A record deal may seem like the ultimate goal to an artist however all contracts (including record deals) contain a number of details which flow on to affect to what and how an artist actually gets paid. Sometimes a small detail in a recording contract can result in big affects down-the-line for an artist.
Because of this, it's vital to understand all aspects of a deal including royalties (and how they're calculated) and any costs (recoupments or deductions) that will reduce payments to the artist.
In addition, there is a difference between royalties of the recording artist and the royalties of the song writer. Sales of a recorded album or single relate to royalties for the recording artist. Whereas, the songwriter’s royalties ALSO come from public performances (when the song is played on the radio or in restaurants etc). This is often the key driver of why the singer/songwriter is usually able to buy a beach house well before the non-writing drummer in a band.
In the past, record deals have been very complex. Up until recently, my 3 year old had more chance of constructing his own IKEA bed than I had of accurately calculating royalty formulas in some contracts. Thankfully most deals now are more ‘straightforward’. Old formulas still survive and we will look at them in a later article. Let’s look at the more straight forward ones.
Royalty Calculations on record sales
There are many different types of royalties that an artist may receive for their work. Here we deal specifically with record sales.
The royalty payment depends on the math and how the calculation is made. Most record contracts are not straight forward “60/40” or “50/50” split deals. A customary royalty calculation takes into account fixed deductions, taxes, recoupment of expenses, the price of the product, giveaways and in some cases quite a few extras. This is why it’s so important to make sure you understand the royalty terms within a proposed record deal.
Whilst we are using the word “percentage” each royalty percentage is known in the industry as a point. So if the royalty percentage is 15%, it’s a 15 point deal.
Artists are paid royalties based upon a percentage of total record sales and those percentages will differ in each country. In the United States and the United Kingdom, artists will likely have a lesser percentage rate than in Australia. This is solely because of the different size of the market. Your royalty rate will also depend on a number of other things, including the company you’re dealing with and how their deal is structured, how much clout you have, the fine points of the deal and the deductions. You have to look much further than the rate offered.
Let’s say an artist has a 15% royalty rate. This does not mean that for a $20 CD the artist receives $3.00. Even under a basic royalty calculation, the reality is far from it.
There is a variety of different formulas applied. Here is one of the ‘simpler’ calculations we see.
Wholesale Price Calculation
The royalty rate is a percentage of the published price top dealer (PPD) otherwise called the wholesale price. It’s the price that the retailer pays to the record company for the product. Some companies may use the retail price but not many anymore. From the PPD, deduct the GST, that’s because you are never going to receive a royalty on the GST.
Sub total $13.64
Royalty per unit @ 15% $2.05
There you go, you can sign now. You will receive $2.05 for every CD sold. Wrong, if only it was that easy.
Now there are a few deductions that need to be taken into the account before the royalty rate is applied. Packaging is common, and in some cases some other items. Delivery charge deductions are less common nowadays, but can still remain and could be between $0.25 and $0.40 per unit. They could also be applied elsewhere. Look at the deductions carefully as they can make a massive difference to what looks like a generous royalty rate.
An archaic deduction to look out for is in the style of “90% of net sales.” This is the wisdom tooth of the old shellac records sales accounting for an arbitrary 10% breakage rate. They are still found in some contracts. Put a red pen though anything of the sort. The same can be said for any percentage deductions that allow for ‘free’ or ‘promotional goods’ in a contract where the royalties are paid on records “sold.”
An old trick in the industry was to provide retailers with 10%+ of free goods with an order. Because the goods were free they were not “sold” and as such no royalty was paid. Although they may have still been sold by the retailer, they were not sold to the retailer.
There will be a deduction for packaging in most major deals. The theory goes that the artist should only obtain a royalty for the album not the artwork etc. In the past, a common deduction was generally 25%. “Packaging” a digital album and a 10 sleeve physical CD doesn’t cost the same does it? If your contract has a standard percentage deduction for all packaging look at it closely.
Depending on the type or sale/product for deals with packaging deductions you will now may see different rates for difficult products. Whilst deduction rates do vary company to company and deal to deal, below is an example (and just an example):
Physical CD’s, cassettes, Vinyl 20% deduction
DVD’s and Videos 25% deduction
CD’s with more than 4 panel inserts 25% deduction
Records with more than 6 panel inserts 30% deduction
Digital Albums 0% deduction
Anything not covered above 35% deduction
Ultimately, the rate must relate to the royalty percentage. For example there is no use negotiating comparatively low packaging percentage deductions if your royalty rate percentage is also low. Our view is that the packaging deductions should be removed altogether in favour of a lower royalty rate. Some of our clients have done this and some have personally funded any non-standard packaging.
Having now discussed packaging deductions, let’s return to our example (15% royalty on a CD with a PPD price of $15) and apply the above standard CD packaging rate of 20%. Our calculation now looks like this:
Less 20% (CD packaging) ($2.73)
Sub total $10.91
Royalty per unit @ 15% $1.63
So the packaging deduction has reduced the royalty payment from to $2.05 to $1.63. And this is assuming there were no other deductions for delivery.
We said previously there is no such thing as a standard “60/40” or “50/50” split in a deal. They do exist particularly with smaller labels and digital only deals. They may seem simpler and clearer but they are not. A record company and an artist may have a deal that splits the net profits on a 60/40 or 50/50 basis after all expenses are taken care of. In this type of deal, all of the revenue is collected, the direct costs deducted and the “profits split.” These deals need to be looked at a bit more closely. They are easy to manipulate over time and require a constant cross check through the life of a contract.
They work like this: income from sales - the expenses = profit ÷ 50% = your royalty
Simple, No! These deals can be a mine field. The expenses taken into account could be some, all or more of the following;
• Producer’s costs
• Packaging and pressing
• Accounting costs
• Legal costs
• Staff costs (or a percentage of)
• Songwriter’s royalties
• Marketing, advertising, promotion
• Office and administration costs
You need to pay close attention to what is included in these deals such as staff, administration or office costs. There could be a service charge or an hourly rate applied for staff for the company. Likewise what is the marketing allowance and should it be included. Some artists have argued that marketing should come with the costs of doing business. After all, the artist is marketing the album by playing gigs and undertaking press commitments. If it’s a 50/50 deal, should the burden be shared 50/50? However if the company is putting up 100% funds for the album’s recording; production; art work; mastering; marketing and release it may say it is sharing the risk and burden and should equally share in the spoils.
Here, the entire royalty amount is also not likely to be paid in each accounting period. A certain amount may be held back for a period to allow for fluctuations over periods. For example, unsold physical CD’s that could be returned might result in a royalty hold back of say 20%. These split deals are more common in contracts that relate to digital releases only (and independents), because there is less investment required. The reality is that retail physical CD’s are still a major and important source of sales revenue.
And now for recoupments.
So we’ve looked at deductions, royalty calculation methods and split deals. So you can sign now. You will receive $1.63 for every CD sold. Wrong, if only it was that easy. We haven’t even gotten to recoupments. No matter what royalty rate is included in a contract it means nothing if the costs of the album have not been recouped (recoupments) and it is very rare that an artist will receive a cent in royalties until that happens.
You can read more about recoupments in our article: Record deals: how recoupments in recording contracts effect royalty payments from record sales. And make sure you do because they’re easily as important as royalties.
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