure or use of information may be said to have a generally rational purpose, it may be abusive and overreaching under certain circumstances and for certain people.

  Contract language in the realm of works for hire will often specify that the employee must warrant that all ideas, creations, literary, musical, and artistic materials and intellectual properties created or developed by the employee during the course of employment will be owned by the company. And, often, these provisions are buried in general boilerplate warranty paragraphs. Obviously, those who are hired for creative purposes must be very cautious about agreeing to such provisions when they do not provide for additional compensation. An A&R person who contributes ideas as part of his or her job does not usually intend to relinquish ownership in songs written outside of the parameters of the job description—particularly for no compensation. While ideas, as such, are not susceptible of copyright protection, the expression of ideas is, and this fact should be considered carefully in each case before signing an employment agreement that contains language that is improvidently or heedlessly conceived. As with other provisions in these “standard” inducement plans, business affairs lawyers are reticent to make any changes in language, so your attorney’s battle on your behalf to avoid a potentially catastrophic result, where your company owns your creations without having compensated you for them, will not be an easy one.

  —

  Most people at some point in their lives work for others. Most people have never had an opportunity to work for themselves. While Forbes magazine lists the one hundred companies that are the “best” to work for, chances are you will not be working for one of them. Insecurity is the norm and it is your reality. Many long-term music executives who have been found “redundant” in recent years as the industry has shrunk and the cost of benefits and salaries has risen have told me, with some bitterness, that the moment one feels secure, one is vulnerable. Regrettably, the quote at the beginning of this chapter is not far from the truth.

  8 • RECORD PRODUCERS

  Are They as Sharp as Their Points?

  The first cut is the deepest Baby I know

  —YUSUF ISLAM (CAT STEVENS)

  In the world of recording, the media have told us more than we want to hear about artists and record companies. But one role player who has traditionally succeeded in keeping a fairly low profile is the record producer. (This is not necessarily so in urban music, where often one identifies the recording more with the producer than with the artist.) I am, of course, talking about individual producers rather than record companies that “produce” recordings.

  Who was the first producer? It is hard to say, but Walter Legge, formerly the chief creative person at EMI in London, claimed to be the first. (Norman Lebrecht, in his tell-all book Who Killed Classical Music? refers to him as the most disagreeable personage ever to intrude upon musical performance.) It was Legge’s aim to “make records that would set the standards by which public performances and the artists of the future would be judged.” He tried to make records not only match live performances, but to exceed them in quality. He certainly succeeded. A huge percentage of EMI’s “Recordings of the Century” bear his imprint as producer. Legge even created an orchestra, the Philharmonia of London, for recording purposes only, although today the Philharmonia is one of the world’s most respected performing orchestras as well.

  The old adage about the chicken and the egg has some resonance in this area. Who is responsible for an artist’s success, the artist or the producer? This is a question that will, most probably, never be answered to everyone’s satisfaction. The producer shapes the recording, but depending on the nature of the artist and the artist’s particular talent, the producer’s role will differ dramatically from artist to artist. The nature of their deals, however, will not.

  HOW 25% CAN EQUAL 100%

  In chapter 4, I more or less glossed over the producer’s cut of the artist’s royalties. Let’s look more closely at the financial impact of the producer’s deal on the artist’s ultimate take-home pay. Let’s say that an artist’s royalty rate from the record company is 12% of the suggested retail selling price of records. Not unusual. A customary producer’s royalty would be approximately one-fourth of that rate, or 3%, leaving the artist with 9%. Another way to put it is that the producer receives 25% of the total royalties, but 33.33% of what the artist receives. So it would seem that for every $9 credited to the artist’s account (and notice the “credited”; the artist may never see this money), the producer gets $3.

  Not so. Here’s why.

  First, and most significant, after recoupment of recording costs, the producer customarily gets paid from record one—the first record sold. The artist does not.

  Let’s say the recording costs are $100,000 and the 12% royalty works out to about $1.07 per record. (In this example, I am assuming that a royalty “point” is worth about $0.09. It can be higher.) The record company will usually recoup these recording costs (that is, pay themselves back) at the so-called “net artist rate,” that is, 9% (12% less the producer’s rate of 3%). (I am assuming, for the sake of this example, that the producer is solely responsible for producing the entire CD; it is entirely possible that the producer’s share is not calculated on 100% of the tracks on the CD, as pointed out below under “Pro Rata Royalty Share.”) At $0.09 a point, a 9% royalty rate works out to be about $0.80. At $0.80 per unit, it will require a sale of 125,000 records before the recording costs are recouped. A new clinker for the producer: Since about 2005, record companies insist on recouping not just the recording costs before going back to record one to calculate the producer’s royalties. Now they want to wait until the recording costs plus the producer’s advance is recouped before doing do. At $0.80 per unit, an additional 62,500 units (for a total of 187,500 units) must be sold to recoup, say, a $50,000 producer’s advance. At that point, the producer is entitled to be paid his or her 3% royalty from record one. At $0.27 per record (three times $0.09), the producer is entitled to a check for $625 over his $50,000 advance. The artist? He’s entitled to nothing at this point.

  Is the producer receiving 25% of the total royalty paid out by the record company? No. He is receiving 100%! Meanwhile, the record company has received about $7 per record sold through its distribution system. Thus, 187,500 in sales represents more than $1,312,500 in cash receipts to the company.

  Let’s examine what happens when the record has achieved sales of 250,000 units. The producer’s royalties have now reached $67,500. The artist royalties are now in the positive column also. Once the 125,000th sale has occurred (the record has now recouped the recording costs), the artist will be due royalties of $0.80 per record on all units sold after that. The differential between 250,000 and 125,000 is 125,000. Therefore, the artist will have earned a grand total of $100,000 ($0.80 times 125,000). This is beginning to look better for the artist. Yet at the same time that the artist will begin to receive his first royalty dollar, the producer will receive an additional $16,875 to add to his $50,625.

  The total royalties payable by the record company (which, lest we forget, has received by now $1.75 million from it
s distributors) have amounted only to $167,500. The producer’s $67,500 share amounts to 40% of the total royalties paid (hardly the 25% the artist originally had in mind), and the artist’s $100,000 share will be 60% of the total royalties paid. In fact, the producer’s share of total royalties will never be as low as 25%. I am not saying this is unlikely; I am saying it is impossible. Watch.

  More bad news: The artist will not receive the $100,000 that he or she has earned according to the above scenario. It will take many more sales before the artist receives the first royalty check. Why? Because not only does the artist pay out of royalties the cost of producing his or her own recordings; the artist also has to pay for tour support advances, equipment advances, independent promotion expenses (more about this later), and video production expenses (or at least one-half of them). Nowadays, record companies have even added certain marketing, artwork, and other costs to the list of recoupable monies. So it can require 500,000 album units or more before the record company has recouped all of these advances and expenses. At that point, the producer will have received $135,000 in royalties ($0.27 [3 × $0.09] × 500,000 = $135,000) and the artist will still have received…zero.

  The disparity between artist and producer royalties can be even greater—and, at the same time, camouflaged, when the producer receives a “penny rate” rather than a royalty rate (which is cast in terms of a percentage of receipts, or suggested retail, or wholesale price). On its face, the penny rate appears insignificant. But it’s not. For example, let’s say that the producer receives $0.50 an album rising to $0.5625 at 500,000 units and to $0.6275 at one million units. Calculated at $0.09 per royalty point, this works out to be about a 5.5% of retail royalty rate, going to 6.2% and ultimately to 7% at 1 million units. At $0.10 or $0.11, the equivalent royalty percentage would be even higher….possibly so high as to be unconscionable.