At some point, you’ve changed your direction and moved beyond simply being a musician. The result of this change in your direction—whether deliberate or an outcome of revolution or evolution in your growth—is your perception of yourself as an artist. When a mechanical device such as a tape recorder or a digital recorder records that medium of self-expression, you are elevated to the status of a recording artist. In the legal context, the generally accepted definition of a “recording artist” is a musician who no longer simply plays music, but rather puts his or her own signature spin on it, adds a certain element of self-expression, and, of course, records it.

You take great pride in your artistry. You craft it, you practice it, you hone it. Eventually, you want to share recordings of your artistry with others. Maybe it is with a handful of others, maybe it is with millions. You may have made some recordings and given them away or maybe even sold them. However, you’ve come to the conclusion that a certain amount of time, effort, technical expertise, and energy is required to create, produce, and share these recordings. If you’re like most artists I’ve met over the years, you would prefer to focus on the artistic side of your endeavors. And yet, unless you are independently wealthy, have a patron, or don’t want or need to devote a great deal of your time to your efforts as a recording artist, you have to find some way of sustaining yourself financially as an artist.

“If only someone out there liked selling my music as much as I like making my music,” you think to yourself, “I’d have more time to devote to my artistry and the world would be a better place.” Well, someone does like selling music that much. Whether fueled by commerce, belief in an artist, or some combination of the two, that someone (or something) is what we’ve come to know as a record company. The idea of selling recordings of music to the public started back around the turn of the 20th century in the United States. The record companies of the time found that demand for recordings from a particular company increased when the public could buy recordings of an artist from only one particular company. From this practice came the concept of exclusive artist agreements. An artist would make recordings only for a certain company, so as the popularity of the artist grew, so did the profits of the company that owned the rights to the exclusive recording services of the artist. To reward the artist for this exclusivity, and as compensation for the artistic services rendered, the record companies paid a royalty to the recording artist based on recordings sold. Through the years, the companies and the industry have grown. The sophistication, details, and thus, the legalities of this basic arrangement between record company and artist have grown along with the industry over the past hundred years.

Companies that manufacture and distribute the recordings of artists have come, gone, grown, shrunk, and consolidated into the business structure of the recorded music industry that we’ve come to know today. As I write this book, deals are in the works for even further ownership changes with the largest of these companies. I will not identify any of them by name, because these changes are happening so quickly that any attempt by me to memorialize the information is likely to become obsolete almost immediately. However, it should be noted that a handful of large multinational companies with their beginnings in a variety of different businesses, from appliance rental to media to liquor distribution to high-tech electronics, have come to dominate the business of music distribution. These companies and their music subsidiaries are known as the major labels or “the majors.” For our purposes, when an artist talks hopefully about the Deal, he is usually referring to signing an exclusive artist agreement with one of the majors or an affiliate company that is distributed by one of the majors. This is our starting point.

Before moving forward, I’d like to go over some vocabulary and roles first. Being signed is a phrase that I hear used quite a bit. It simply means that two parties have entered into a formal agreement for the artist’s services. While many states honor the terms of oral agreements, an agreement of this magnitude is usually in writing; thus, the phrase “being signed.” Indeed, a contract for services that spans greater than one year must be in writing to be binding and enforceable. A label or a record label is the trademark or name of the company that is generally responsible for the manufacture and distribution of recordings. Record label and record company are usually used interchangeably in conversation.

The role of the record company varies depending on whom you talk to, so it is a good idea to go through the entire spectrum of what the roles of a record label include. In large record companies, these roles are often separated into various departments, each with its own staff of employees. By looking at these departments one at a time, we can get an idea of where and how your artist deal fits into the overall process.

Artists usually have their initial contact with a division of a record company called the A&R department. A&R stands for artist and repertoire, meaning this department coordinates recording artists and the music that they record. The A&R department is primarily responsible for scouting talent—for example, stalking the clubs, listening to demos, and checking out contacts all over the country in search of acts that are compatible with the company. In addition, A&R departments work closely with the signed acts, interfacing with other departments within the company to create recordings that can be effectively marketed to the public. Depending on your style of music and how developed your act is, some labels have A&R reps in the studios with you to accept material from outside writers and publishers that they think might be good matches for your project and generally shepherd a recording along. Others take a completely hands-off approach, allowing you to do the bulk of your artist development and production on your own. Record companies also will take on the role of bankrolling the costs associated with the recording process. This includes paying for the entire range of projects from inexpensive, one-shot recording sessions to heavily produced projects that can take months or even years of time and rack up millions of dollars in recording costs.

Simply having a great single master recording isn’t enough for most artists, though. To fuel a part-time or full-time career from your recording talents, you want other people to be able to hear and buy your music. Like any other product, your recording needs to be manufactured into a configuration that can be purchased. Over time, the so-called standard configuration of recorded music has changed based on a combination of consumer demand and what the record companies have to offer. Our industry has experienced an evolution, from sheet music; piano rolls; and 78, 45, and 33 rpm (revolutions per minute) phonograph records all the way to eight-track and cassette tapes; CDs; and the digital forms of music we have today. There are costs associated with the design, photography, printing, and mass production—elements that combined with the recorded media itself result in a product that the record company can sell. Record companies have traditionally taken on the financial responsibility of advancing these manufacturing costs, which eventually factor into overhead.

Next on the list of record company responsibilities is the distribution of these mass-produced recordings. They need to be spread around so a great number of consumers can be exposed to them and have an opportunity to buy them; otherwise, you simply have mass-produced versions of a great recording that sit in boxes on a shelf. The major record labels have developed a distribution network of their own, which enables them to get recorded music into retail stores. Wholly separate from the major label distribution system is the independent network of record distributors that have similar relationships with retailers.

Finally, a demand needs to be created for the sales of the recordings. While an artist can generate a great deal of this demand by performing live, the promotional efforts of a record label are crucial and often necessary to gain mass consumer exposure. Traditionally, a combination of radio, press, online media, and advertising promotions is used to create audience awareness and excitement for artists. Using in-house personnel or hiring third parties, record companies create the campaigns that transform unknown artists into household names.

All of the preceding responsibilities form the backdrop and starting point of a label’s position in a relationship with you, the artist. Some labels bring more experience, personnel, money, and other resources to this relationship; some bring less. Some artists bring more of their own audience, money, reputation/name recognition, press, and other resources to this relationship; some bring less. While these relative bargaining positions dictate many of the high-profile financial details of the artist–record company agreement, including artist advances, royalties, and bonuses, we need to focus our discussion on the basic artist–label relationship. The record company has the experience and resources to broaden your audience and sell recordings. You have the talent and desire to be heard by a broader audience. Both sides seek to earn enough money from this relationship to enable them to keep doing it. Oversimplified? Maybe. The essence of the relationship? You bet. That’s our basic starting point.

You might argue, “But I can do all that stuff myself. I don’t need a record company to do all this for me and take all my money!” This argument has become increasingly valid, especially as technology has developed and enabled artists to handle a great deal of the label responsibilities. If this is your firm and unwavering belief, then my advice is to not get into a relationship with a third-party record company and start working immediately to get your music heard. However, before you make such a drastic decision, think about what you might gain from having someone else take on the various responsibilities that this section has discussed. By far, the two most important tangible advantages that you gain when a third party takes on any or all of these duties are the time and expense involved in carrying out these duties. If someone else is handling these responsibilities, it frees up your time and resources—financial and otherwise—to devote to your artistry. It takes time and money to develop the skill set, contacts, and sales strategies necessary to produce, manufacture, and market the work of a recording artist effectively. Only you can decide in your heart if this aggregate time and financial investment is worth sharing the wealth with someone else. If you decide it is worthwhile to enter into a relationship with a record company, this section has laid the foundation for discussing some of the major issues that you may want to consider as you negotiate the terms of your relationship.

A major consideration of recording agreements is whether your relationship with the record company is exclusive. The record company wants the relationship to be exclusive. The company is making a substantial financial investment in producing and promoting your music, and thus wants that investment to be reflected in the sales of its products, not the sales of a competing company. In a perfect world, the artist’s relationship with the record company is symbiotic. If your name and reputation should become more valuable due to the company’s efforts, then the company’s name will likewise become more valuable.

It is relatively common for an artist to have a non-exclusive relationship with a record company. Single-record or “one-off” deals do exist in the industry. The advantage is that you can still be a free agent, giving you the flexibility to look for another record company in the future if it would prove to be a better fit. For example, you might make a one-off deal with a small, regional record company with limited promotional resources. If the company takes the approach that this recording is the only one it will have with you and it had better give it the company’s best shot, then you’re in pretty good shape. The added efforts put into your recording might be the thing that attracts larger labels with more money, experience, and wider promotional range than the regional label can offer. Then, you may be in a great position to choose either to make a deal with one of the larger companies that didn’t know about you before, make another, similar deal with the smaller company with the advantage of knowing how you work with each other, or anything in between. A potential disadvantage of the one-off deal is that absent an exclusive relationship, a company might not work as hard on your project as it would on another artist signed to the company with whom the company has a more committed relationship. With a one-off deal, if the record company doesn’t promote your recording as well due to the non-exclusivity of your arrangement, perhaps the record would not attract the attention of other companies, leaving you with fewer options.

Compilation records are very popular hybrids of non-exclusive and exclusive relationships between artists and record companies. Record companies that own the exclusive recording rights of certain artists can contract with the company putting together the compilation and for a flat fee, royalty, or some combination of the two, allow the compiling company to license (borrow) the masters as well as the right to use the artist’s name in connection with the sale of the compilation. These arrangements usually have a “courtesy credit” provision so the public makes the connection between the artist and the original company with which the artist has an exclusive relationship. Many times, non-exclusive artists are also included on the same compilation recordings as exclusive artists, which gives lesser-known artists the opportunity to be associated with major label artists on the same project.

A company that owns exclusive rights to an artist can also license (loan) out his or her services to perform on other projects, either as a non-featured performer (such as being a session instrumentalist or vocalist) or as a featured guest artist. In the case of the background artist, you simply would be listed in the credits like any other session player or vocalist along with a courtesy credit (for instance, “Joe Guitarist appears courtesy of XYZ Records”). If you are appearing as a featured performer, which means that your performance, name, and reputation are being used as a selling point for that particular recording, the company that owns your exclusive rights as a recording artist could ask for payment of a fee, a piece of the royalty from the project, or other negotiated compensation from the record company of the artist with whom you are appearing.

Both the compilation and the featured artist configurations have become commonplace in the industry. It is a way for you and your record company to cross-promote effectively. It should be noted, however, that the timing of releases is very important for all involved, as cross-promoting projects at the same time to the same audience may leave you in competition with yourself or diminish your audience popularity due to overexposure.

In cases of exclusivity, a major question that arises with any contract—including artist deals, songwriting deals, endorsement deals, and others—is the length of your exclusivity. Most traditional major label contracts consist of an initial contract period followed by a series of option periods, with the opportunity to exercise the option being granted solely to the record company. At a time when major label artists release recordings only every two or sometimes even three years, a five-album deal can have you wrapped up for at least 10 years! This extraordinary length of service can certainly be viewed as against public policy. For example, there have been attempts in the California legislature to limit personal service contracts to seven years. To avoid a controversy for not delivering the minimum number of albums within the allowable time frame, it is advisable to have an experienced entertainment lawyer advise you on the legal duration for contract obligations in your jurisdiction. As with any relationship, if everything is going great, a decade can fly by in a snap, but if either side is dissatisfied with the relationship, being under contract for that length of time could be pure hell.

Before you assume that signing such a contract is the equivalent of being shackled to a ball and chain for the rest of your natural life, consider the rationale for this logic. The record company is taking a considerable risk with you and their other artists; it is not guaranteed that every recording it releases will make a significant return on its investment. To recoup the sizable cost of developing and promoting a new artist, as well as to offset the money that it loses on acts that don’t make it, the company needs to be able to benefit from its signings over several years and projects. The time it takes to release and promote five albums still sounds like a long time, doesn’t it?

One solution is to make the record company’s exercise of the options contingent upon the payment of cash advances or meeting certain performance levels, such as guaranteed releases, promotion commitments, or tour support. The advances are usually the most common middle ground; if an act is making money for the record company or if the company really believes in the act, it is well worth the option costs for the company to continue the relationship.

Some artists spend years creating their own trademark sound, assembling the right combination of songs, figuring out who they like to work with, and developing a method for transforming this melting pot of creativity into something that a record company can sell. Other artists have never been in a recording studio in their lives, don’t write songs, and have never explored their own musical identity. Depending on where you fit between these two extremes, the issue of creative control of your recordings will either be something that you ferociously fight for or graciously give up. Many record companies, citing that they are protecting their investment in your act, will want to have a great deal of creative control over your project. This includes details like choice of studio, budget, producer, musical genre, what material you perform, and other creative calls, all the way up to having the final approval of what is considered to be a commercially acceptable recording, and which songs are actually included on the record. A combination of careful negotiating of recording procedures, coupled with building a spirit of trust and sharing ideas, is the recommended method for alleviating issues of creative control.

The best method by far of gaining as much creative control as possible over your projects is to walk into the relationship with a clear vision of who you are as an artist and the chops to back it up. What I’m suggesting is that you do a great deal of your artist development on your own, which is a huge responsibility. This may not be your absolute ideal situation, but it is the trade-off for artistic freedom, and creates a relationship with a record company that is less likely to end up with you having to wrest away control of your sound down the road.

Negotiating a commitment from your record company to promote your recordings can enhance your chances of shared success. While not exhaustive, here is a brief list of some of the promotional efforts to which record companies are willing to commit: setting aside specific dollar amounts for promotions; distributing releases in specific territories; video production; radio promotion; hiring a publicist; and tour support. The difficulty lies in what you as an artist can reasonably request or even plan for early on in your relationship with a record company. As you formulate plans for how you want your career to unfold, share them with your label to see how your plans can intersect with the label’s promotional efforts.

Of course, one of the main obligations that you must commit to as an artist is to make yourself available for promotional appearances. These range from simple in-store autograph sessions to full-blown concerts. Many artists are not prepared for the great deal of time it takes to travel from town to town, shaking hands at radio stations and retail stores, sounding relatively alive while doing 7 a.m. interviews, and opening up their lives via the media in an effort to sell their recordings. Whether or not you are on a major label, these appearances are all necessary to promote your products, so be ready to take on the responsibility of promotions when deciding to become a recording artist.

The issue of artist royalties has always been one of the major negotiation points of artist–record company agreements. I’ve found that working my way with a client through the forest of percentage points, reductions, deductions, returns, reserves, and other financial terms of a major label agreement is often a harrowing exercise. With this in mind, I would like to review the basics of the traditional recording artist royalty structure using very conservative and easy-to-follow numbers. While the standards for royalty rates are changing constantly as artist production contribution and digital distribution practices evolve, a basic understanding of the concepts discussed below are important to grasp.

Let’s begin with a clear understanding of artist royalties. When I refer to an artist royalty in this discussion, it is specifically the royalty paid to the recording artist solely for providing services as a recording artist. Artist royalties should not be confused with mechanical royalties (discussed in the previous chapter) that may be earned by a recording artist who also writes her own material. Remember that these two royalties (artist royalties and mechanical royalties) are separate royalties paid for separate services. I find that the confusion arises because (1) sometimes the artist providing each service is the same person, and (2) both royalties are based on the sales of the same recordings. Separating the apples from the oranges (the recording artist services from writing services) will be helpful. Sometimes, however, an artist might be the producer of Masters as well, in which case the combined artist-producer royalty is paid to the artist. When this is the case, the combined royalty is referred to as an “all-in” producer-artist royalty. Since both of these royalties are being paid to the artist, for simplification purposes of this example, I will refer to this all-in royalty as an artist royalty as well.

Artist royalties are traditionally based on either the suggested retail price of a recording or the wholesale price that a record company charges to retailers or distributors. Between the fluctuating prices that different retail stores charge for the same product, and consumer demand driving down the cost of recordings, basing royalties on the suggested retail price of a record can be an unstable deal. Using a wholesale price base will give the deal some stability; however, adjustments need to be made in order to get the same rate when comparing wholesale and retail royalties. While most artists and their record companies protect the information about their royalty rates like the combination to a bank vault, it is generally accepted that the retail-price royalty range for major label artist fluctuates between 8 percent for unknown artists with very little negotiating clout and more than 20 percent for superstar artists with a track record. Wholesale royalties are adjusted according to what each respective record company charges to stores.

Let’s take as an illustration a royalty rate somewhere in the middle of this range. If you were to negotiate a deal for 12 percent of the retail rate and the suggested retail price of your recordings is $15, then your base rate would be $1.80 per unit. If the wholesale price for that same recording is $7.50 (a 50 percent reduction in the retail rate), the adjusted artist royalty would be 24 percent of the wholesale price (a 100 percent increase from the retail rate). If you sold 50,000 units, you’d be sitting pretty at $90,000, right? Well, not so fast; let’s look at some additional accounting first.

Our artist royalties calculations need to be considered next to recoupable costs. Over time, record companies have developed a number of costs that are billed back to artists and recouped from sales of records. While these recoupable costs are negotiable, some of them have become accepted as relatively standard in the normal course of business. Recording costs—including studio rental, outside musicians, vocalists, producer fees, and engineer fees—are all recoupable expenses. Often, video costs and outside radio promotional costs are recoupable. For both video and radio promotion, the recoupable amount varies from 50 percent to 100 percent of the actual costs. Artist advances and monies spent on the artist’s behalf (such as promotional trips for the press or monies paid to third parties on the artist’s account) and tour support are recoupable as well.

Both artists and labels are taking advantage of the modern Do It Yourself (DIY) world with artists being able to produce and deliver world-class audio recordings, video recordings, and a great deal of ready-to-use promotional materials to record labels. These costs may not be subject to recoupment at all or, in the alternative, kept to a minimum. However, as you can imagine, if money is being wildly spent and left unchecked, these recoupable costs can quickly add up. Think about that the next time you see some superstar jetting around to some foreign country to promote a record or to lay a vocal track on a single; the record company is recouping the expense of the jet.

Now, to be absolutely fair, we’re not talking about outrageous amounts of money being spent on every single project, so don’t stereotype all of the record companies as being guilty of wild and excessive spending. Looking at our previous example, let’s plug in a few more conservative but realistic dollar amounts. Let’s attribute $60,000 to recording costs; two singles promoted to radio at a cost of $45,000 each (at 50 percent recoupment); accompanying videos for the two singles at $75,000 apiece (at 50 percent recoupment); $20,000 in tour support to buy some gear, rent a truck, and pay for side musicians and hotels; and $20,000 each to the three band members as an artist advance. Even with these conservative figures, the recoupable amount for this project is $260,000.

Continuing with our example, the label still needs to make some accounting adjustments before putting money into our artist’s pockets. Artist royalties usually include any royalties paid to third parties such as outside producers (note the “all-in royalty” discussed above). If a 3 percent royalty is paid to producers in our example (a reduction of 25 percent of the artist’s royalty), the net artist royalty actually is now down to $1.35 per unit. Labels then make adjustments for a variety of reasons, including breakage, packaging deductions, and a variety of other deductions until one by one, the negotiated artist royalty is whittled down to a fraction of what originally was negotiated. Let’s assume that the combined amount of the previously described deductions is 10 percent of the net artist rate (again, this is a conservative figure).

After the label makes all of these adjustments, at 50,000 units, instead of the $90,000 in artist royalties that we anticipated, your artist royalties end up being dramatically different. The first thing we need to do is to subtract the third-party producer royalty of $22,500 (3 percent of $15 or 45 cents multiplied by 50,000 units) from artist royalties. This leaves a net artist royalty of $67,500 ($90,000 minus $22,500). The 10 percent combined deductions reduce the royalty by $6,750, leaving a figure of $60,750. The recoupable expenses included artist advances of $60,000 ($20,000 for each of the three band members), recording costs of $60,000, video productions costs of $75,000 (50 percent of two videos at $75,000 apiece), radio promotions costs of $45,000 (50 percent of two singles at $45,000 each), and $20,000 in tour support. Subtracting all of these recoupable expenses (totaling $260,000) from the adjusted artist royalty, instead of being paid $90,000, you would still be unrecouped in the amount of $199,250. While your label does not require that you write it a check for that amount to pay it back, you still have to sell quite a few units to even approach receiving royalties.

At 50,000 units, this band is still close to $200,000 in the hole. On the up side, each of the band members has seen $20,000 in artist advances and maybe picked up some gear from the tour support. But the fact remains that the band still has to sell quite a few records—more than an additional 150,000—for the band and the record company to break even. Once again, I want to emphasize that these are very conservative figures and are not intended to scare you away from major record companies. It is, however, meant to illustrate the reality that the stakes are very high when it comes to the kinds of sales that major record companies are expecting from the acts they sign. Unfortunately, the reality of the major label world has become that only those artists who sell a lot of records can recoup the significant investment made by the record companies.

The good news is that major labels are not the only game in town. While many of the same issues previously discussed are shared by smaller, independent record companies, the independents have a few advantages worth noting. First, independents are usually working on a much smaller scale than majors, and thus spend less money. If you were counting on paying for a new sports car with your artist advance, the independents’ budgets may not be to your liking. On the other hand, the smaller budget might be in your favor because the recoupable expenses are much lower than with a major, thus the pressure to sell really big numbers is decreased. Be it by genre or geography, independent labels also tend to have more focused niches than major record companies do. This means there is less of a chance that money will be spent without focus, the marketing effort will be more targeted, and the audience is likely to be more loyal. This great combination of advantages can enable a label with limited resources, and the artists on that label, to succeed.

Another alternative is signing an exclusive artist agreement with a production company. Production companies are different from record companies because even though they produce the master recordings just as record labels do, production companies stop short of the manufacture and distribution of the recordings that they make. Many independent production companies fill the role formerly served by the A&R departments at record companies. The production companies seek out talent, sign the artists to multiyear production agreements at a certain royalty rate, provide the skill and expertise to develop the acts, and then sell the acts off to record companies at a price “marked up” from the original royalty rate. This is a win-win situation because the producers are more aware of “the street” than the record company can be, the producers are taking care of the artist development at their own expense, and the record companies can hand-pick the acts that fit their company profiles with much less risk than if the label signed the artist from scratch.

Both major and independent record companies sign artists to development deals, which are basically equivalent to a test drive of the artists. The recording industry adopted this concept from the film and television business. In this variation of the artist deal, a company signs the artist to an abbreviated exclusivity period (for example, six months instead of a year or longer) during which the artist commits to recording demos funded by the company. The demos gives the record company an idea of the direction of the artist’s work and how the artist works in the studio, and allows the company an opportunity to observe the working habits and ethic of the artist. If, after reviewing the demos, the record company decides it wants to work with the artist, then it converts the development deal into a long-term artist relationship as described previously. If the record company decides to pass on the artist, the artist has a demo to let other record companies listen to in order to try to get an artist deal.

The ability of artists to secure direct distribution arrangements, to sell products directly to their audiences, and the explosion of digital distribution opportunities have collectively forced both independent and major record labels to be creative and flexible when it comes to crafting an exclusive “Deal.” Variations of what used to be a relatively standard agreement of “time and money” now offer flexibility when it comes to shortening the term of exclusivity, changing the delivery requirements, expanding or contracting the “rights package” obtained from the artist, giving the artist more creative control, alternative royalty structures, and more. The creativity of the deal-makers is now being tested with the restructuring of the entertainment industry and the business savvy of artists.

As this book goes to the printer, a new twist to the exclusive artist recording deal is developing with mixed implications. Dubbed the “360 degree deal,” this exclusive artist agreement entails that a company secures all of the rights that an artist has to offer, including recording rights, songwriting/publishing rights, management rights, merchandising rights, and performance rights, in exchange for a share in the artist’s income. As the name implies, this type of deal takes into account all 360 degrees of an artist’s talents and earning capacity when securing rights. While some view the 360 deal as an innovative partnership between artist and industry that works for established artists who are paid significant advances for their complete services, others are criticizing the deal as a “land grab” of rights—a throw back to the “old days” of presenting 360 deals as a “take it or leave it proposition” that exploits inexperienced artists who do not have a grasp on how valuable their services are. Only time will tell if the 360 degree deal will become a standard of exclusive artist agreements. As you proceed in your career, do so with caution and evaluate the pros and cons of “packaging” yourself prematurely.

As you can see, the Deal is no longer simply one mythical destination. Necessity and innovation have turned what used to be only one choice into many for artists and record companies alike. Many artists are making conscious choices to be associated with smaller, more targeted companies largely because they allow the artists to have more control over their careers. In addition, the corporate structure and spending of major record companies are forcing artists to try to generate hundreds of thousands of sales. Many artists no longer want to face such pressure and are opting to seek other opportunities, professional paths, and relationships that lead them closer to their goals. Ultimately, it is important for artists to understand how, where, and to what degree the sales of recorded music fits into their careers. They can then put that relationship in the right priority and develop their own version of the Deal from there.