• Your Team of Advisors

• How to Pick a Team; Personal Managers; Business Managers; Attorneys; Agents

• Record Deals

• Broad-Strokes Overview of the Record Business; Advances and Recoupments; Real-Life Numbers; Other Major Deal Points; Producer and Mixer Deals; Advanced Record Deal Points; Advanced Royalty Computations; Loan-out, Independent Production, Label, and Distribution Deals

• Songwriting and Music Publishing

• Copyright Basics; Publishing Companies and Major Income Sources; Secondary Publishing Income; Songwriter Deals; Co-publishing and Administration Deals; Advanced Copyright Concepts; Even More Advanced Copyright Concepts

• Group Issues

• Touring

• Merchandising

• Tour Merchandising; Retail Merchandising

• Classical Music

• Music and New Technologies

 

• Motion Picture Music

• Overview of Motion Picture Music; Performer Deals; Film Songwriter Deals; Composer Agreements; Licensing Existing Recordings and Existing Songs for Motion Pictures; Music Supervisors; Soundtrack Album Deals

FROM CHAPTER 7...

Basic Concept: Royalties

My brother-in-law, Jules, is in the used car business. He's famous throughout the West Valley because he'll trade cars for anything. At one point, he traded a car for a silver tea set, a set of golf clubs, and a mule. (Honest.) He then traded the mule, along with a stained-glass window of Daffy Duck, for an English bulldog named Rosie.

About that time, my wife and I were looking for a dog. It was before we had children, and we wanted to test our parenting skills on something that wouldn't use drugs if we failed. In trying to decide what kind of dog we wanted, we used to take Rosie for outings on weekends, and in a perverted way we began to think of her gnarled face and drooling as cute. Anyway, Jules decided he was going to breed her, and we wanted a puppy. So I helped by finding a stud dog, through a sophisticated referral program - the Yellow Pages. I called a place named Royal Family Bulldogs, which conjured up images of pampered dogs reclining on velvet pillows in a castle. Well, it turned out to be a dilapidated house in Pacoima, the most impressive feature of which was its bulldog smells. But Royal Family had a huge brown stud named Winston, who was a champion. So Jules hired Winston, and Rosie got pregnant.

About this time, Jules decided he wasn't interested in the headaches of small puppies. So he enlisted the help of his friend Corky. Corky's deal was that she would take care of Rosie and the puppies, and when each dog was sold, she'd get half of the sales price. Thus, if a dog sold for two hundred dollars, Jules would get a hundred dollars and Corky would get a hundred dollars.

So what does this have to do with records? Well, your record royalty is very much like Jules's share of the bulldog proceeds. In the case of records, the artist (like Jules) turns his recordings (pregnant Rosie) over to the company (Corky), who then sells the finished product (puppies). For each record (puppy) sold, the artist gets a piece of the proceeds, and the company keeps the rest to cover its costs and make a profit.

Basic Royalty Computations

The division of proceeds between the artist and record company is a bit more complicated than the puppy deal.  In fact, up until a year or two ago, this process was more complex than NASA's formula for getting the Space Shuttle home.  But recently, in a surge of Why can't we all just get along?, most companies shifted to a much simpler system.  You get off easy–I had to learn all the complicated crap.  (At the end of this chapter, I'm including a section on how it used to work.  That's because (1) there are a lot of older deals written this way, (2) there's a few cranky hold-outs, clinging to the old system, (3) I spent hours writing that section and hate to see it go to waste, and (4) I thought you might need it some night if you have trouble sleeping.)
To follow this next part, we'll need to use a little math.  Don't worry if numbers aren't your strong suit–I'll go slowly.  I explained these concepts to my cousin David, who has to take off his shoes and socks to count to twenty, and he understood them. 

To follow the next part we'll need to use a little math. Don't worry if numbers aren't your strong suit - I'll keep it simple and go slowly. I've explained these concepts to my cousin, David, who has to take off his shoes and socks to count to twenty, and he understood them.

Here's how it works:

1. The artist royalty is a percentage of the wholesale price.  The companies also call this price the published price to dealers (PPD to its friends), or sometimes Basic price to dealers (BPD).

Each royalty percentage is knows as a point, so if you have a 10% royalty, you have 10 points.


2. You multiply your royalty percentage times the wholesale price to find out the number of pennies you'll get.  Here's an example (using easy math numbers): 


  CD wholesale price   $10

  Royalty rate    x10%

  ROYALTY    $1 

That part's simple enough, but here's a few wrinkles:


Free Goods

Royalties are paid for each record sold. Why do I emphasize the word sold?  Well, the companies give away free goods, also known as special campaign free goods. This started when the companies wanted to push out large numbers of a particular artist's album.  To get the stores to stock more if it, they gave away 5% or 10% of all records shipped.  Originally, these were short-term deals (a few months), but they've evolved into a near-permanent arrangement.

These free goods are a very real discount of the price.  Because these freebies actually cost the record company, they don't bear royalties.

Promotion Copies

Records given away for promotion, such as radio-station copies, are also free goods and don't bear royalties.  They are known as promotional or promo (pronounced "pro-moe") records.  These don't go to retailers and are marked "not for sale".

As with any number of other things in life, unfortunately the theory and reality of promo records don't quite converge.  While these records are meant for disc jockeys, they sometimes end up being sold in record stores.  And of course they're priced cheaply, for the obvious reason that the person selling them to the store didn't pay for them.

What is less obvious is that the people who created the record don't get paid for sales of promos.  Thus, while someone is enjoying a bargain, it's at the expense of the artist, publisher, songwriter, record company, unions, etc.  (I hope I'm making you feel guilty if you buy records marked "promo-only", since you're taking bread out of the mouths of your creative brothers and sisters.)

Some record companies–for example, Sony–have tried to solve the problem by stamping their promotional product with an official-looking statement that says the record is only licensed for promotional use, as opposed to being given away.  The theory is that the record company keeps ownership of each promo records, and so any resale if it is illegal.  In theory the company is absolutely right–it is illegal to sell something you don't won, and Sony could demand return of the record at any time.  However, you can imagine how meaningful this concept is to the owners of Mortimer's Used Records and Ski Shop in East Elk, Vermont.  So the best cure is an informed boycott.  Let's start one.