Few artists would want to be considered to be “in business” for doing what they do, but like it or not, as soon as you get paid for it, you’re a sole proprietor. For artist-entrepreneurs, the art lies in the creative process – those endless hours working your fingers to the bone, trying to get that sound out of your head, and into others’ ears. Everything else is business. For a record label, owning the rights to do what you need to make your business viable is the key… and ambiguous contracts will come back to bite you in the long run. In this post, I’m going to talk about one of the first high-stakes legal issues a label and recording artist will face – the record label contract.
A contract is a binding agreement where two parties exchange something of value, called “consideration”. The artist gives up certain rights to their creations, while the label helps you get it to market, and hopefully you both make money. Contracts are rarely an issue when everything goes according to plan… but if things go sour, you can bet your bottom dollar (or, pay it to a litigation lawyer…) that the label will use the contract to get as much for itself as it can. So, it is soooooo frickin’ important to understand what you’re signing, and agree to all of it before you sign it.
Contracts are a two-way street – a business relationship that relies on trust, and common interests to succeed. Therefore, there’s almost always room to negotiate – to remove things that you don’t like, and add in things that you want. You may be really good with keys and chords, but not so slick with the legalese – so it’s a smart idea to get a lawyer to help you interpret and negotiate the contract. The best time to look for a lawyer is at the start of your career, before you go too far down the road on the business side of the game. A little money spent at the outset can save you a ton of heartache, expense, and lost income down the road.
More on contracts in this other blog post…
Record label contracts
Every record label contract is different. Major labels may use a 50-100 page document, while indie labels might be as short as 5 pages. The gist of them is the same – the artist sells rights to exploit their songs for profit to the label, in exchange for a cut of the profits. In return, the label puts its money and influence into recording and promoting the album. Record label contracts typically include:
- Term & territory
- Rights & exclusivity
- Money – royalties & recoupment
- Creative control
- Release commitment
I’ll explain each of these in turn.
The duration of the contract. It’s usually a fixed term (perhaps one year), during which time the artist must produce a certain number of tracks or albums to a reasonable standard.
Multi-album, multi-year deals are usually not set in stone. Typically the contract will cover the first year and first album, and give the label the option to extend it for successive terms. If the first album does well, the label will likely use its option to extend for another. If it tanks, the label probably won’t extend, and may drop you. Most labels won’t make a firm commitment to release anything beyond the first album.
It’s a good idea to set a “long stop” – or a maximum number of years the contract can run for. This gives a successful artist (as labels will likely only keep successful acts) a chance to negotiate a better deal down the road. Six or seven years is advisable.
Even after the term of the contract ends, the record company must continue to pay royalties for the artist’s work it sells.
This is the geographic area that the label has the right to exploit the work for profit. Most deals these days are “worldwide” or “universal” thanks to the internet. Smaller labels may buy only North American rights, or for certain countries.
Just because the label has rights worldwide doesn’t mean it has to release the work worldwide. Think practically about the reach of the label, and whether or not it can actually push the work in the whole territory. If not, it may be worth carving some areas out of the territory in favour of a local label or distributor, or having the label give up its rights where, after a period of time, it doesn’t release the work.
Rights & Exclusivity
Rights are what the artist sells – or rents – to the label. These may include:
- Assignment of copyright
- Ownership of masters and unreleased tracks/versions
- Use of name and likeness; merchandise
- Mechanical rights – who owns the underlying work?
- Profits from off-stage sales
An exclusive right to the work means the label may exploit any recorded performances during the term of the contract – albums, concert videos, live recordings, etc. The artist (or any member of the group) may not record any material for another record company.
Some acts may sign under a specific stage name, which could leave them free to contract with other labels under a different pseudonym.
If the artist wants to do outside projects, such as making guest appearances with another act, a “sideman” provision should be negotiated.
Show me the money!
For the artist, the financial terms of the contract are some of the most important. They can get pretty complicated, so this is where your lawyer and accountant earn their keep. 80% of acts never sell enough albums to see a cent of artist royalty payments, so understanding the math how much will need to be sold for the artist to earn a profit is ever so important.
At its simplest, the math is:
(Artist Royalties) – (Recoupment) + (Mechanical Royalties)
Royalties are the act’s cut of the profits. There are two types:
- Artist Royalties – money paid to the act for its recorded performances – usually defined as a percentage of the sales price (typically between 9-18% of retail)
- Mechanical Royalties – paid to the publishers/songwriters for the underlying composition
Royalties for music videos, secondary uses (like commercials or movies), and live performances are sometimes included as well. If you want to be certain who owns them, put it in writing.
The money paid to the artist when albums are sold, usually a percentage of the wholesale or retail price. 9-18% of revenue sounds alright… but that’s a gross percentage, not net. The label will deduct every expense that it can – recording costs, reserves against returned albums, free goods, packaging costs, and often pay only reduced royalties for foreign, discounted, and TV sales. The artist is usually expected to pay the producer royalty as well, which is usually around 3% – but shouldn’t be on the hook for income advances paid to the producer.
After all of those deductions, the artist has to pay back the label’s costs out of the artist royalties, known as “recoupment”. Once the label recoups all of its costs, the artist gets paid the excess. I’ll talk recoupment in a bit… but long story short, 80% of acts never see a penny of artist royalties.
The record label has to pay the songwriter for the use of their songs. Mechanical royalties are not recouped, and shouldn’t be cross-collateralized either (below). That means the songwriter gets paid on every song or album sold. For most singer-songwriters, this is the only payment they’ll ever see. Outside writers get paid first.
Mechanical royalty clauses usually limit the number of songs mechanical royalties are paid on, and the per-song amount the label will pay.
Record labels often spend a bunch of money to get an album to market, which the artist pays back through its artist royalties. Once all of the costs are paid, the artist royalties start being paid to the artist. These costs include:
- Advances – money paid by the label to the artist up-front to cover cost of living, management commissions, legal fees, etc.;
- Recording costs, which are either a budget or a fund to cover studio time, production, mixdown/mastering, etc.:
- Budget – a guaranteed minimum amount. If it’s not spent, the label keeps the money; or
- Fund – an amount is set aside for recording, and anything left over is paid to the artist when the album’s done;
- Tour support – money spent by the label to promote the tour;
- Video production costs – are typically paid 50% by the label, and 50% recoupable from artist royalties
These costs are “non-returnable” – which means that if the album doesn’t earn enough artist royalties to pay for the costs expended, the label takes a loss. The label’s other costs – manufacturing, advertising, promotion – should be wholly paid by the label. That’s why it gets its 82-91% cut of every album.
Some labels reach outside of industry norms to find creative ways to get the artist to reduce the label’s risk on an album, including:
- A clause in the contract that makes the money “returnable” – meaning that the artist must reimburse the label for the entire cost, and
- Recoupment from other sources – such as mechanical royalties or through cross-collateralization (below).
Both of these are exploitative, and certainly not standard industry practice.
Now, musical interlude:
Cross-collateralization allows the label to use royalties from one contract (such as publishing, production, other mechanical licenses, or a separate album-by-album deal) to recoup its costs from another.
How much can the label tell the artist what to do? Usually singer-songwriters have more creative control, while groups assembled by a label will get less. Creative control could mean the right of approval, the right of consultation, etc. Creative control rights include:
- Videos – song choice, concept, budget, editing
- Producers and remixers – who, costs, royalties
- Song selection – what gets recorded, and what goes on the album
- Use of the act’s name and likeness
- Marketing & merchandise
- Secondary exploitation – commercials, movies, etc
Unless it’s stated otherwise in the contract, once the contract ends, so to does the artist’s creative control over the rights they’ve given up.
What’s the use of putting together an album that nobody will ever hear? It’s often worthwhile for the act to get a firm commitment from the label to make a meaningful release of the album in the territory of the contract, including a minimum budget. If not, the artist may buy back the masters.
So, those are the nuts and bolts of record label contracts. Often there’s a lot more to them, and there’s a ton of little things that can come back to bite you – whether you’re a label or an artist. As with any contract, it’s a smart idea to get a lawyer to help you write or review it, and most importantly to understand what it is that you’re signing. I happen to know a guy… 😉
Lawyer Stuff 101 – Contract Negotiations | Small Business Law
[…] been harping a lot on contracts lately – generally, and for record labels – since it’s a big part of my practice, so the process of birthing a contract seems a logical […]
Very good and informative article!
Out of curiosity what usually happens if the contract has a cross collateralization clause and the artist still owes $$ by the time the contract term is over? Is that still debt to be paid? Thanks
To answer your question, it would depend on what was agreed to in the contract in general, and the cross-collateralization clause in specific.
Generally, cross-collateralization payments would be tied to revenues for the songs/albums produced during the term – whenever that revenue is made. Even after the term of the agreement expires, the label and the artist continue to split future revenues. If I were writing the contract for the record label, I’d write it in a way that made sure that the payments would continue.
If you’ve got questions about a specific contract, drop me a line at [email protected] and I’d be happy to help!
Hi, in the case of a termination of a verbal 50/50 split contract between an artist & cowriter/one man label who has the right to exploit a recording which was funded by both parties? Can both parties exploit the recording & have it for sale diditally & hard copy to regain costs when there is no agreement reached after the termination? Thanks, John
Hi John, thanks for your question. 50/50 can be interpreted in different ways – you could each have the right to exploit it individually (as in equal rights in the property)… you could each have a right to 50% of the profits of any exploitation by either party (equal rights in the profits)… one could have rights in the eastern hemisphere, the other in the western… one could own the first half of the song, the other the second half… maybe all of the above? 50/50 is pretty vague on its own.
Without anything in writing, how future exploitation of the work would be divided is probably best based on how such exploitation was dealt with in the past. If you drop me an email, I might be able to help choose a reasonable and legally sound way forward…