Deals, Deals, Deals

By George Howard, Read more articles at Artists House Music or follow George on twitter @gah650 

Even as artists increasingly either release their own records, or work in partnership with their manager to do so, there is still a need to understand both the historical and emergent types of deals.  This article presents a framework that delineates the differences between the most prominent types of deals.  Future articles will look more closely at the contractual elements of each.

The Royalty Deal Type 1: The Copyright Ownership Deal  

The most common type of deal that artists were offered emerged from the era when artists needed the label to pay for the creation of their recordings.  In a pre-ProTools era it was inconceivable for an artist to make a competitive recording on his or her own dime.  Similarly, artists were reliant on labels for distribution and promotion.  

Grant of Rights

The artists thus trade the rights to their master recordings in exchange for the funds needed to create a recording, and for the promotional dollars and expertise the labels offer.  Remember, the labels control the copyrights to the versions of the songs they release on the album (as signified by the (p) copyright mark); the writers maintain ownership of the songs used on the record (as signified by the ©), and license the songs to the label via a mechanical license agreement.

Term

Up until the early nineties (and, to a degree, continuing today) the vast majority of these exchanges were perpetual.  Meaning, the artists assigned the copyright to the versions of the songs (not the songs themselves) the label release to the label…forever.  

Royalties

The label attempts to exploit the compositions embodied on the record, and pays the artist a percentage of the profit (if any) after certain expenses were paid back (“recouped” in label parlance).  In these types of deals, recoupables are typically limited to advances and some or all costs associated with independent promotion or publicity. 

Typically, the labels pay the artist somewhere between 10 and 20% of the suggested retail list price (srlp).  Thus, if an artist had a “12 point deal” with a label it meant that for every record that was sold at a list price of (for easy math) $10, the artist would theoretically receive $1.20 from the label as an artist royalty.

I say “theoretically” because the labels put in all sorts of deductions (packaging, free goods, etc.) to limit both the percentage paid and the number of records that earn royalties.

Options

As stated, the labels would have the right to exploit these masters in perpetuity.  Additionally, the labels would often have options on future records.  In other words, the label would have the exclusive right to determine if they (the label) wanted to release future records from the artist.  Typically, the label would have anywhere from two to seven options that, in their sole discretion, they could elect to exercise or not.

Territory

The labels would also typically have the exclusive right to exploit the signed artist’s work throughout the world (or universe).

While there are a ton of other elements in an artist contract with a label, the above represent the most material terms.  This template, with little deviation, was the dominant one for decades.

 

The Royalty Deal Type 2: The Term Deal 

One deviation from the above emerged simultaneous to the popularization of ProTools.  As artists began to be able to record high-quality masters at greatly reduced costs, the value exchange between artist and label became strained.  Artists no longer needed the labels’ money to record, and while they still needed the labels’ promotional money and expertise, the artists became increasingly unwilling to part with masters they themselves had funded. 

This dynamic led to far more so-called licensing or term deals.  In these types of deals, the artist grants the label the rights to exclusively exploit the recordings for a set period of time.  At the end of the term, the rights to the recordings revert back to the artist.  The artist may then re-license them, sell them, or exploit them herself.

This deal is obviously an attractive deal for many artists, as, beyond the financial implications, it also represents a sort of moral victory for the artist who is reluctant to forever part with his or her work.

The caveat, of course, is that these deals tend to have little or no advances associated with them.

Beyond these differences, the Term Deals operate essentially in the same manner as the Copyright Ownership Deals outlined above; that is, there are clauses for royalty, territory, number of options, etc.

 

The 360 Deal

While the license deals may have represented a move towards a more balanced label/artist relationship, the 360 deal represents a decisive shift back towards labels as acquirers of all rights.

The 360 deal is a Copyright Ownership deal where the label has rights in not only the master recordings, but also in ancillary rights that artists typically kept sacrosanct; such as, merchandise, revenue from touring, and publishing.  

The labels’ argument is that as a result of their exploitation of the artist’s master(s), they increase the value of the artists merch, ticket sales, and publishing, and, thus, should participate in the revenue from these elements.

The problem with this argument is that few if any labels have competencies in the area of merch or tickets.  With respect to publishing, there are a host of conflict of interest issues with respect to a single entity controlling both the master and publishing rights of an artist’s work (these are not insurmountable, and there are benefits, at times, to a “one-stop” publishing/master relationship, but such situations are not without their challenges/potential for conflict).

These 360 Deals have become de rigueur amongst the majors; if you want a major label deal, this is what you will be offered. All other deal elements are consistent with the above with respect to term, territory, and royalty.

 

Net Profit Share (NPS)/Joint Venture (JV) Deals

 On the other end of the spectrum are deals seen with increasing frequency in the indie world, as well as between investors and artists.  These deals, often referred to as JVs, but more accurately described as Net Profit Share deals are typically perceived as more artist friendly than any of the above-mentioned deals.

In these types of deals, the artist typically delivers a finished master to the label.  The label pays a small (if any) advance, and then spends money exploiting the master. 

In these deals, the label recoups all expenses associated with this exploitation (remember, in the deals above, recoupment typically tends to be limited to advances and money spent on independent promotion and publicity).  This means that every dollar spent — for postage, manufacturing, advertising, etc. — is all recouped prior to an artist royalty being paid.

Once this money has been recouped, the label splits the profit — on a net basis — with the artist.  Meaning, if the label spent $5000 to exploit the master, and they recouped this $5000 through sales, at the very next record sold, the label would divide the profit after expenses with the artist.  So, if the cost of goods sold on a per-record basis was $3 (for manufacture, marketing, etc.), and the label received $10 from the sale of the label, they would remit $3.50 to the artist and keep $3.50 for themselves.

While these deals do seem more equitable on the surface, it’s important to keep in mind that few records recoup even when limited to advances and costs of independent promotion/publicity, and thus when you factor in all the other costs associated with exploiting records it can be very challenging to recoup all of the costs.

There are two other important elements to consider with respect to these types of deals: ownership of the master, and mechanical royalties.

You must define who owns or at least controls the ownership of the master during the term of these deals.  Otherwise, issues will arise with respect to what happens if, for example, a larger label wants to buy out the record or the label, etc.

The mechanical royalty issue is more complex.  In all of the deals presented here, the labels are simply licensing the rights to manufacture the copyrighted songs of the writer on the label’s record (or download).  This is accomplished via the use of a mechanical license agreement.  Unless waived by the writer, the label must pay the writer a mechanical royalty as soon as the first copy of the record (or download) that contains the copyrighted songs of the writer is sold.  In other words, the label can’t wait to recoup their costs prior to paying mechanicals — they must pay from record one.

These issues aside, these deals are increasingly common outside of the majors.  Whether you are a label or an artist, you will likely present or be presented with this type of deal.

 

Summary

There are infinite variations to the four principle deals presented above, and future articles will explore in more specific detail the elements associated with each, but understanding the key distinctions will allow you to make better informed decisions, whether you are offering an artist a deal, or being offered a deal.

 

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George Howard is the former president of Rykodisc. He currently advises numerous entertainment and non-entertainment firms and individuals. Additionally, he is the Executive Editor of Artists House Music and is a Professor and Executive in Residence in the college of Business Administration at Loyola, New Orleans. He is most easily found on Twitter at: twitter.com/gah650

Comments

[Cesar Regino]

Waht about the new Digital Music Outlets? Tuencore, CD Baby, Ditto, etc....? How fair are they? Thanx.

[Harry Broker/aquablauw, Google search me!]

Cesar Regino,

Your answer? Just collect your part from tunecore and keep selling your songs. Too much, mumbo jumbo and other parties involved. Collect your 100%, nothing to deal with others...I do....Tunecore is my baby! That means, I am a recording artist and A&R Executive of my own company, "CrystalClearProduction/Tunecore". Now I have the power, to even sign up my neighbor to my own label, so to speak. Forget all the above mumbo jumbo.Enjoy, selling your songs.

[RM]

Suprisingly sloppy Journalism! This statement is entirely false:

"In a pre-ProTools era it was inconceivable for an artist to make a competitive recording on his or her own dime."

Shamefull to find a quote such as this in an article pretending to present a "historical context".

[Ryan Nagy]

I'm enjoying these posts. I'm not a musician but publish my own educational mp3's and find that your various post give me a lot to think about.

As an aside, I'm surprised when others in my field insist on creating and selling physical CD's when digital downloads are much more profitable and sell better.

- Ryan

[Aaron Hill]

Great Article and accurate info!!

[Nilda Fasoule]

My main issue with the standard "NPS / JV" type of deal as presented here, is that while labels recoup all of their expenses from promotion, the artist who paid all recording expenses up front does not recoup theirs.

[Jeff Price]

@Nilda

For food thought on the other side of the coin. The label incurs the costs of their rent, employee salaries, healthcare, taxes, phones, internet that the artist does not have to pay for.

In addition, when the music sells, the artist most likely makes more money than the label - that is, the artist gets 50% of the revenue from the sale, plus all the other revenue that comes in from the promotion of the recordings. The songwriter makes money as well.

If the release does not recoup the money spent, the label has to singularly eat the entire loss (i.e. the band will not be sending the label a check for half of the loss) and the band could still conceivably make money from other things (like gigs, t-shirts, public performances etc) that the label does not get to participate in.

But the bottom line is, you are right, the deal should be equitable and fair and have both sides feel good about it.