Record ContractsAlthough they do vary and have got more and more complicated in recent years, record contracts have a basic character. Essentially the record company agrees to advance an artiste an amount of money, and some royalty payments on the sale of the artiste's records once the advanced sum has been recouped from the artiste's earnings. It is a bit like a tax free loan which must be paid back if the artiste is successful. In return the artiste has to produce a number of acceptably high quality recordings during the period of time the contract runs for. The contract could run for as long as 5 or 7 years, but will contain an 'option' clause meaning that the record company has the choice of whether to keep the artiste on or not every year or so. Every time the record company keeps the artiste on it has to pay another advance. Most contracts are structured so that advances and percentage royalty points increase with each new contract period. This implies that the record company must achieve a degree of success to make it commercially viable to retain an artiste and pay out further royalties. In principle this is to safeguard against a company which might sign and retain an artiste on an exclusive contact without investing in them. The company is placed in a position where it is financially committed to an act, so it can either work to establish that artiste and generate a return on investment, or it save money and free the artiste from the contract to go elsewhere. The days of excessively exploitative contracts are by no means over (Negus, 1992) , but they have now become less widespread as the music industry has consciously attempted to cultivate a more professional image. It has become standard practice for contracts to stipulate that the artiste must have received professional legal advice before signing. Most of the most exploitative contracts are offered by small, inexperienced, or just incompetent companies involved in signing poorly advised acts. Artistes are now accredited with being more commercially minded and aware of what the contractual relationship with a record company entails. Artistes are also surrounded by business advisors, lawyers, accountants, who may engage in some quite sophisticated signing strategies. Recording contracts appear to be the most desirable ambition of most musicians. They are extremely difficult to get, and arguably, at best only of limited benefit to the artiste. "Under part II of the Copyright, Designs and Patents Act 1988 a performer has statutory rights in his performance, which can be protected from unauthorised recording, broadcast, or other exploitation. There is also....in the UK a statutory perception of an "exclusive recording contract", and that, for example, record companies, will have statutory rights under them to the exclusive rights performance rights of their artistes....The basis of all recording contracts is that the artiste has the ability to grant his performance rights to the record company, which will then have exclusive rights to them." (Music Business Agreements).
What this essentially means is that all the rights we have discussed since starting the topic of copyright - mechanical rights and performing rights, as defined in copyright law - are what the record company wants from the artiste, along with some other things, when it enters into a contractual agreements.
Points to consider in recording contractsOne of the first things which must be sorted out before a recording contract is agreed is whether or not the artiste has had any contracts in the past which still have an effect on his/her career. The artiste must warrant that there are no such restrictions. The record company should try to find out if the artiste recorded music under an old contract which was never released. Because;
Previous Contracts.When negotiating contracts artistes should make sure there are no skeletons in the cupboard from old contracts, particularly with respect to unreleased material recorded during that contract. The new record company will need to know about any other contracts and the artiste will have to disclose any which may still be effective.
The new record company needs to know whether there were undelivered recordings under a previous contract because;
All recording contracts are exclusive. The concern of an artiste with a record company in which he does not have complete confidence is that it may not release his recordings or promote his records to his reasonable satisfaction. In this case the artiste does not have the right to find another company to do the job, unless things are so bad that the lack of company effort amounts to a breach.
The wording of contracts makes it so that the record company has all rights to all recordings of the artiste during the period of contract for the purpose of making an selling records. This means even recordings which the company do not release. Exclusivity clauses are drawn as widely as possible, but must take into account other activities of the artiste, for example an acting career, or a theatre stage show career in which a stage show album may be recorded by a company other than the main company - in this case there would be arrangements made for an 'override royalty' for lending the artiste for the recording.
A recording agreement must carefully define what a record is. This is mainly to exclude the sale of promotional material such as films, etc. This is not the same as video necessarily, but some promo material will be specifically for that purpose and not for sale. This allows promo material to be freely used for its intended purpose.
The definition will also include what the recording should consist of in terms of quantity and quality of material. For example, minimum playing times etc., in the case of quantity, and 'acceptably good' in terms of quality.
Record companies require from an artiste warranties which state that the record company will get the recordings free from any encumbrance or liability. They would include;
The range of royalties available from record companies varies from artiste to artiste, depending mostly on sales potential, any previous success, etc. New artistes usually receive between 8 and 12% for full price UK market sales. An already successful artiste may receive a higher rate.
Some will have a sliding scale with modest rates on low sales, rising to better rates on higher sales, while others may have a fixed rate regardless of volume of sales. It is good for an artiste to negotiate for a sliding scale. This is because the artiste will be justly rewarded for success if it exceeds expectations and will do no harm to the record company because low sales mean low royalties.
If there is a sliding scale it must be made clear whether all of the sales receive the higher rate or only those over the agree sales threshold. Record companies prefer the second one generally - there may be exceptions if the original rate was very low.
Where there are different territories involved, which may well have different royalty rates, it must be clear whether royalty increases (for whatever reason) relate to all territories or just the UK and major territories. Rates normally differ between sales in 'home' country and those abroad. The remaining territories will be divided into other levels of territorial rates, depending on their record sales potential.
Rates vary with types of retail channels, depending on retail prices. For example, budget releases may have a lower rate than full price releases. Bulk sales at a lower price , although providing a reduce profit per unit sold, can be as profitable overall to the company as lower sales only on the full price label. It can also mean extensive promotion through more people becoming aware of the artiste, reducing the high cost of promotion which might otherwise be required to encourage full price sales to the same extent.
All record companies reduce the royalty rate on less than full price sales of records, and each has its own formula for doing so. The artiste might expect that, as the royalty rate is proportional, the reduction in the monetary amount he receives per record sold at a reduced price should be only because the normal royalty rate would be calculated on a lower figure. e.g., a 10% royalty on an £8 album will produce (leaving aside all other deductions) 80p. If the royalty rate is retained at 10% for a lower price version of the album, say £5, the royalty will produce 50p, i.e. a pro-rata reduction. But the reduced royalty rate on budget sales will be 60% of the full rate, so producing an amount of 30p per album. At first sight, by reducing both the price of the record, and the royalty rate, the record company is taking two bites of the cherry. This is not so, because although the price of the record is reduced, manufacturing, distribution and advertising costs, as well as record company overheads, are not reduced. Royalty rate reductions on less than full price sales will usually be between one third and a half of the full price royalty. There are also categories of rock bottom prices with no royalty at all. Some companies won't pay a royalty on sampler albums (comps of all artistes on label).
Reductions sometimes occur if substantial promotional expenses are incurred, e.g. TV advertising. This is only justifiable if it is very expensive, e.g. national and international.
Record producer royalties will depend on the level of royalty the artiste receives and whether the artiste or the company is in control of the recording sessions.
Royalties are calculated as a percentage of the rrp of the record after making certain deductions. Some record companies have based their rates on wholesale price. Those calculated on wholesale tend to be one and a half and double those done on rrp. Rrp is recommended as being more reliable and impartial than publisher sealer price (wholesale). It is also very difficult to work out royalties from actual selling prices as they vary too much.
The usual deductions from the rrp are taxes (VAT and sales tax) and the costs of the packaging of the product. The deductions should not include payments to third parties, such as copyright royalty payments - which may be deducted from the gross fee before being divided between artiste and company.
There will also be deductions to account for a proportion of records which will inevitably be returned, no returns are payable on records which are not sold. Sale or return arrangements are common in the retail trade. Because it would be impossible to account for actual returns, an arbitrary percentage is placed in the equation, normally 5% or 10%. This means that an artiste with high sales and no returns loses out slightly but gains on reasonable sales with high returns.
A major artiste can sometimes receive a non-returnable and non-recoupable incentive payment to procure the signing of the contract. An inducement payment for the artiste's signature should be separated from the other financial terms of the contract, unless there are conditions in it to be fulfilled after signing relating solely to the inducement payment.
It is usual for advances to be non-returnable but recoupable from royalties due under the contract. Apart from exceptional circumstances, by custom in the record industry advances are never returnable, i.e. they are not repayable otherwise than from royalties. Advances may only be returnable if the artiste is fraudulent or refuses to do anything for the company.
The amount of the advance will depend on the status of the artiste and the chances of recoupment on record sales in a reasonable length of time. Recoupment time will also depend on the level of the artiste's royalties. The lower the royalty rate the longer will be the time it takes for the artiste to earn money over and above repayment of advances.
If a contract has renewable options the artiste should negotiate for increased advances each time. this provides the artiste with confidence in the record company's commitment and provides an incentive for the company to provide sufficient promotion to sell records.
Most artistes try to renegotiate their recording contracts in their favour in times of success, but they would never voluntarily offer to reduce their royalty or advance in a relatively bad period. Record companies prefer to terminate unprofitable artiste's contracts as soon as convenient, but like to retain successful artistes for as long as possible.
A recording agreement can be for a fixed number of years or an option basis up to a maximum period. Alternatively the period can relate to a specified number of recordings delivered, either as a fixed number or as options up to a maximum.
Some contracts contain a clause entitling the record company to suspend the period for lack of records delivered for whatever reason. For examples; strikes which prevent record manufacture, breach of contract or force majeure. The only commercially valid reason is if the artiste fails to deliver the minimum recording commitment.
An exclusive recording contract should oblige the record company to manufacture and release a minimum amount of recordings per year, say one album. If that minimum obligation is not fulfilled by the company the artiste loses the opportunity to make as much money as possible and n extreme circumstances should entitle the artiste to terminate the contract. Same goes for the artiste.
Some contracts allow the record company to carry forward excess recording from a previous contract period to fulfil the minimum requirement in a subsequent one.
Where an artiste is contracted direct to a company, it will pay the recording costs.
After studying this section use the sample contract at the link above right to see some of these principles in action. See whether you think they are fair or not.
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