DANGER FROM RECORDING CONTRACTS

          Elsewhere in this site, I have been mainly concerned with various songwriter contracts and the ways clauses in those contracts affect your rights as a songwriter.  But many songwriters would classify themselves as singer-songwriters, in the market for recording contracts as well as publishing deals. 

           It is important to realize that your terrific publishing contract can be severely weakened by the wording of your record contract.  I want to focus on some very important ways a recording contract can reduce the royalties you would normally be entitled to as a songwriter.

 CROSS-COLLATERALIZATION

            When a singer-songwriter is negotiating with a record label for a recording contract, it is not unusual for the record label to insist that the artist also sign a publishing contract with the record company's affiliated publishing company.  For some reason, this is especially true with a small or independent label. The most notorious danger area here is cross-collateralization. 

           Just as a publisher wants to recoup its expenses, (advances, demo costs, etc.) out of royalties your songs earn before it actually has to pay you any royalties, record companies want to recoup their expenses before paying any royalties.  That's fine as long as the record company is recouping its expenses out of recording artist royalties.  What you will often find in these recording contracts, however, (at least in the company's first draft), is some innocent looking language providing that the record company may recoup its expenses out of any and all moneys owing to you. 

           If you have also signed a publishing contract with its affiliated publisher, you may wind up agreeing to cross-collateralization.  The result is that you will not see any publishing royalties or recording artist royalties until both the publishing company and record company are recouped.  The record company will have the right to recoup its expenses out of your publishing royalties and the publisher will have the right to recoup its expenses out of your recording artist royalties. 

           A record company may have a lot more to recoup than a publisher, such as recording costs, video production costs, etc.  In addition, the recording contract may provide that the expenses related to any record recorded pursuant to the contract are recoupable out of the revenues generated by any song recorded pursuant to the contract.  You want to avoid the situation where the record company is recouping its recording expenses, (not only for this particular record, but for previous and future records as well), out of both record artist royalties and publishing royalties.  Your attorney should try to get the company to modify the first draft so record company expenses are recoupable out of record artist royalties only.

           (Remember also that I have warned you about transferring your copyrights to an entity that is not really an active publisher, even if it is "affiliated" with a record label.  It is often just a ploy on the part of the record label to attach itself to another income stream.)

  CONTROLLED COMPOSITION CLAUSES

          A second way record contracts can reduce songwriter royalties is in the way mechanical royalties are to be calculated.  This is true regardless of whether the record company and publishing company are affiliated. 

           Mechanical royalties are moneys paid by a record company to a publisher for the right to place a song on a record.  The current statutory rate for mechanical royalties is generally 9.1 cents per song per record, or 1.75 cents per minute per song per record if the song is over five minutes in length.  This seems fairly straightforward, but most record contracts contain a "controlled composition" clause whereby the recording artist, (that's you, the performer) agrees that the record company will pay the publisher, (that's you, the songwriter), a reduced mechanical royalty rate, generally 75% of the statutory rate, on songs written or controlled by you.

           As if that's not enough, the recording contract will often limit the total mechanical royalties for an album to 10 times the reduced rate, regardless of the number of songs that actually appear on the album, and  regardless of whether the songs are actually owned or controlled by you.  This effectively imposes a ceiling, or upper limit, on the amount of mechanical royalties the record company will pay, (i.e., 75% x 9.1 cents x 10 songs). 

           If you wrote all the songs on the album and there are more than 10 songs on the album, your actual mechanical rate per song averages out to be even less than 75% of the statutory rate.  If some of the songs are written by other parties, who refuse to agree to a 75% rate, you have to make up the difference.  Even if you wrote all the songs and you entered into a publishing contract whereby you agreed not to enter into a reduced rate agreement with a record company, you will have to make up the difference to your publisher.  The record company may also seek to reduce the mechanical rate further for record clubs and budget records, as well as arrangements of songs in the public domain.

           Unlike cross-collateralization, there's not much a new artist can do about these controlled composition clauses.  You may be able to have the overall album limit for mechanical royalties calculated on the full statutory rate rather than 75% of the statutory rate.  In addition, the statutory mechanical royalty rate fluctuates over time.  So far, it has only gone up, so I try to negotiate a provision that the rate will be calculated as late as possible, for example, on the date the particular record is released, rather than being based on the statutory rate in effect at the time of the recording.

CALCULATION OF RECORDING ARTIST ROYALTIES

           The articles in this series have dealt with your rights as a songwriter.  But many aspiring songwriters are also aspiring recording artists.  Before the Beatles, most recording artists did not write their own songs.  Now many recording acts are self-contained, writing the songs they record.  There may be a temptation among singer-songwriters to de-emphasize the importance of songwriter/publisher contracts and to rely on their royalties as recording artists.  After all, if you have a gold album, (500,000 units sold), you will have more money than you know what to do with, right?  Wrong!

           The reason songwriter/publisher income is so important to a singer-songwriter is because a performer may not receive any recording artist royalties, even with a gold album.  A typical recording artist royalty is 9 to 12% of the suggested retail list price of records sold.  It should only take a page or two for a record contract to describe that royalty, but most major label recording contracts run 40 to 60 pages.    The other pages must be there for a reason.  The great bulk of these contracts describe various reductions and deductions in the way the royalty rate will be calculated.  The bottom line is that the recording artist often ends up with little or no recording artist royalties, even though his or her album has sold well. 

           Let's take an example.  Assume you have just signed a recording contract. In deference to my arithmetic phobia, let's assume a royalty rate of 10% of the suggested retail list price (SRLP) of records sold.  If the SRLP for compact discs is $15.98 and the SRLP for cassettes is $10.98, it should be a simple matter to multiply the number of records sold times the applicable SRLP.  Assuming your album sells 250,000 CDs and 250,000 cassettes, your recording artist royalty should be $674,000:

But that doesn't take into account the various deductions and reductions. 

           Most record companies start off with a packaging deduction.  The reasoning is that the company paid for the packaging, not the artist, so the artist's royalty should not be calculated based on that portion of the SRLP attributable to packaging.  The standard packaging deduction is 25% of the SRLP for CDs and 20% for cassettes.  There is a further 25% reduction for CDs because the record companies are taking such a risk on a "new and untested technology".  Now the royalty rate looks like this:

Packaging costs for CDs and cassettes are nowhere near 25% and 20% of the SRLP, and CDs are no longer a risky technology.  Still, these are standard figures insisted upon by the record companies.  And this is only the beginning.  To save space as we go through the remaining calculations, let's average the CD and cassette royalty rates together: 

                    ($.958 + $.878) - 2 = $.918 average royalty per unit

 So, don't you apply this reduced royalty rate to the number of records sold?  No, the fun continues as the record companies begin applying reductions and deductions to the number of units sold.

             Back in the days of brittle 78 rpm records, product breakage was a big problem.  Record companies automatically took 10% off the actual number of records sold to make up for the loss.  Many companies still include this deduction in their contracts.  The result is that you are only being paid on 90% of sales.  Another 5% is deducted to account for "special" free goods.  These are records the companies give away to record stores to encourage them to stock more records.  Consumers still buy them at full price, you just don't get a royalty.  Still another 15% is deducted for "normal" or "standard" free goods.  These aren't really free goods, but are instead, a discount to record stores.  Typically, for every 85 records sold to a store, the record company will ship 100.  15 are "free." The record stores go on to sell the "free" records at full price.  You could say that the price per 100 records is just discounted, but by calling the 15 records "free", the record company does not pay the artist any royalties.     Consumers often return records for a refund or store credit.  Record companies use this to justify a "reserve for returns" policy whereby the companies wait to credit you for up to 35% of sales, often for 3 years or more! Now, the calculation looks like this:

          There are other deductions I haven't touched on, such as records given away by record clubs or sold at discount or budget prices, but you get the picture.  Now comes recoupment.  Record companies don't pay royalties until they have recouped various expenses out of the royalties that would otherwise be payable to the artist.  Assuming some fairly standard recoupable costs, the artist will still be in the hole, and not receiving royalties, even after sales of 500,000:

            As a music lawyer, I've been able to negotiate some of these deductions down -- a little.  But the percentages in my example are fairly standard.  Not all recording artists receive a $50,000 advance or spend quite so much on recording or videos.  On the other hand, the odds of selling 500,000 copies of anything are remote.  If you are dealing with an independent label, ask how many units their highest seller has sold.  You would be surprised.  Yet, the calculations in their contracts are often the same. 

          The reality is that, as a recording artist, you may never see any record artist royalties.  If you are a singer-songwriter, then, your songwriter/publisher income becomes quite significant.  A publisher should have far less to recoup before paying royalties:  demo costs, lead sheets, etc.  The danger is that you will sign a publishing deal with your record company's affiliated publishing company and the royalties from the two contracts will be cross-collateralized against one another.  This means that if the record company has not yet recouped its expenses out of your record royalties, it can recoup them out of your publishing royalties as well. 

          You can often negotiate a provision expressly prohibiting cross-collateralization, but you'd better make sure.  The moral of the story is that the ins and outs of songwriting and publishing income I've been harping about for so long are critical, not only to songwriters, but to singer-songwriters as well.  Don't assume that your royalties as a recording artist will make up for a bad publishing deal.