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MUC110.LEC6 Record Deals and Economics


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A Brief Overview of Record Label Deals and Economics

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MUC110.LEC6 Record Deals and Economics

  1. 1. Record Deals and Economics © 2007
  2. 2. I. I Royalty Payments © 2007
  3. 3. A Music Royalty Refresher y y • A Royalty is $$ payment based on a percentage of sales • A Royalty is NOT a guaranteed dollar amount • Royalties to Songwriters are different from royalties to Recording artists © 2007
  4. 4. A Copyright Refresher • Why are Royalties to Songwriters different from royalties to Recording artists? Ownership of underylying musical work/song • A recorded song h t d d has two separate sets of t t f copyrights •One set for the underlying “Musical Work” /Song One Musical Work •One set for the “Sound Recording” • Each set can (and, often,) does have a different set of copyright owners © 2007
  5. 5. Copyright Ownership Owners of music copyrights (typically) are: For th “M i l W k” F the “Musical Work” •Author/Songwriter •Music Publisher For the “Sound Recording” •Record Label •Producer; Producer/Engineer © 2007
  6. 6. Payments to Songwriters Songwriters gets paid via • Mechanical Royalties from album sales ( (via Harry Fox/Record Labels) y ) • Synch fees from placements in movies/TV/video (via Film/Video Production Companies) ( i Fil /Vid P d i C i ) • Performing Rights royalties when songs are “performed”/played in public (via PROs) © 2007
  7. 7. Mechanical Royalties •Mechanical Royalties are monies paid to Songwriters/Music Publishers for the use of a song in a recorded music product •Paid by the record company to the songwriter/ publisher - no recording charges deducted! •Songwriter/Publisher split the revenue (50/50; (50/50 75/25) © 2007
  8. 8. Mechanical Royalties • Mechanical Royalties are based on a "statutory rate rate" set by the U S Congress This rate is U.S. Congress. currently 9.1 cents per unit. • Record companies will often negotiate to pay less. Usually 75% of the statutory rate (6.85 cents); when th songwriter i also th recording t ) h the it is l the di artist. (aka "Controlled Composition Clause") • No Mechanical Royalties are paid to Recording Artists © 2007
  9. 9. The Problem for Recording Artists If, copyright owners are: • Songwriters/ Publishers • R Record L b l / /Producers d Labels/ /P d Where are the R Wh th Recording di Artists (who don’t write songs) in the don t copyright ownership mix? © 2007
  10. 10. How Recording Artists get Paid Recording Artists (performing other artists’ work) g paid via ) get • Union scale wages for time spent in studio • Recording Artist royalties from sale of albums; paid AFTER deductions of various recording costs © 2007
  11. 11. Recording Artist Royalties Recording Artists (performing other artists’ work) get paid via • Master use royalties from placement of previously performed recordings in Film/TV/Video; split 50/50 with Record Label and paid AFTER record label takes deductions • Digital Audio Transmission public performing royalties via S li i SoundExchange-Paid di dE h P id directly to l Artist; Artist may choose to split with producers who contributed substantially to creative product © 2007
  12. 12. Recording Artist Royalties from Music Sales • Negotiated with Record Labels; no standard or mandatory rate • A percentage of recorded music sales • Generally between 13%-20% of the PPD – Published 13% 20% Price to Dealers or MSRP; wholesale • “All In Recording Fund”- given to recording artist; artist All Fund must pay producer from this fund- typically, 3% © 2007
  13. 13. Recording Artist Royalties from Music Sales •Various deductions will be taken out BEFORE the artist is credited with royalties from the record label •Deductions include royalties due to producer and songwriter(s) © 2007
  14. 14. II. II Record Label Deals © 2007
  15. 15. Recorded Music Deals Overview There are various deal types for with respect to making recorded music: • Major Label Recording Deal • Demo or Development deal with a Producer or Record Label • Di ib i d l with a L b l Distribution deal i h Label • Production deal with a Producer •SSpec deal with a P d d l i h Producer • Others: 360 Deal; Joint Venture © 2007
  16. 16. Major Label Recording Artist Deal –Label signs artist to an exclusive recording deal –Label provides marketing, promotion, and distribution resources –Label provides an advance and recording fund to Label artist to make recording –Option is usually for 5 to 7 years –Average artist royalty percentage for the artist is 12% or 13% –Label retains 100% ownership of sound Label recordings Less common today © 2007
  17. 17. Demo Deal AKA “Development" deal: To test brand new artists & p help build their overall package – Record Label agrees to take new artists on for career development and to record 1-5 demo tracks – Record Label pays artists little or no money upfront – Artists may have to pay for recording session costs or label may provide nominal recording budget – Label may try to specify recording studio and producer for demo recordings – Labels will decide whether or not to “option” the artists for a recording contract after demo is done – Record Label generally owns the demo masters in masters, either case © 2007
  18. 18. P& D Deal Pressing & Distribution Deal also called a P&D deal: – Artist/independent label owns copyright to the recorded masters (sound recordings) – Label provides access to pressing & distribution – Label charges a “distribution fee” – Label provides little or no financial or marketing support – Artist/Independent label p y for manufacturing, p pays g, mechanicals, artist royalties, marketing, promotion, overhead, salaries, etc. © 2007
  19. 19. Production Company Deals Production deal with Record Label – Producer takes record label talent talent, develops sound, produces and records finished masters – Producer delivers completed master(s) ( ) to the record company – Producer receives a royalty on units sold and a negotiated fee for production costs © 2007
  20. 20. Production Company Deals Production deal with Recording Artist: – Producer helps artist develop overall sound – Producer produces and records demos for artist to shop to labels – Producer receives a fee for services and, may, takes a percentage of future record sales p g royalties and publishing (songwriting royalties) © 2007
  21. 21. Production Company Deals Production Company Spec Deal: – Producer takes on a new artist on speculation p – Producer develops artist from ground up; works to create overall sound and branding package of artist – Producer puts own money up to develop artist and create viable, marketable master recordings viable – Sells or “rents” master recordings to record label for finished sound recording projects Owns sound projects. recordings – Garners fees and royalties from Artists and Labels © 2007
  22. 22. Other Deal Types – 360 Deal: Record Label or Media Conglomerate takes a percentage of all of the artists’ revenue streams including live p g performance, p publishing, merchandising, g g etc. in exchange for more in-depth marketing and development – Joint Venture or Partnership Deal: Artist and Label share in both the total expenses and the total revenue streams. Profits and losses are often split 50/50. © 2007
  23. 23. Anatomy of a Major Label Record Deal •Record label deals are generally structured as a number of albums over a set period of p time with “option periods” for renewal •Recording Artists are given an all-inclusive “Recording Fund” to cover all recording costs for a recording •Recording Artists must create and manage total budget from “Recording Fund.” © 2007
  24. 24. Anatomy of a Major Label Record Deal Recording Artists are “paid” in several ways by the record labels: The Advance- lump sum of cash used to cover recording Advance costs and living expenses for artists during record production Artist Royalties from Record Sales- for your performance on the record; % of the money that results from sales of recorded music Mechanical Royalties from Record Sales if you wrote Sales- the songs you are recording; songwriting (mechanical royalites: % of the money that results from sales of recorded music m sic © 2007
  25. 25. Anatomy of a Major Label Record Deal • A “Recording Fund” is considered an advance g against future income • This sum is a LOAN only and is considered the property of the record label • This sum is 100% “recoupable”- The artist must pay back the sum from earnings from record sales (royalties) • Typical advances range from $50,000-$350,000 © 2007
  26. 26. Major Label Deal Economics $300,000 (Total Recording Fund) -200,000 (Actual cost to complete recording) 200,000 =100,000(Advance for artists) -30,000 (taxes 30%) =70,000 (final artist share of advance) ($17,5000 ($17 5000 advance split four ways) © 2007
  27. 27. Major Label Deal Economics: Royalties • After the album is produced and sold, the record label owes the recording artist their th i recording artist royalties di ti t lti • Recording artist royalties are, generally, managed via an account at the record label l b l • Before a recording artist receives any payments, the record label calculates typical deductions aka recoupables t i l d d ti k bl © 2007
  28. 28. Net Artist Royalty Rate • Recording Artist royalties are not applied to recoupables at a 100% rate • They are paid back at the “Net Artist Royalty Rate” Rate • Artist Royalty Rate 12% ( f wholesale/PPD) (of h l l /PPD) LESS 3% Producer Royalty LESS 10% Free (Promotional) Goods LESS other charges, i.e. Return Reserve Account Foreign royalties,etc. = “Net Artist Royalty Rate” © 2007
  29. 29. Major Label Deal Payment Scenario 14% Royalty- 3% royalty for Producer (all-in royalty) = 11% royalty paid to artist X 12.05 (PPD/wholesale price) =$1.32 per unit sold -10% (free goods) =$1.19 to Recording Artist per CD sold ( pp (approx. 9% of total CD price) p ) © 2007
  30. 30. Additional Recoupables Record Labels may provide funding which is funding… RECOUPABLE Tour Support 100% recoupable Independent Radio Promotion 50-100% recoupable 50 100% Video production 50% recoupable © 2007
  31. 31. More Money= More Recoupables What it looks like: $300,000 (Total Recording Fund) +100,000 +100 000 (50% of Video production cost) +50,000 (100%Tour support) +100,000 +100 000 (50% Independent Radio Promotion) = $550,000 total recoupables owed to the $550 000 Record Label © 2007
  32. 32. If Your Record Goes “Gold” Record Label Math: $ 12.05 (PPD) X11% Artist Royalty Rate/all-in =$1.32 ( $1 32 (per unit sold) it ld) X500,000 (units sold) =$660,000(Artist earnings for CDs sold) -10% Free Goods =600,000 -$550 000 (total recoupable amount Artist owes to Record $550,000 Label) = $50,000 due to the Artist vs. $6 Million Gross d e to Label s due Note: If there is a deficit after sales, the balance due may be charged against future records made (aka “cross collateralization”) cross © 2007
  33. 33. Major Label Deal Realities • It can cost a Major Record Label $500,000-$2MM to “develop” a new artist • Average # of records sold by a new major label band=12,000 units • It generally takes sales of 500 000 copies (Gold) to pay 500,000 back recoupables, depending on the initial recording fund • 1 out 100 records go “gold” • Major record labels sign about 4-5 new deals per year • Major record labels now sign primarily “demo deals” with demo deals new artists © 2007
  34. 34. D-I-Y Label Economics What it looks like when you produce and market your own CD. 15.99 suggested retail price -1.99 (production cost per unit) =14 99 (gross revenue per unit) 14.99 - 3.99 (cost of sales and promotions per unit) =11.00 11 00 -25%(Attorney, Manager, Business Manager fees) =$8.25 per CD sold (56% of total CD price) -30% (retail distribution) =approx $6 per CD sold Plus, Plus NO recoupables © 2007