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Negotiating a record contract

Article from The Mix, August 1994

Don’t sign a thing until you’ve read this

Your first hit is breaking, you need a record deal - and fast. You don't want to end up like George Michael but you haven't time for a law degree. Sounds like a case for legal beagle Wayne Wadhams

Before any first-time recording artist sits down to make a deal with a label – large or small – a good deal of research, preparation, and homework needs to be done. Every recording contract is a significant career decision that can affect – for better or worse – the most creative years of an artist's whole career. Spend some time and money to make sure the contract provides a clear path to the future, with a minimum of potential pitfalls.

Career strategy

What kind of life do you want to have a decade from now? Solid touring, 200 dates a year, à la Squeeze? That's a lot of gear-toting travel. Or would you rather be writing film scores and commissioned pieces, working at home near the family?

How can setting priorities affect your contract negotiations? Simple – figure out what kinds of deals will help you achieve your goals and what kinds won't. The scale of money involved, length of commitment, amount of control relinquished to a label or manager... such parameters can lead you directly toward or away from your real goals.

Think of a couple of artists who are reasonably successful in your genre of music. Now find out about how many units each of their albums sell. The best way is to talk with buyers at major record stores. Sure there are runaway hits from time to time in almost every area of music, but these are unpredictable.

In "grunge," a Nirvana might sell 500,000 units on each release, but they've been the only ones. The likes of Tad or Jesus Lizard, probably only achieve sales of 80,000 units on a new release - just enough to recoup their recording costs. By comparison, many small jazz labels would call sales of 15,000 units a big hit for top-name traditional artists. The point is, get happy with the size of the market for your kind of music. It won't change much.

Aim for the top

The six major labels (Sony, WEA, BMG, EMI, PolyGram, MCA) are big financial engines. Anything they release requires input from the same executives in the same high-rent offices, using the same art departments and national sales structures that enable them to sell millions of copies of hit rock or rap albums. They need real hit makers in each type of music. Subtle or esoteric artistry, especially in first-time acts, does not pay their bills.

Nevertheless, you should submit to majors for several reasons. First, if your music can sell big, nobody can sell more of it than a major label. Second, if your long-term goal is to be on a major, make sure they hear your name as often as possible – on tape, in print, etc. Third, being ignored or rejected early on will help you develop the thick hide it takes to persevere. The rejections aren't personal, just business judgements about the size of your audience each time you submit. So keep submitting until something happens.

Small label legwork

Now it's really time to do your research. Go to a big record store with a list of other artists in your style of music, find their latest releases, get their manager's name, or the label name and address. Ask the store's buyer which labels work hardest for their artists. Find out which labels set up in-store appearances for their artists; and help artists get out on tour and meet radio personnel. If a label scores poorly in any of these areas, you will know what to ask for if you wind up talking seriously with that label.

When presenting your promo package, look like an artist who is going to make it with or without the label you are approaching. If you're getting good gigs, good reviews, playing festivals, and finding opportunities to open for bigger artists, then the label would be stupid to pass you up. You already look like a future money maker!

Copyright your material, the songs, and any master recordings you've made. This prevents them from being stolen – intentionally or otherwise. If you don't, you risk everything with each submission.

It may be worth taking legal advice about matters such as recording budgets, and contract terms you should insist upon or guard against. With these in hand, preliminary discussions with any label will tell you whether their deal is right for you.

Presuming that you have made a master tape for submission, you need to know what each label might have spent if it had signed you first and commissioned that tape. There are several "retail" prices associated with a master tape, depending on the size of the label.

Real world recording

If you are a rock artist, a major label might have spent £70-£100,000 to make the finished album you are presenting. The fact that your album is ready to buy with no risk about its quality is worth a lot if the label likes it. [Remember, among other things, that the majors are under contract with the Musician's and Singers' Unions to pay everyone on their releases at scale rates.] At the other end of the spectrum, a local rock label might only have spent £10,000 for virtually the same product.

Say you actually spent £12,000 on the masters and a well-known indie label that is distributed by a major wants them. Ask for £40,000 and settle for £30,000. Such labels normally spend about half the amount a major might spend to produce the same album. If the only label to make an offer is an indie distributed solely through regional indie distributors, ask for £25,000 and settle on £15,000. Whatever the label, they should pay for additional costs if they want remixes or changes.

For comparison, a major label might spend £20,000 to make a small group acoustic jazz album. Jazz indies rarely spend over £5,000 for such masters. Thus, regardless of what you actually spent – including high-end guest soloist fees – be ready to let your masters go at £3-4,000 to an indie, and maybe £15,000 to a major label.

Making allowances

Whether the label purchases or licenses, they will designate one so-called "all-in" royalty rate, i.e., one that includes artist royalties, producer royalties, and anything owed to third parties. On the other hand, if the label signs you and then finances the making of the album, they will most likely specify separate artist and producer royalty rates. Either way, the label wants to keep the total royalties paid to the same maximum.

Royalty rates, recoupables, and allowances are tough subjects because there are so many variables and "standard" ways of treating them. Obviously, a label would prefer to pay an artist the smallest possible amount at the latest possible date. Knowing this, let's work backwards, starting with allowances.

An allowance (or charge) is a percentage of sales that the label may deduct from total sales before multiplying net sales by the artist's royalty rate. In the era of the 78 RPM record, about 10 percent of all units shipped to stores got broken in transit, so all labels took a 10 percent breakage allowance. CDs don't break much, but some contracts still include such a clause. Axe it immediately if it turns up in a deal offered to you.

CD pressing, cover design, booklets, and jewel boxes are not part of the music, but are necessary to deliver the music to the customer. Most labels apply a 15-20 percent "packaging allowance" or "container charge" for the effort and expense of creating CD packaging (some specify 10 percent allowance for cassettes, or more than 20 percent for CDs if you insist on leather-covered jewel boxes or other so-called "special packaging"). If the only allowance that applies on your album is 20 percent packaging, the label will compute your royalties based on 80 percent of the gross receipts.

Royalty rates can vary widely, depending on the size of the label, type of music, the artist's past performance, and the accounting basis used by the label. Most labels specify royalty rates based either on "suggested retail list price" (SRLP) of all units sold, or on the actual wholesale pounds they collect when selling albums to distributors or stores. The SRLP is generally about twice the wholesale price, so a 20 percent wholesale-based royalty rate would actually pay an artist the same amount per copy as a 10 percent retail-based royalty.
An oft-overlooked protection for the artist is to retain the right to approve any extraordinary recoupable expenses – life-size placards for in-store promotion, or full-page ads in the music press at £10,000 a throw. Try for joint approval, you may get it in some categories.
Major labels expecting major sales can offer a new rock act wholesale-based royalty rates of up to 25 percent, with an extra point for each subsequent release, e.g., 26 percent for a second album, 27 percent for a third album, and so on. In SRLP terms, the starting royalty rate might be 15 percent, tops. The producer's royalty rate, paid separately, might be from 5 to 8 percent on wholesale, or 3-5 percent SRLP. Artist and producer royalties for other types of music will generally be a little lower. Thus, if you're selling a completed album master, you can try for an "all-in" royalty of at least 30 percent for rock, and maybe 26 percent for traditional jazz.

On a small indie label, artist royalty rates for rock acts may be 18 percent of wholesale, or 12 percent of SRLP. For jazz artists, these numbers drop to 15 percent and 10 percent, respectively. These labels often don't pay a separate producer royalty (assuming the act will produce itself or divert their royalty monies to a producer), an so in effect offer only "all-in" deals. If you predict a runaway hit, ask for a "sliding scale," – a higher royalty rate as your album achieves greater sales. You might get 18 percent of wholesale on the first 50,000 units, then 19 percent on units up to 100,000, 20 percent on units from there to 200,000, and so forth.

Recoup to conquer

Recoupables are any one-time expenses that the label makes on behalf of the artist or the album, which they recoup from the artist's royalties. Recoupables include personal advances given to the artist upon signing; the master purchase price or licensing fee if the label bought the finished album from the artist, or the full cost of producing the master tapes (including producer's fee) if the album is made after the artist signs; part or all of the cost of making promotional videos (the artist should pay no more than 50 percent of video costs in most cases); tour support (generally charged back to the artist in full); design costs for any special packaging or promotional materials (remember, these are taken as a separate allowance); and the cost of advertising beyond that done for every new album of its musical type (ask to be responsible for paying only 50 percent of special advertising costs).

"Royalty rates can vary widely, depending on the size of the label, type of music, your past performance, and the accounting basis used by the label"

Make sure you know how many free copies of your album are being given away to stimulate sales. Even copies sent to stores to "buy" window space or a featured location can be called promo copies, although the store will sell them. The real problem here is that if major artists impose limits of, let's say, 5 percent of all units manufactured that can be given away as promos, the label may give extra copies of your album away, to buy Metallica that front window display. Seek to limit promo copies to 10 percent of all units made.

All labels accept some records back from stores that ordered more than they ultimately sold. These are placed in what is known as a royalty reserve account. Such "overstock returns" are normally swapped for newer releases from the same label. With most indie labels, record stores demand the right to return 100 percent of their orders. But with majors, even large chains may only have a 20 to 25 percent return privilege. In either case, copies can be returned for full credit as long as the title remains in the label's active catalog.

Most labels set up a reserve account for each artist, withholding some of the royalties earned in each accounting period to cover future returns. Often, "standard" contracts allow the label to withhold 50 percent of each period's royalties, then dole them out over two years. Since a rock release that's not a hit may only be in the catalog for six months, and most returns will come back to the label within a year and will be limited to 25 percent of the units shipped, a 50 percent reserve and two-year payout is unacceptable. Ask for 30 percent, and a one year payout of withheld funds.

Penury to paydirt

In any contract with a label where an artist will make more than one album, the label will regard the whole effort as a single business venture. Thus, if your first album is a flop, and the second a hit, the label will want to take the losses from the first out of the royalties from your second. This accounting procedure, known as cross-financing, allows the label to take its losses from your royalty reserve account. This is the reason for high reserve percentages and long payouts.

Labels will rarely forego the concept of cross-financing and pay you separate royalties, deducting separate recoupables for each album. But by reducing the reserve account numbers, you can reduce the label's ability to cross-finance subsequent flops against earlier hits.

Publishing rights and reduced mechanical royalties. Some labels insist that if an artist is to be signed, he, she, or they must also sign a publishing deal with the label's publishing division or an owned or affiliated publisher. Furthermore, some labels insist that the artist give administration (copyright control) and 100 percent of the publishing income (which equals half of the total income from the songs; the writers receive the other half). Remember that songs are a separate entity from master tapes.

Global control

Ask two questions. First, are your songs likely to be later recorded by other artists or used in motion picture soundtracks? If so, the second question is, Will the label's publishing subsidiary really make an effort to get other artists, movie producers, and other parties to use your songs?

If the label's publisher does place songs regularly with artists and make sales to TV or film, you stand to earn a lot of extra money by letting them have 50 percent of the publishing rights (they won't take less, and must have administration). Don't give them the rights, but sell them for a publishing advance. How much? With a major label publisher and rock tunes, maybe £2,000 to £4,000 per song for 50 percent of the publishing. For jazz tunes, maybe £400 to £1,500 per song.

The amount depends on how hot the label is about your album, how much the publisher thinks the songs will earn from the initial release, and how saleable the material seems to be. A publisher will advance no more than half the amount it feels will come back through the songs' earnings on initial release.

Recording contract negotiation is a deep and complex subject. When all is said and done, however, you should view any proposed contract as the vehicle by which you and a label will conduct an extended business collaboration. Demanding too much financially from a label will discourage the label from working hard for you – they also have bills and salaries to pay.

Your goal in the negotiation is to figure out what the label can spend or pay in each category and to secure amounts or percentages that will satisfy your needs to create good masters. You want to be sure your label rewards you fairly if your record becomes successful, without letting anything get in the way of their promotion efforts.

Wayne Wadhams is the owner of Boston Skyline Records; an independent producer; and Professor of Music Production and Engineering at Berklee College of Music.

(This is an augmented version of an article that appeared in Berklee Today.)

Brewing under licence

If the label that wants your album can't afford to pay the appropriate "retail" price, license it to them. Licensing deals are essentially rental or leasing agreements, not much different to car leases. Majors and indies distributed by majors don't like to license. Smaller, cash-strapped labels often prefer to license masters because they can then put more money into promotion than acquisition.

For starters, the label should pay you a licensing fee, the amount of which will depend on the length of the licence (normally 3 years, minimum), the countries or "territories" in which they will release your album (don't grant world rights unless the label has good distribution worldwide!), and any other guarantees you insist on.

These may include release by a certain date, promotion expenses, and even the achievement of specified sales levels before the label can renew its licence. The important thing here is that ownership of the Masters stays with you, and if the label does not meet its obligations you can revoke the licence.

With these parameters in place, a licensing fee should fall between 20 and 40 percent of the amount you would receive for a retail sale of the masters to the same label. If you can find similar indie deals in other territories, a Japanese or German license might go for between 15 and 25 percent of your retail price, and other territories between 10 and 15 percent of retail. Be prepared to adjust your fees according to local tastes; Sade is still riding high in France, long after she peaked at home.

Thus, bit by bit, you might even amass more in licensing advances than if you had sold the masters outright. In addition, the royalties specified in each deal will be paid in full to you. If you had sold the masters to a U.K. label and allowed them to arrange foreign release, royalties from foreign sales are generally half the normal rate! The downside, however, is that dealing directly with foreign labels is slow and expensive, and it's hard to know if their sales reports are accurate — if they actually send any!

George Michael a case in point

Most musicians gave a sigh of resigned disappointment at the outcome last month of George Michael's 18-month contest with his label Sony. Mr Justice Jonathan Parker found in favour of the multinational conglomerate, and appeared to strike a terminal blow against what most of us vaguely yet fondly assume to be 'artistic freedom'. Michael's argument rested chiefly on those aspects of his stringent recording contract that could be construed as, literally, a restriction of trade within the EC - and his counsel, Mark Cran, invoked Article 85 of the Treaty of Rome as evidence. The judge, however, failed to be convinced that any of the original clauses of the pop star's contract - which he signed quite willingly, of course - had been breached. Furthermore, he saw the rewards that George Michael has already reaped from the music business to be a demonstration that the relationship between himself and Sony had worked successfully, and that working towards this goal was the reason he had signed the deal in the first place.

Yet the case is far from over. Michael's immediate declaration to appeal has been met with much optimism by his supporters, who feel that the EC aspects of his case are far from exhausted. There is even talk of Sony favouring a settlement that would release Michael from his contract, now that their point has been proved at the first of many potential hurdles. The whole thing remains at the very heart of the business of negotiating record contracts. One side has a signed document, the other a change of heart. Simply, neither side can ever know the future realities that will come to bear on the clauses in which they are putting so much - forgive us, George - faith. From obscurity to fame; from fame to... what? A record deal is a dotted line that will change your life like nothing else.

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Publisher: The Mix - Music Maker Publications (UK), Future Publishing.

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The Mix - Aug 1994

Donated by: Colin Potter

Coverdisc: Mike Gorman

Sound Advice

Feature by Wayne Wadhams

Previous article in this issue:

> Rhythm methods

Next article in this issue:

> The art of noise

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