An Examination of the Songwriter & Music Publisher Relationship [PART 2]

[Editors Note: This is a guest blog written by Justin M. Jacobson, Esq. Read Part 1 of this series here. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research.]

We will now continue our examination of some of standard clauses contained in the music publishing company’s exclusive agreement with a songwriter.

Below is another clause included in a major publishing agreement.

ROYALTIES – Provided that Publisher has recouped any and all monies payable to Writer under this Agreement, Publisher shall pay to Writer the following royalties with respect to the exploitation of the Compositions: 

(a) Mechanical Income – fifty percent (50%) of Publisher’s Net Receipts derived from the license of the Compositions. 

(b) Synchronization Income – fifty percent (50%) of Publisher’s Net Receipts derived from the license of the Compositions for use in commercials and synchronized in audiovisual works. 

(c) Print Income – fifty percent (50%) of Publisher’s Net Receipts derived from the licensing of the right to print, publish or sell printed editions or other printed reproductions of the Compositions. 

As the paragraph heading states, the above language describes the royalty rate that the writer earns. It is important to note, similar to most agreements in the music industry; the music publisher must first recoup “any and all monies” already paid to the writer, such as advances or other costs or expenses incurred on behalf of the songwriter, prior to the songwriter earning any of the above listed royalties. This means that until the writer’s account is balanced, they will receive no additional funds from the publisher.

However, once the songwriter recoups the outstanding balance, they will begin to earn royalties based on the above listed percentages. For instance under the above language, the writer is entitled to fifty percent (50%) of the “mechanical income” (CDs, Downloads), fifty percent (50%) of the “synch income” (song used in motion picture or television show), and fifty percent (50%) of the print income (printed or digital sheet music).

The listed percentages are fairly standard and are applicable to most exclusive publishing deals. Nevertheless, it is prudent to at least attempt to negotiate for higher percentages or better provisions; ultimately, the publisher may not agree to any increase.

Writer warrants he is a writer member and publishing member in good standing of ASCAP, BMI or SESAC. In the event that Writer is in breach of Writer’s warranty of being a member in good standing of ASCAP, BMI or SESAC, Writer hereby warrants he will become a member in good standing of ASCAP, BMI or SESAC. 

In addition to the above listed clauses, most standard publishing deals require the songwriter to be a member in good standing with their respective country’s P.R.O. This is typically due to the publisher requiring the P.R.O.’s assistance in collecting the public performance royalties due for the licensing of compositions. If a writer is not in good standing or is not a member of a P.R.O. at all, it could potentially cause issues in the publisher receiving payments, which they want to avoid. The above language helps obviate the issue by requiring that the songwriter warrant they are in good standing with their P.R.O. and will stay as such.

OPTION TO PURCHASE – In the event that Writer desires to grant, sell, license or otherwise transfer any right, title or interest in or to any of the Compositions, for a period of thirty (30) days, Writer hereby agrees to negotiate in good faith exclusively with Publisher, and to exert best efforts to reach an agreement with Publisher for Publisher’s acquisition of such rights in and to the Compositions. In the event that Publisher and Writer fail to finalize the terms of such agreement by the end of the thirty (30) day period, then Writer shall thereafter be free to negotiate with any third party for the sale, license or other transfer of such rights, but only on terms and conditions that are no less favorable to Writer than those last offered by Publisher. Furthermore, if Writer receives an offer from a third-party at any time (the “Third Party Offer”) to purchase all or any portion of Writer’s interest in the Compositions, or any one of them, and Writer desires to sell such interest, Writer agrees to first offer in writing to sell such interest to Publisher (the “First Offer”).

The First Offer must specify all of the terms and conditions of the Third Party Offer. In the event Publisher does not agree to match the First Offer within fifteen (15) days after Publisher’s receipt thereof, then Writer will have the right to accept the Third Party Offer. However, any sale to such third party must be consummated upon terms no less favorable to Publisher as those contained in the First Offer. If such sale is not so consummated, Writer will not sell all or any portion of Writer’s interest in the Composition(s) or any one of them without again offering such interest to Publisher as provided hereinabove. 

One way a publishing company ensures that they can potentially retain rights to lucrative materials after the expiration of the agreement is through a right of first refusal or a “matching right.” As described above, a right of first refusal provides the publishing company with the option to purchase a composition and/or all of the compositions, if the writer is attempting to sell the rights to the material. This language provides the publisher with a proscribed time period (30 days) where the writer must present any third-party offer they receive for the material to the original publisher.

The publisher then has a specified time period (15 days) to either match the third-party offer or to pass. If the publisher matches the offer, then a deal will be finalized on those terms; however, if the publisher fails to match the third-party offer, the writer is free to enter into a new arrangement with the third-party on the same terms as those presented to the original publisher. The above specific language requires that the deal must be consummated no later than a specified period of time (15 days). If the deal with the third-party is not finalized by the end of this time period, the original publisher has an additional opportunity to purchase the composition(s) for the same terms as those offered by the third-party to the writer.

Since “publishing” money is one of the most lucrative and consistent streams of income in the music business and music publishers are the top facilitators of licensing in this space, it is prudent to fully understand how they function and the best way to approach them. Overall, most standard deals are negotiable and should be viewed as so.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling.

An Updated Look at Neighboring Rights

[Editors Note: This is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. In 2012, we published an article titled “Neighboring Rights: What They Are & Why They Matter”This newest installment includes a current exploration of today’s neighboring rights, including which countries currently provide them and which don’t. It also explores recent United States’ legislation that has been discussed in an effort to extend “neighboring rights” to U.S. Citizens; as well as a discussion on the current financial impact these royalties have on the world-wide music business. It expands on the existing material while reinforcing the information it provides.]

 

Featured artists, session musicians and master sound recording owners, typically record labels, are entitled to an additional royalty stream that artists and sound recording owners within the United States are currently not receiving. This additional revenue stream is referred to as “neighboring rights” royalties. In recent years, this revenue stream has become a valuable source of additional income for non-U.S. citizen performers. It is reported that neighboring rights generates over $2 billion per year. 

It is well established within the music industry that there are two copyrights in music, the underlying musical composition (“PA”) and the sound recording (“SR”). The underlying musical composition is usually exploited by a music publishing company and songwriters. They receive public performance royalties from a Performing Rights Organization, such as ASCAP, BMI or SESAC in the U.S. The sound recording is typically owned by a record label, which receives their rights from the featured vocalist on the track.

“Neighboring rights” are monies distributed to musicians and master sound recording owners when a work is publicly broadcast or streamed. The concept of “neighboring rights” is derived from Copyright law and has been applied to many countries through the signing of the 1961 Rome Convention. The Rome Convention treaty was enacted to provide featured performers and session musicians with an additional revenue stream when their works are publicly performed.

To receive “neighboring rights” royalties, the Rome Convention treaty mandates that a featured performer, studio musician and master sound recording owner must be a permanent resident of one of the signatory countries. Some signatory countries include Canada, the United Kingdom, Australia, Germany, Japan, Greece, France, Hungary, Italy, Sweden, Switzerland, Spain and Poland.

In Rome Convention signatory countries, neighboring rights collection societies, similar to United States’ ASCAP and BMI, collect and distribute “neighboring rights” royalties to their members. Since collection societies vary in different countries, a musician must register the individual master recordings with each collection society in all of the countries that their track is receiving airplay in to receive full payment.

For example, the performing rights organization that distributes neighboring rights royalties in the United Kingdom is PPL; in Germany, it is GVL; in Spain, it is AIE; and, in Canada, it is The Recording Artists’ Collecting Society (RACS), which is a division of The Alliance of Canadian Cinema, Television and Radio Artists (ACTRA).

As discussed earlier, the United States is not a signatory to the Rome Convention treaty. Since the U.S. is a non-signatory country, U.S. citizen musicians do not receive any neighboring rights royalties. This is due to a concept called “reciprocity,” which means that because the United States does not pay neighboring rights royalties to non-U.S. citizens, those countries refuse to pay neighboring rights royalties to U.S. citizens.

This has put U.S. musicians, especially those who are solely featured vocalists and studio session players, such as many of today’s pop stars, in a bind by limiting most of their income to only record (which have steadily declined) and touring sales.

There are various reasons why the U.S. did not become an initial signatory to the Rome Convention treaty. One suggested justification is that radio station lobbyists fear that terrestrial radio stations would then have to pay additional license fees, essentially doubling its current fees. This additional expense may could result in a severe strain on their already dwindling business. The broadcasters are a significant lobby. Others counter this argument by saying that radio stations are predominantly kept in business by the music they play and without the master sound recording copyright owners, featured artists, and session musicians’ creations, the radio station would have nothing to air.

Although American law does not currently recognize neighboring rights for a terrestrial broadcast such as traditional radio stations, the “Digital Performance Rights in Sound Recordings Act of 1995” was established in an attempt to compensate featured vocalists for the digital public performance of their work. This Act allows U.S. musicians and master rights owners to collect royalties on digital performances of their work through satellite radio and Internet platforms.

This includes royalties paid by music streaming platforms such as Pandora and Spotify as well as satellite and Internet radio stations, such as Sirius XM. These royalties are collected and distributed through the licensing organization, SoundExchange. While American musicians can now collect digital performance royalties with the passage of this act, they still cannot collect royalties on terrestrial broadcast platforms. This means that U.S. musicians, who are only featured vocalists, still only receive half of the potential revenue streams available to them that other non-American vocalists do.

As recently as 2017, legislation called the “Fair Play, Fair Pay Act” has been discussed before the U.S. Congress with the intention of remedying the issue of neighboring rights. However, to date, no progress has occurred and it seems that no immediate movement is on the horizon. The lack of this income stream has widespread effects on U.S. musician’s earnings. In fact, according to Niels Teves, Co-CEO of Fintage House, the inclusion of neighboring rights could potentially “double the size of [the U.S.] annual market,” an industry severely in need of a monetary infusion.

Neighboring Rights are untapped revenue streams for many featured musicians and master sound recording owners. Unfortunately, most of this revenue is left unclaimed due to a lack of reciprocity between signatory and non-signatory countries. In order to help accelerate the music business’ recovery, copyright owners should attempt to apply additional pressure on the U.S. Congress to enact the “Fair Play, Fair Pay Act” or some variation of it. This would hopefully give musicians and sound recording owners their due royalties and compensation guaranteed under the U.S. Constitution.

This article is not intended as legal or business advice, as an attorney or other professional specializing in the field should be consulted.

A Look At 360 Agreements: “Multiple Rights Deals” [PART 2]

[Editors Note: This is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. It’s the second in a two-part series – read Part One here.]

We will now continue our examination of some of the pros and cons of entering into a “multiple rights” agreement as well as look at some other clauses utilized in these agreements that are rarely seen elsewhere within the music industry.

Another common agreement that is part of the “multiple rights” a label acquires is one that covers the artist’s “collateral” or “ancillary” entertainment activities. This clause applies to any stream of income not covered by the other existing agreements between the parties.

Typical language stating this is as follows:

Artist hereby grants Label the right to participate financially in the results and proceeds of the Ancillary Entertainment Activities. “Ancillary Entertainment Activities” refers to Artist’s activities in and throughout the media industry as a performer, singer, musician, writer, composer, author, lyricist, producer, engineer, mixer, DJ, or otherwise in connection with the Artist’s songwriting and music publishing, exploitation of merchandise and fan clubs relating to the Artist, but excluding Recordings exploited by Label pursuant to a Recording Agreement with Artist.

As discussed above, this paragraph entitles the label to a percentage of all entertainment related activities that the label is currently not already entitled to under any existing agreements. Typically, the percentages earned by the label for non-record income ranges from 10% to 25% of gross or net income, depending on the specific agreement and specific source of income. However, under some agreements, the percentage can be as much as 50% of the net income from each and every source of revenue.

One final “right” included in a standard “multiple rights” deal is an artist’s merchandise right. A typical clause granting the label rights to the artist’s merchandise is displayed below.

Merchandise – Artist grants to Label the exclusive rights throughout the universe (“Territory”) to utilize the Artist’s Identification Materials, in connection with the manufacture, advertisement, merchandising, promotion, distribution and sale and/or license of any Merchandise bearing Artist’s name and/or likeness. Artist grants the Label the exclusive right to sell Merchandise to wholesalers and retailers, including internet-based wholesalers and retailers, for resale. Artist grants the Label the exclusive right to sell Merchandise directly to consumers through the Internet, mail order sales, and CD inserts. Artist grants the Label the exclusive right to enter into License Agreements for Merchandise. “Artist’s Identification Materials” include: posters, stickers, patches, lighters, buttons, keychains, novelty items, souvenir tour merchandise, toys, dolls, lunchboxes, t-shirts, jerseys, sweatshirts, hats, and other apparel bearing Artist’s name and/or likeness.

This clause provides the label with the exclusive right to sell the artist’s merchandise to physical and digital retailers and whole-sellers as well as selling the items directly to consumers (“D2C”) through the Internet or “CD” insert offerings. It also grants the label the exclusive right to enter into third-party licensing agreements for the sale of the merchandise. It also lists the various artist branded apparel items subject to the merchandise agreement.

Merchandising income is often calculated in a variety of ways. Sometimes, the label receives a flat percentage, such as 15-25% of any and all merchandise income. In other instances, as shown below, the different items sold by the record label entitle the talent to different percentages.

Royalties – Label shall pay to Artist the following royalties on Net Sales of Merchandise:
(1) Wholesale/RetailSales

1. 22% of Net Retail Receipts for t-shirts;

2. 20% of Net Retail Receipts for hoodies and sweatshirts;

3. 15% of Net Retail Receipts for headwear and other items.

(2) Direct To Consumer Sales (“D2C”)

a. 25% of Net Receipts

(3) LicensingIncome

a. 60% of Net Licensing Receipts.

As depicted above, the amount the artist is entitled to vary based on the type of items and channels through which they are sold. This difference could be due to the associated production, manufacturing and/or distribution costs associated with each item. In these instances, a musician should try to negotiate the highest percentages they can in order to ensure they receive most of the monies grossed from the sale of their merchandise.

One final clause that provides protection for the artist is the inclusion of a “sell-off” period at the expiration of the merchandise agreement. An example of this type of clause is listed below.

Sell-Off Period – Label shall be entitled for a period of six (6) months after the expiration or termination of the Merchandise Agreement (“Sell-Off Period”) to continue to sell, on a non- exclusive basis, any already existing Merchandise in Label’s possession. Label will not manufacture quantities of the Merchandise in excess of the amount Label reasonably expects to sell during the Sell-Off Period. Label shall pay Artist in accordance with the terms and conditions of this Agreement during the Sell-Off period.

This clause permits the label to sell off any remaining merchandise it has in inventory after the expiration of the agreement. It also limits the amount of new merchandise the label can manufacture. An artist should try to limit the time frame that the label’s “sell-off” period lasts for. In addition, the musician should try to ensure that the label does not sell the merchandise at a substantially reduced rate as to undercut any sales efforts taken by the artist after their exclusive merchandise deal ended.

There are a variety of reasons that an artist may or may not accept a “multiple rights” deal with an entertainment entity. The biggest reason for these extensive arrangements is to create a “partnership” between the label and artist. Since the label is now much more invested in the artist, due to the extensive financial investments (separate advances for each agreement) and all the potential avenues of possible return; the label may see the benefits of having a dedicated staff or representative(s) committed to collect monies generated by the artist, to actively pitch and market the songs to publications and music supervisors for potential placements in movies, television and video games. If the label is not as invested in the artist and does not foresee substantial returns, it may be hard for the label to dedicate their limited resources and time to build such an artist.

In contrast, there are several drawbacks to entering into such extensive agreements. One is that the label typically has extensive control and approval over the artist’s career, including the artist’s “image,” selection of songs, appearances and sponsorships. Another negative aspect is that although the label takes a cut of all a musician earns, most labels have begun paying much smaller advances than in prior years. They have also down-sized personnel, so they do not have sufficient staff to actively and vigorously work on behalf of all its signed artists. In an effort to balance this, an artist should work to acquire some sort of creative control over the label’s use of the artist’s name and likeness as well as who the music can be licensed to.

The music business has undergone a monumental shift caused by the decline in recorded music sales and aided by an increase in music streaming and illegal music downloading. In an effort to alleviate some of the traditional record label’s losses, they crafted new “multiple rights” agreements. These agreements have benefits and drawbacks; but, are here to stay.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling.

A Look At 360 Agreements: “Multiple Rights Deals” [PART 1]

[Editors Note: This is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research.]

 

UPDATE: Read Part Two of this series here!

With physical music sales evaporating and an overall decline in total earnings across the entire music business throughout the last decade; many music distributors have begun entering into more extensive arrangements with the talent they sign. There has been a shift from traditional record distributors “signing” artists solely to a recording agreement to now signing artists to much more elaborate contracts. These new agreements are commonly referred to as “multiple rights deals” and are also known as “360 degree deals.” We will examine some of the pros and cons of entering into a “multiple rights” agreement as well as look at some clauses utilized in these agreements that are rarely seen elsewhere within the music industry.

This new breed of music distribution deal provided by many labels is characterized as a “multiple rights” deal. They are also referred to as a “360° deal”, a “270° deal” or a “180°deal”, depending on which rights are contracted for. For example, a typical “360° deal” entitles the label to receive a set percentage from four of the artist’s revenues streams. These would include a portion of the artist’s record sales, touring and personal appearance income, as well as publishing income, and the merchandise revenues. A “270°” or a “180°” multiple-rights deal may only cover two or three streams of an artist’s income, such as the label solely receiving a percentage from the musician’s record sales and publishing monies (180°) or a percentage from the artist’s record sales, publishing and touring incomes (270°).

Additionally, some agreements include “catch-all” clauses, which entitle the label to a portion of the musician’s “collateral” or “ancillary” entertainment activities. Essentially, this means the label is entitled to a percentage of income generated from anything related to the musician’s entertainment career that does not fit into one of the above categories (touring, publishing, record sales, merchandise, etc.). Thus, the record company will not only be entitled to their traditional stream of revenue from recorded music (CDs, MP3s, Vinyl); but, they will also be entitled to percentages of all of the artist’s entertainment related revenues. This could include portions of the artist’s merchandise sales, endorsement and sponsorship fees, motion picture and television appearance fees, digital sales and music streaming royalties, tour and live performance revenues, songwriting and publishing revenues, ringtone and ring-back sales in addition to fan clubs. In a nutshell, the label receives a portion of anything and everything related to the signed talent’s entertainment career.

Generally, in these situations, an artist enters into a few separate agreements with separate contractual “advances” that encompass the entire “360°” arrangement. Similar to the recording agreements we looked at in a prior installment, all of these agreements are usually cross-collateralized with each other. This means that any income earned from the different revenue streams (i.e. recording, publishing, touring, etc.) can be used to recoup any advance provided by the label to the artist as opposed to the label solely utilizing the publishing revenues to recoup the publishing agreement advance and so on. It is advisable for an artist to attempt to negotiate that the different streams are not cross-collateralized. However, this is a hard sell, as most labels will not accept such an accommodation, as they want ample opportunity to recoup their full investment from as many income sources as possible.

Another important negotiation consideration is whether the company has an “active” or “passive” interest. A “passive” interest exists when a label merely earns their set percentage under the agreement without having any control over the rights involved. This means that the artist is free to enter into any deal, such as a publishing or merchandising agreement that they desire as long as they ensure the record label receives their compensation.

Conversely, an “active” interest is one where the company has rights over the work, which permits the label to insist that an artist signs with their publishing or merchandise company. In these instances, a musician should try to negotiate a smaller percentage for the particular stream of income that the label is “active” in. For example, if an artist is obligated to sign with a label’s publishing company, the artist should try to reduce the percentage the label receives under the “360°” deal from publishing revenues as the label would essentially be getting paid twice (once as a publisher of the song and once through the label’s “multiple rights” deal) for the same material.

While there are many benefits as well as drawbacks to these extensive “multiple rights” deals, it has become the norm for many major labels and entertainment companies. Since there have been many more unsuccessful artists than commercially successful ones throughout history, the labels started seeking new ways to attempt to best recoup the funds they expend. Robbie Williams is an example of one of the first artists to sign a “multiple rights” deal. Additionally, in recent years, top artists such as Jay-Z and Madonna have signed similar “multiple rights” deal with the “tour company” Live Nation. These entities justify the new agreements and the increased ability to earn from the artist’s non- recording revenues in a variety of ways. For instance, the record label feels that they take all the risks with minimal chances of recouping their investment.

This is true as a label generally issues a non-refundable advance of the recording costs to the artist. The artist does not need to pay back the advance(s) to the record distributor, even if the musician’s work fails to generate any income for them. The company would then end up losing all of the funds advanced to the artist without any recourse against them. The label typically supplies all of the upfront recording costs necessary to create the music through the recording costs “advance.” These advanced funds are then utilized by the artist to pay for studio time, production, mixing and mastering costs, which the artist typically would otherwise not be able to afford on their own.

Furthermore, the label may also provide “tour support” to an artist to cover any deficient touring costs to ensure that the talent can adequately perform as they envision. The label also expends substantial funds to market, promote and manage the artist’s released music, including on radio promotion and press. Since the label invests so much upfront money and the potential return from the traditional record sales has bottomed-out; they justify these new more extensive agreements as a way to recoup the expenses they invested in the artists they sign. In these instances, the label may envision functioning as a pseudo-manager by looking after and assisting in building the artist’s entire career rather than only focusing on selling records.

We have already discussed the recording agreement and we will explore publishing agreements in latter articles; so, we will now examine the additional agreements and clauses included in some of these new “multiple rights” agreements.

One common agreement included in the “multiple rights” deal provided by most traditional record labels covers the formation and operation of an artist’s official “fan club.” Standard language, such as that listed below, discusses the label’s right to run a fan club on behalf of a signed artist.

Fan ClubLabel shall have the exclusive right throughout the Territory to establish, register, maintain, control, administer, promote, and monetize the Fan Club, including the right to create, update and manage website(s) related to the Fan Club and to sell, advertise and promote the Fan Club and products and services offered for sale by the Fan Club on behalf of the Artist. A “Fan Club” shall mean any Artist-based subscription or registration-based subscription services.

Artist shall have prior approval over the so-called “look and feel” of the Fan Club. The parties contemplate that the Fan Club shall include but not be limited to a home page, message board, early ticket purchasing opportunities, exclusive merchandise, contests, unreleased recordings, interviews and VIP Fan Experience packages.

This paragraph means that the label has the right to create and monetize an artist’s official fan club; however, the artist shall have prior approval over the “look and feel” of the club. Therefore, the artist will have some creative input over the marketing and promotional materials created to advertise the club as well as the designs of any websites or other publicly distributed materials bearing the artist’s name. In addition, the clause mentions some of the fan club offerings such as exclusive merchandise, contests and early ticket purchasing opportunities.

Fan Club ObligationsArtist shall provide Label with timely information regarding Artist’s entertainment-related activities (including public appearances, endorsements, advertisements sponsorship, and performances). Artist shall provide Label with materials as Label reasonably requests for use in connection with the Fan Club, including but not limited to Artist Identification Assets, Special Greetings, audio and audio-visual messages. Artist shall also make itself reasonably available for a reasonable number of Fan Club interviews and to make personal appearances and participate in “Meet and greets” in connection with the Fan Club. Artist shall be responsible for answering fan mail; however, all reasonable out-of-pocket costs (e.g. cost of Fan Club stationary, postage, photos of Artist) shall be reimbursed pursuant to a mutually agreed budget.

As indicated above, the label imposes a variety of obligations on the artist. One such obligation is to inform the company of any upcoming appearances or tours, in order that the label can create contests or other “fan club” exclusive promotions tailored to those appearances. It is advisable to limit the number of appearances and “meet and greets” in connection with the fan club’s promotion. In addition, similar to the reimbursement of the artist’s “out-of-pocket” expenses in responding to fan mail; an artist should try to request some sort of budget to cover or mitigate some of their expenses in complying with the label’s other requests such as creating an audio-visual greeting or attending a fan “meet and greet.”

In addition to the artist’s obligations to the fan club, the artist and label typically have an equal 50/50 split on any income earned from the operation of the club. In these instances, it might be advisable for an artist to attempt to negotiate a larger percentage of the revenues earned due to all the obligations the artist has undertaken. Conversely, since the label normally advances most of the costs to run the fan club, it may be a hard sell to increase the artist’s percentage.

In our next installment, we will continue our discussion on additional agreements included in a “multiple rights” deal.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling.

The Artist & Record Label Relationship – A Look At the Standard “Record Deal” [Part 2]

[Editors NoteThis is a guest blog written by Justin M. Jacobson, Esq. It’s the second in a two-part series on the Artist/Record Label Relationship – read Part 1 here. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research.]

 

We will continue from our prior installment on “The Artist & Record Label Relationship.” We will now explore some additional contract clauses included in most recording agreements as well as a few negotiation tactics for these clauses.

Once the artist and distributor agree on the advances and what constitutes “delivery” to satisfy an artist’s commitment, the negotiation of the actual royalty rate earned for each sale is next.

ROYALTIES – (1.) Artist shall accrue to your royalty account, in accordance with the provisions of this Agreement, as described below; provided, however, no royalties shall be due and payable to you until such time as all Advances have been recouped by or repaid to Label. Royalties shall be computed by applying the applicable royalty percentage rate specified below to the applicable “Royalty Base Price” in respect of the “Net Sales of Records” described in this paragraph. Label shall pay to Artist all-in royalties (i.e., inclusive of producer and artist royalties). The term “Net Sales of Record” shall mean all gross income actually paid to Label in connection with its exploitation of such Album less all expenses (excluding overhead only) paid or incurred by Label in connection with the exploitation, manufacture, sale, advertising, promotion and marketing of such Album.

(2.) (a) The royalty rate (the “Basic U.S. Rate”) in respect of Net Sales of Records of the Album made hereunder made during the respective Contract Periods specified above and sold by Label through Normal Retail Channels in the United States (“USNRC Net Sales”) shall be as follows:

(b) The royalty rate (the “Escalated U.S. Rate”) in respect of USNRC Net Sales of each Album recorded pursuant to your Recording Commitment in excess of the following number of units, shall be the applicable rate set forth below rather than the otherwise applicable Basic U.S. Rate:

As the above clause mentions, the royalty that an artist earns for the sale of their music is calculated as a percentage of either the “Published Price to Dealer (PPD)” or the “Suggested Retail List Price (SRLP).” The “SRLP” is the approximate price charged by the retailer, such as Wal-Mart; while, the “PPD” is the approximate price that distributors charge to the retailers (wholesale unit price). It is prudent for an artist to attempt to negotiate for the highest possible royalty rate they could receive, as the higher the rate, the sooner they recoup the amounts advanced and the sooner the artist will begin receiving funds again.

In addition to agreeing upon the royalty rate and what the rate is based on (“PPD” or “SRLP”), similar to the clauses above, an artist can create royalty rate “escalators” based on album sales. As described above, when an artist sells 500,000 units (R.I.A.A. certified gold) or 1,000,000 units (R.I.A.A. certified platinum), the royalty rate escalates or “rises.” This increases the royalty rate that the artist is entitled to. An artist should also be cognizant of whether the royalty rate escalators are “prospective” or “retroactive.” A “prospective” escalator is one that only applies to sales going forward after a specified sales level is reached. This means that the artist’s royalty rate only is increased for any albums sold after they reach the listed sales level, for example, unit 500,001 is paid at the higher royalty rate. Conversely, and what is the ideal scenario for the artist, is “retroactive” escalation.

This means that once the artist reaches a specified sales level (i.e. 500,000 copy sold), the royalty rate is increased to the higher rate for all the albums sold prior (1-499,999 copies sold) as well as those going forward (500,001+ copies sold). An artist should also be aware that any “free goods” or albums given away for “promotional use” do not count as royalty bearing sales as no royalty or money is earned in these instances.

As in the example listed above, most royalties are considered “all-in.” This means that the artist is responsible for paying the producer of the track from the amounts they receive from the label. For example, if the artist is entitled to a 15% royalty rate from the label and the artist entered into a production arrangement with the producer providing him with a 3% royalty rate, the artist must provide the producer with the 3% royalty from the royalty the artist is entitled to. Thus, the 15% royalty rate paid to the artist by the label is split with the artist receiving 12% after the artist pays the producer their 3% royalty from these funds.

Once the royalty rate is set, the examination of the “reserve against returns” clause is necessary.

Reserve Against Returns – Label shall have the right to establish, during each semi-annual accounting period, a royalty reserve against anticipated returns and credits, of up to twenty- five (25%) percent of the royalty earnings associated with the units of each Record reported as distributed to its customers in that period. Each royalty reserve shall be liquidated equally and in full over the four (4) semi-annual accounting periods following the accounting period during which the applicable reserve is originally established.

While the above clause has begun to become obsolete in most instances, it is still important to examine and understand. The “reserve against returns” specifically applies to any physical record music as there is currently no way to “return” a digital downloaded MP3. This means that the label shall “reserve” or set aside a specified portion of the royalties the musician would otherwise be entitled to in case of any “returns” or “credits.”

For instance, in the example above, the label shall reserve twenty- five percent of the royalties the artist is entitled to in case any retailers must provide any refunds to its customer, which the label must in turn refund to the retailer. After a specified period of time, the “reserve” funds are “liquidated,” thereby, releasing the royalties to the artist. The frequency of “liquidation” is determined in the contract. As the above clause states, the reserves will be liquidated in “four” accountings, meaning every semi-annual accounting period. An artist should try to negotiate for a lower reserve percentage as well as a more frequent liquidation to earn as much of their royalties as quickly as they can.

Finally, one more clause that is included in many recording agreements is one that addresses the artist’s non-musical obligations, such as publicity and marketing for the released album.

Publicity – As Label reasonably requests, Artist shall appear for photography, poster, cover art, and the like, under the direction of Label or Label’s designees and to appear for interviews with representatives of the media and Label’s publicity personnel, at Label’s expense. As Label reasonably requests, Artist shall perform for the recording of brief audio, visual, and/or audiovisual spoken-word recorded messages and fan greetings suitable for use on and in connection with digital products and services and/or digital media platforms (e.g., Internet and wireless). In addition, as Label reasonably requests, Artist shall perform audiovisual works (e.g., so-called “B-roll” and “behind-the-scenes” footage) suitable for use on and in connection with Records embodying the Artist’s performances.

As the clause above outlines, the artist has to make themselves available for any public appearance, audio or audio-visual fan greeting or other audio-visual work as requested by the label. This is fairly common and in most instances, the artist will not receive any additional compensation for these services. However, an artist should try to negotiate for some of their expenses to be covered, such as transportation and/or meals, especially if the artist is required to travel further than a specified distance from the musician’s home.

Overall, the artist and label relationship is one of the most important ones and the next step in an artist’s quest for stardom. Since these agreements typically span many years and many albums, it is prudent that an artist fully understand the contract they are signing and ensuring they enter into an arrangement that works for them as this could be the document that makes or breaks an artist’s entire musical career.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling. We are also aware of the importance of streaming recordings; but, we will need to leave that for another day.

The Artist & Record Label Relationship – A Look At the Standard “Record Deal” [Part 1]

[Editors NoteThis is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research.]

 

UPDATE: Read Part 2 of this series here!

In our prior installment, we examined the artist and manager relationship and explored a variety of standard clauses as well as negotiations tactics. We now start our initial examination of a few selected clauses from a standard recording industry agreement, better known as a “record deal.”

Once a musician has finished its product (music), the music is then distributed to the public for sale, either physically (CDs, vinyl), digitally (MP3 downloads, internet streams) or in both formats. Distribution is generally handled by a third-party on behalf of the artist unless the artist independently distributes their own music themselves. If an artist utilizes a third-party distributor, one of the industry’s most dominant distributors of recorded music is the recording or “record” label. These companies dispense the musician’s recorded music through a variety of channels, including to “Big Box” Retailers such as Best Buy and Target. Record labels are also involved in digital distribution by providing the work as digital downloads (MP3 format) in digital stores such as iTunes Store and on digital music streaming platforms, such as Spotify and Pandora.

Today’s recording industry landscape has significantly changed from its earlier roots, with many of the older, independent labels being sold and merged into each other. For instance, there are still a variety of major recording labels, such as Capitol Records, Columbia Records, Interscope Records and Atlantic Records; however, most of these are owned by other larger entertainment entities such as Warner Music Group, Universal Music Group or Sony Music Entertainment. In addition, many major labels have also established “vanity” labels. These act as smaller distribution companies where a producer or an artist signs additional artists or producers to this imprint and the “vanity” label then is dispensed to the public by a larger entertainment entity. For example, “Cash Money Records” is a “vanity” label distributed by Republic Records, which is under the Universal Music Group umbrella. There are also a variety of independently owned record labels such Sub Pop Records, Epitaph Records and Norton Records, who operate and distribute works on their own. In addition, there has been a recent rise in “digital only” record labels that function like traditional record labels; but, solely distribute music digitally.

Once an artist selects the appropriate distribution entity, it is standard practice for the parties to enter into an agreement outlining the deal points. To better comprehend this contractual relationship, let us now review a series of common clauses included in many standard record label agreements.

Similar to management agreements, the “term” or length of the agreement is of paramount importance.

TERM – (a) The Term will consist of an initial contract period (“First Contract Period”) and each of the renewal contract periods (“Contract Periods”) for which we will have exercised the options set forth in the next sentence. LABEL will have three (3) separate and successive irrevocable options, each to extend the Term for a further Contract Period. Each option to extend the Term for an additional Contract Period will be exercised automatically. The second Contract Period will be called the “Second Contract Period,” the third Contract Period will be called the “Third Contract Period” and the fourth Contract Period will be called the “Fourth Contract Period”.

(b) The First Contract Period will commence upon the date of Execution and will continue through the later of:
(i) The date twelve (12) months from the date hereof; or
(ii) The date six (6) months after the last day of the month in which Record Label
commercially releases the Album made in fulfillment of the Recording Commitment for the first Contract Period in the United States.

(c) Each subsequent Contract Period will run consecutively, commencing upon the expiration of the immediately preceding Contract Period, and will continue through the later of:
(i) The date twelve (12) months from the commencement of the particular Contract Period; or
(ii) The date six (6) months after the last day of the month in which Company commercially releases the Album made in fulfillment of the Recording Commitment for the first Contract Period in the United States.

This language states that the record label shall have one “firm” or “committed” album release with the “option” for up to three additional albums, totaling a potential four album deal. As it is written, these options are in the label’s sole discretion. In addition, this provision means that the agreement shall commence upon signing and shall end at either the expiration of one year from the signing of the agreement or six months after the last commercially released album. It also states that any subsequent option shall run for a similar period of time.

Since most record distribution deals contain similar language, an artist can attempt to negotiate specific parameters that are required in order for the record label to exercise one of its options. For instance, an artist could provide language that affords the label with the right to exercise an option for an additional album if the prior album reaches a specified sales figure (i.e., selling 20,000 copies of an album) or if the release recoups a certain specified percentage of an advance provided to the artist by the label (i.e., 75% of the preceding advance was recouped).

Once the “term” of an agreement is established, another important clause to decipher is the definition of what constitutes “delivery” of an “album” to satisfy an artist’s “recording commitment.”

Delivery Requirement – During each Contract Period, Label will cause the Artist to record and Artist will Deliver to Label Masters sufficient to constitute one (1) Album (the “Recording Commitment”). An “album” shall consist of approximately twelve (12) tracks with a total duration of approximately seventy five (75) minutes (the “Album”). In order for an Album to be “Delivered” under this Agreement, it must be contained in such format of which the Label advises the Artist, in the proper form for the production of the parts necessary for the manufacture of commercial Records, which shall be delivered to Label together with all materials, clearances, consents, approvals, licenses and permissions necessary to commercially release the applicable album. Each Album shall be subject to the Label’s approval as being technically and commercially satisfactory.

Further, unless Label otherwise expressly consents in writing, Artist will ensure that the Artist does not record Performances in fulfillment of the Recording Commitment that are: (1) not recorded in a recording studio (i.e., “In Concert” or “Live” performances); (2) instrumental Performances; (3) solely speech or spoken word; (4) not in the English language; (5) remixed or re-edited or mixes (e.g., extended mixes of an Album Master) or otherwise altered versions of Performances previously recorded; (6) based on an overall theme (e.g., a Christmas Album); or, (7) Performances of more than one Composition (e.g., a medley).

Under a recording agreement, the “delivery” of an album is an important point of contention between the label and artist. For instance, traditional language, such as in the clause above, requires that any album submitted to the record label must be both “technically” and “commercially” satisfactory to constitute a “delivered” album under an artist’s “album commitment.” An album is “technically” satisfactory when the master is technically well-made and able to be utilized to manufacture CDs, records, etc. This is fairly easy to satisfy, as any track that was recorded, mixed and mastered at a reputable recording studio or by a reputable professional, should suffice. Conversely, an album is only “commercially” satisfactory, if and only if, the label believes the album will sell. This means that the album is “satisfactory for commercial exploitation,” which is highly subjective. In negotiating this clause, an artist could try to limit the satisfaction of the “delivery” with an album that is “technically” satisfactory as opposed to one that is both “technically” and “commercially” satisfactory. This is especially important in emerging musical genres, such as electronic-dance music, where there are often quick and unpredictable listenership shifts whereby an artist or a type of musical genre which was once highly marketable is now no longer. If the label rejects an artist’s delivery of an album, it prevents any additional progress within the contract, such as the issuance of additional monetary advances. This situation may also arise where an artist is signed to a record label and then takes several months to finalize their album. If during this time period, the entire musical landscape shifts, the artist’s music may become outdated and not commercially satisfactory to the label, who feels they can now no longer sell this material.

In addition, the above clause defines one “album” as approximately twelve songs totaling seventy-five minutes; however, there are a variety of recordings that do not constitute a “track” sufficient to count toward an artist’s “album commitment” to the record label. For example, the language above states a “live” recorded performance does not constitute an acceptable track unless the record label permits it. Furthermore, a track that is solely instrumental or solely acapella will not count unless the label says so. Additionally, any foreign language tracks, remixes of original tracks or “theme” tracks, such as a Christmas or holiday album, will not count without approval from the label. An artist can always attempt to negotiate that a particular “live” version of a track counts toward the “album;” but, ultimately, the label may not agree or may only agree to allow this one particular track as opposed to removing the restriction entirely.

Another essential clause in a standard recording contract is the “advance” or “advance of recording funds” section. The negotiation of this paragraph has the potential to severely impact an artist’s career as this is the “money” the artist gets for signing the deal and are the funds the musician has available to actually record and finalize their album.

Advances/Recording Funds: Label will provide to Artist the following Recording Funds (inclusive of all producer advances and recording costs), which shall be recoupable from any and all royalties and any other agreements between the parties hereto. “Any other agreement,” in this paragraph, means any other agreement with Label relating to Artist’s Recordings or relating to Artist as a recording artist or as a producer of Recordings of Artist’s own performances.

(a) “Recording fund” advances for the Albums shall be subject to the following “minimums” and “maximums”:

(b) No respective recording fund shall exceed the “maximum funds” set forth in Paragraph(a). If the Artist fails to earn an amount which is the equivalent of one hundred (100%) percent of the proceeding “Recording Fund” advance as earned artist royalties in respect bearing units through normal retail channels in the United States of the Album, then the “Minimum” amount listed in Paragraph(a) shall be provided to Artist by Label. If the Artist earns an amount which is the equivalent of at least one hundred the proceeding “Recording Fund” advance as earned artist royalties in respect bearing units through normal retail channels in the United States of the Album, then the “Maximum” amount listed in Paragraph(a) shall be provided to Artist by Label.

(c) Label shall pay Artist one-half (1/2) of each Recording Fund advance listed in Paragraph(a) hereunder upon commencement of recording for each respective Album. The balance of each respective recording fund advance will be payable to Artist within thirty (30) days of the technically and commercially satisfactory delivery of each completed Album to Label.

As it is stated above, each album released by the label coincides with an additional “advance” of recording costs so that the artist may complete its album obligation to the label. Typically, most labels want approval over the recording budget; and, if any money remains from the recording funds after paying all the associated recording, mixing, editing and mastering costs, the artist gets it. If the musician requires additional funds to record and finalize the album, the artist must usually go into their own pocket to pay the difference. However, in select situations, the label may choose to pay the difference; and, in those instances, the label treats the additional payment as an additional recoupable advance. This situation could arise when there is no other way for the artist to obtain the funds to finish the album; and, the label would rather accept a finished album that costs a bit more than originally budgeted for than an unmarketable, unfinished album. The “minimum” amount listed above is known as the “floor.” As the above clause states, if an artist fails to fully recoup their entire prior advance from the label, they will only receive the “minimum” amount listed for their next album. Conversely, the “maximum” listed above is known as the “ceiling.” This is the highest amount that the label will provide to the artist for their next album no matter how good the prior albums sales were. As the proceeding clause states, if an artist does fully recoup their prior advance, they will receive the “maximum” amount listed for their next album.

In most instances, any advance provided by the label to an artist is fully recoupable from the royalties earned on the material. This means that after the label advances a specified amount to the artist, the label keeps any and all royalties earned by the artist for the recordings until the original amount is paid back. This is further exemplified as most clauses state that the amounts subject to recoupment by the label include “all amounts paid to you or on your behalf, or otherwise paid in connection with this agreement.” Thus, all the expenses the label pays including, to name a few, any
recording costs, music video production costs, studio session players and marketing and promotions for the album. They are generally all recouped prior to the artist receiving any additional monies. This is why the actual “minimums” and “maximum” are subject to extensive negotiations, since the amount the artist initially takes subsequently impacts what they will receive in the future, if anything.

The royalties earned by an artist under this agreement and in most standard ones are typically subject to cross-collateralization. This means that any monies advanced by the label “under this or any other agreement between the parties” shall be recouped from any and all streams of income that the label is entitled to. For instance, if the label has a publishing deal with the artist, the recording company could recoup the funds it advanced to create an album from the artist’s publishing monies. Similarly, if an ancillary income arrangement exists with the artist, the label could potentially recoup the funds it advanced to create the recorded music from the artist’s touring monies or from the artist’s merchandise sales, or any other income that is included in the agreement with the artist. Conversely, an agreement that is not cross-collateralized permits the label to only recoup the funds it advanced for the creation of recorded music from the funds earned from the sale of the music instead of the label recouping the funds of any potential stream of income the label is entitled to. Ideally, an artist should attempt to negotiate that the agreement not be cross-collateralized; but, this may be a hard bargaining point, as the label may insist on cross-collateralizing any income earned to reimburse itself for the costs it has already advanced to the talent.

In addition, it is a common industry practice that in most every recording deal that an advance is non-returnable. Therefore, there is no need for the artist to re-pay the money provided to the artist by the record label. This is true even if the artist ends up “flopping” and never recouping the original advance amount from the royalties it earns from the sale of its music.

These are just a few of the main points that need to be agreed upon between the parties. We will explore some additional clauses typically included in many standard recording agreements in our next installment.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling. We are also aware of the importance of streaming recordings; but, we will need to leave that for another day.