Deals, Deals, Deals
The Royalty Deal Type 1: The Copyright Ownership Deal
Grant of Rights
Typically, the labels pay the artist somewhere between 10 and 20% of the suggested retail list price (srlp). Thus, if an artist had a “12 point deal” with a label it meant that for every record that was sold at a list price of (for easy math) $10, the artist would theoretically receive $1.20 from the label as an artist royalty.
I say “theoretically” because the labels put in all sorts of deductions (packaging, free goods, etc.) to limit both the percentage paid and the number of records that earn royalties.
While there are a ton of other elements in an artist contract with a label, the above represent the most material terms. This template, with little deviation, was the dominant one for decades.
The Royalty Deal Type 2: The Term Deal
This dynamic led to far more so-called licensing or term deals. In these types of deals, the artist grants the label the rights to exclusively exploit the recordings for a set period of time. At the end of the term, the rights to the recordings revert back to the artist. The artist may then re-license them, sell them, or exploit them herself.
This deal is obviously an attractive deal for many artists, as, beyond the financial implications, it also represents a sort of moral victory for the artist who is reluctant to forever part with their work.
The caveat, of course, is that these deals tend to have little or no advances associated with them.
Beyond these differences, the Term Deals operate essentially in the same manner as the Copyright Ownership Deals outlined above; that is, there are clauses for royalty, territory, number of options, etc.
The 360 Deal
The 360 deal is a Copyright Ownership deal where the label has rights in not only the master recordings, but also in ancillary rights that artist typically kept sacrosanct; such as, merchandise, revenue from touring, and publishing.
The labels’ argument is that as a result of their exploitation of the artist’s master(s), they increase the value of the artists merch, ticket sales, and publishing, and, thus, should participate in the revenue from these elements.
The problem with this argument is that few if any labels have competencies in the area of merch or tickets. With respect to publishing, there are a host of conflict of interest issues with respect to a single entity controlling both the master and publishing rights of an artist’s work (these are not insurmountable, and there are benefits, at times, to a “one-stop” publishing/master relationship, but such situations are not without their challenges/potential for conflict).
These 360 Deals have become de rigueur amongst the majors; if you want a major label deal, this is what you will be offered.
All other deal elements are consistent with the above with respect to term, territory, and royalty.
In these types of deals, the artist typically delivers a finished master to the label. The label pays a small (if any) advance, and then spends money exploiting the master.
In these deals, the label recoups all expenses associated with this exploitation (remember, in the deals above, recoupment typically tends to be limited to advances and money spent on independent promotion and publicity). This means that every dollar spent — for postage, manufacturing, advertising, etc. — is all recouped prior to an artist royalty being paid.
Once this money has been recouped, the label splits the profit — on a net basis — with the artist. Meaning, if the label spent $5000 to exploit the master, and they recouped this $5000 through sales, at the very next record sold, the label would divide the profit after expenses with the artist. So, if the cost of goods sold on a per-record basis was $3 (for manufacture, marketing, etc.), and the label received $10 from the sale of the label, they would remit $3.50 to the artist and keep $3.50 for themselves.
While these deals do seem more equitable on the surface, it’s important to keep in mind that few records recoup even when limited to advances and costs of independent promotion/publicity, and thus when you factor in all the other costs associated with exploiting records it can be very challenging to recoup all of the costs.
There are two other important elements to consider with respect to these types of deals: ownership of the master, and mechanical royalties.
You must define who owns or at least controls the ownership of the master during the term of these deals. Otherwise, issues will arise with respect to what happens if, for example, a larger label wants to buy out the record or the label, etc.
The mechanical royalty issue is more complex. In all of the deals presented here, the labels are simply licensing the rights to manufacture the copyrighted songs of the writer on the label’s record (or download). This is accomplished via the use of a mechanical license agreement. Unless waived by the writer, the label must pay the writer a mechanical royalty as soon as the first copy of the record (or download) that contains the copyrighted songs of the writer is sold. In other words, the label can’t wait to recoup their costs prior to paying mechanicals — they must pay from record one.
These issues aside, these deals are increasingly common outside of the majors. Whether you are a label or an artist, you will likely present or be presented with this type of deal.