In essence, record companies, unlike all other businesses that create and exploit intellectual property (movies, television, book publishing), get to make huge profits on products, the worldwide copyright to which they will own for upward of ninety-five years, without having actually paid for them. Granted, they risk losing the investment, but when a record succeeds, the only thing they have lost is the use, for a year and a half or so, of that money. Yes, they have expended a fair sum on overhead, but having observed the salaries of record company executives over the years and their generous perks, I am not too worried that they will feel taken advantage of.
CROSS-COLLATERALIZATION: IT DOES NOT APPLY TO THE PRODUCER
Because the cross-collateralization provisions contained in most artist–record company agreements do not apply to producers, the disparity between the relative earnings of the producer and the artist on a particular record does not stop with the calculations listed above. When the artist records a subsequent album, its costs will inevitably be charged against the prior album’s royalties as well, but the producer will not have to face this additional headache. Once that 125,000th sale has occurred, the producer is home free for all time and will get his or her share of every record sold, every DPD, every ringtone, every use on a compilation, synchronization in a film, soap opera, TV special, or commercial—even as the artist is wallowing in “debt” due to the right of the record company to recoup costs associated not just with that particular record but unrecouped costs related to both prior and subsequent records as well.
Whether this practice will continue or be modified in the future is something that will require some serious thinking on the part of artists’ advisors who specialize in this field and who understand all of the ramifications of the producer receiving “a couple of points.” It is endlessly surprising to me how many artists and their representatives do not understand the true significance of cross-collateralization provisions, or those affecting royalty calculations for producers. Perhaps when they do, the creative partnership may become a financial one as well. Meanwhile, since the industry still protects producer royalties from the application of any recording costs but those that he or she is involved in, the producer’s attorney should take steps to ensure that on a particular recording project (for example, an album), only those costs attributable to the portion of the album that that particular producer is working on will be subject to recoupment. If the producer has to wait for the artist’s royalties to accumulate until the entire album’s recording costs are recouped at the artist’s royalty rate, and the producer has either produced (or mixed) less than 100% of the whole album, or the record company has engaged other producers or mixers to fine-tune the work of the producer, the producer will have a long time to wait before receiving royalties “from record one”—if in fact they are ever received.
It should now be abundantly clear that being promised three points, calculated as producers’ royalties are calculated, is a lot more attractive than being offered nine points calculated as artists’ royalties are. To put it another way, the work/reward ratio is a lot more favorable for the producer, whose creative input and labor end once the recording process is completed, than for the artist, who must “work” the record for many months afterward, pursuing promotion, marketing, and touring efforts to bring the record to the attention of potential buyers.
PRODUCERS’ ROYALTY PROVISIONS: THE BASICS
Despite the basic disparity between the producer’s share and the artist’s share of royalties—which works in favor of the producer—there are a number of contractual snares and pitfalls that producers should be aware of. From the outset, the producer’s representatives must obtain a copy of the artist’s royalty provisions, without which they will have no basis on which to determine what the producer is supposed to receive. This is because once the number of royalty points is agreed upon, the producer needs to keep track of reductions for foreign sales, the definition of “net” sales, packaging deductions, etc.
Although producers customarily live with the provisions in the artist’s agreement, they needn’t do so if they have some leverage. Here’s the grandest bargain I’ve seen for producers with leverage: a base royalty of 5% of retail, with escalations; no free goods permitted; no packaging deduction; no TV deduction; full royalty worldwide (no territorial reductions); pro rata share (based on original artist’s rate without escalations, thereby keeping the percentage at its highest potential) of 50% of net digital receipts (as if a license); no format reduction; fee not recoupable as if it were an engineering fee; and an absolute payment from record one without delay as a result of the record label recouping recording and/or other costs. Ancillary uses such as promotional giveaways are a considerable source of licensing income, and even if the record company’s agreement with the artist denies the artist a share of that income, if the producer has any leverage, why be hoisted by the same petard? The artist’s negotiating position might have been weak, the artist or the artist’s representatives careless or not assertive, or perhaps the artist’s representatives simply decided that it was not financially sound for the artist to pay the legal costs of fighting for absolutely everything in an eighty-page agreement. The producer need not suffer the same consequences.
It should be a given that the terms of the contract with the producer be clear to all concerned—artist, producer, producer’s lawyer and manager, etc.—and that all agree on what the deal is. But you would be surprised how often this is not case. For example, did they agree to a royalty of 3% of retail, going to 3.5% at 500,000 units and to 4% at 1,000,000 units? Did they agree on the correct number of tracks? Did they agree on whether the producer would do the mix? Did they agree on whether the record company can reduce the royalty if the company brings in another person to do the mix? The remix? Does the producer realize that all recording costs in excess of the agreed-upon budget may be directly charged to him or her? Will the producer’s royalty be paid after recoupment of recording costs attributable to his or her production only, or will it be paid after recoupment of the total recording costs on the album? Will the producer receive royalties directly from the record company, and has the record company formally agreed to this? Or has the record company simply acknowledged receipt of a letter of direction requesting that it honor the request of the producer—which has become the customary way record companies have chosen to deal with this issue. This latter point becomes relevant when a record company refuses to honor the letter of direction. Most often, this occurs when an artist renegotiates his deal with his record label and receives a high advance, only to see record sales dive. The record companies have been known to tell the artist, “Pay your producer out of your high renegotiation advance.” Unfortunately, the artist has often spent it. Too bad. The artist owes it, however, and suddenly the producer, for the first time in his or her memory, perhaps, is at risk. It used to be that record companies would provide the producer’s services as part of their A&R function; now they disclaim any responsibility whatsoever.
The following sections cover some of the important contractual issues the producer and the producer’s representatives must be aware of.
The Producer’s Share of Renegotiated Royalties
An artist’s royalty provisions may—no, will—be modified upward once the record agreement is renegotiated. If the improvements are retroactive, it is important that the producer-artist agreement allow that improvements in the producer’s royalty be made along with improvements in the artist’s royalty—especially because the renegotiation will presumably have occurred, at least in part, because of the success of the record that the producer produced! Increased royalties may also be the order of the day upon a record’s achieving certain sales levels. For example, if a record is a success, and the artist’s royalty increases, from, say, 12% to 13% at 1 million units, does the producer’s percentage dip from his 25% ratio to three-thirteenths, or 23%? While this is 23% of the total, it is only 30% of what the artist receives, a 10% decline from 33
.33%! It might surprise you that this is exactly what happens unless specific provision to the contrary is made in the producer’s agreement. Some reward for success! This would be a good place to vary the tenor of this chapter, in which I have been highlighting the advantages that a producer has over the artist. When the producer is indeed an experienced, successful producer, and the artist is not, my resistance to the inequality of the financial relationship between the producer and the artist fades. In this instance, there is no reason why such a producer cannot seek a better deal than the artist has, particularly when the artist is new and his or her recording contract reflects only the most minimal royalty and other terms. For, as we have seen, a “better deal” does not mean just the differential in the respective royalty rates, but the means by which it is calculated. There is no need for a famous producer to accept some of the “new artist” terms in a record deal such as a half-rate for sales in Europe, or a controlled compositions special rate for his or her songs.
New Technology
In the area of digital or new technology, it is not unusual to see provisions establishing that a producer’s share of the royalties on such uses be calculated according to a specific percentage of the total. The figure 16.67% is one that is often used, and it is obvious that the result will be an overall reduction from the 33.33% of the artist’s share cited above.
This 16.67% (or any other number used) is totally arbitrary, and can have dramatic impact on what the producer gets from ancillary sales of records, which, in the Internet age, may actually constitute a greater percentage of total sales than those through normal retail channels. Recent producer agreements have been quite innovative in ways to reduce the producer’s share of income derived from digital downloads. I have seen as much as a 30% reduction in the producer’s royalty share. Sometimes I think that the record companies, or the artists’ attorneys, insert these provisions just for the hell of it. There certainly is no justification for them, and as the gross share of income derived by virtue of digital downloads has increased geometrically in recent years, producers’ attorneys should be on the lookout for such provisions. Too often, by the time the producer’s attorney gets to the bottom of the royalty provisions, his or her eyesight, let alone consciousness, is blurred and these kinds of provisions slip through the cracks.
Delays
Sometimes the negotiations on a project go on so long that it is appropriate to ask that a start-up advance (customarily 50% of the total producer’s advance against royalties) be paid to the producer even though the paperwork is not complete. One reason negotiations may be dragged out is uncertainty on the part of the artist—or record company—as to the number of tracks for which the producer may be asked to perform producer services or that he or she may be asked to mix. The producer should not be penalized for this uncertainty. Recently, the parties have begun to favor a short deal memo to get things started.
Pro Rata Royalty Share
Customarily, the producer will receive a pro rata share of the total royalty, depending on how many tracks are produced in relation to the total number of tracks on the album. Note, however, that whatever percentage is decided upon can be the subject of heated renegotiation later. For example, suppose the one track that the producer produces is the track that “makes” the record. I recall a situation when a movie soundtrack was released and the only track of any significance was the title track to the film, which was a big hit in and of itself. The record company sold millions of albums, and the artist and producer’s brilliant track was dealt with as if it were merely one of a dozen of tracks on the album. There is no rule that says the track cannot bear a royalty as if it were five or six tracks on the album. At least this way, the track will earn money for the artist and the producer commensurate with its real value. (The soundtrack to Foul Play, starring Goldie Hawn and Chevy Chase, contained “Ready to Take a Chance Again,” which was the only important song in the film—or on the album. Barry Manilow sought—and received—royalties as if the recording represented 50% rather than 10% of the album’s content.)
If the number of tracks to be produced is indefinite at the time of negotiation, the producer’s agreement (or deal memo) can take into account the uncertainty by including a series of contingency provisions, reducing the total royalty base on which the producer’s royalty is calculated by, say, 5% for each reduction in the producer’s contribution by one track. For example, if ten or more songs produced by the producer appear on the album, the royalty will be calculated and paid on the basis of 100% of the base royalty (for example, 3%, going to 3.5% at 500,000 units and to 4% at 1 million units). For a nine-song contribution, the royalty would be calculated and paid on 95% of the base royalty; for an eight-song contribution, the royalty would be calculated and paid at 90% of the base royalty; etc. This is only an example. There are innumerable permutations, and the relative strength of the producer and the artist must always be taken into account when concocting the formula to be used. The point is, producers should not be penalized and have their royalties reduced by the mere addition of “filler” tracks on the record which do not bear any qualitative comparison to the tracks that they have produced.
A-Side Protection
A producer who has not produced all the tracks on an album does not want the track or tracks he or she has produced to lead the sale of a single or a CD single (which might contain more than two songs) and receive merely a pro rata share of royalties based on the total number of tracks on the particular recording. Customarily, when a producer produces the great majority of tracks on an album, or when he or she is a “star” producer and is brought in to produce only one or two key tracks, that producer is afforded what is known as A-side protection. This means that if the producer’s track is on the A side (that is, the featured track on a record), he or she will receive a full royalty without regard to whether other tracks that the producer is responsible for are incorporated onto the B side (or, in the case of CD singles, the B or C sides). Producers may even insist on language in their contracts providing that their track(s) not be included on the B side, in the hopes that the track(s) will be contained on the A side one day. If a producer does insist on A-side protection, the record company will ordinarily counter with a demand that if another producer seeks A-side protection for his or her track, and if the first producer’s track is on the B side, the first producer will receive nothing for that B side. It is important for the producer’s representative to understand what is actually going on in the studio—how many tracks are being recorded, whether the artist or record company intends to bring in another producer to record additional tracks, etc.—so that he or she will be in a position to negotiate this provision effectively given the particular nature of the recordings that the client is making in relation to the album as a whole. This entire area is of steadily diminishing significance in the digital era—with the exception of the occasional CD single.
Credit Provisions
There need to be provisions setting forth the credits to be accorded the producer—size and location on the CD, back cover, liner notes, etc. One thing that is often carelessly handled is the nature of the credit when the producer is providing his or her services through a service corporation. If the producer’s services are being furnished by the producer’s corporation, it would be inconsistent for the CD to carry a simple credit, “Produced by [Producer’s Name].” If the words “For [Name of Service Corporation]” were not included, the IRS could infer that the producer’s claimed tax position, that of being employed by a corporation, was not true. There can be nasty tax consequences as a result of this apparently innocent lapse. Therefore, the contract provisions relating to credit must take this into consideration. Of course, some producers, like artists, do not want to appear too “corporate” and are willing to take the risk.
Producers may also want to avoid the situation in which their names are connected to a particularly goofy corporate name in credit lines and in advertisements. Presumably, they want their wor
k to be taken seriously. This is not as easily achieved when the credit reads, say, “Produced by [Producer’s Name] for “Take the Money and Run, Inc.” Producers should make sure that provisions are included stating they will receive credit in every medium they might wish or expect and in a reasonable size and typeface. Nothing is more disconcerting than for a producer to open Billboard and see that no producer credit is given in the full-page advertisement celebrating the record’s release—or platinum achievement. And don’t neglect consumer ads. Rolling Stone (not considered a trade magazine), People, Vanity Fair—all are consumer publications that can reach the artist’s potential audience, and there is no reason to leave out the producer’s name from those ads, which will most certainly be read by industry professionals. Yes, they do read things other than the trades.
Producers might also want to consider requesting that their credits not appear with respect to mixes or remixes by third parties, or that their names as producers be retained but not as mixers. Only a provision to this effect will assure them of the right to remove their name in such circumstances.
Audits
As stated previously, the producer’s royalties are dependent on the artist royalty provisions. Therefore, the producer’s representatives must have an unredacted copy of those provisions in order to be able to determine what the producer is supposed to receive.
What They'll Never Tell You About the Music Business Page 27