Manage for Success: Artist Contracts, Newsletter #71, March 2007


"Manage for Success" is a free monthly newsletter for record label executives who want to operate their companies efficiently and successfully. It's published by Keith Holzman of Solutions Unlimited, a management consultant, troubleshooter, and trusted advisor, and is based on his many years as a senior executive in the music industry.


Copyright 2007 by Keith Holzman, Solutions Unlimited. All rights reserved.


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It's been a number of years since I've written about artist contracts, but it's a subject much on my mind lately because I've been seeing agreements that would curl your hair. I'm not an attorney so I advise all my clients to retain an experienced entertainment lawyer to draft their own standard artist agreement, but I'm making the suggestions below based on my many years' involvement with them.


I've always stressed to my clients that their contacts be artist-friendly, and I mean this from two standpoints. First, they should be fair and even-handed in the terms and provisions. Second, they should be written so that the average person can readily understand what they mean.


These are some of the things record labels should consider when writing artist agreements.


Term. Be sure the "term" -- the period of time the agreement is in effect -- is clearly stated. Some are so complicated that it takes an Aztec calendar and an abacus to calculate how long they run, and then lawyers are frequently in disagreement when they try to interpret them. The same should also apply to the definition and length of option periods.


Royalty Base. The royalty base should be 100 percent of either suggested retail list price (SRLP,) or the label's price to its distributor, or the distributor's average price to its dealers (PPD.) Whichever of these is used, it should be clearly stated as such, and the calculated royalty should be proportionate. In other words, the artist's royalty should be more or less the same no matter which of the above is the basis. For example, a 10 percent royalty based on an SRLP of $14.98 would be about $1.50, but if based on the label's price to its distributor (about $7.50 -- roughly 50 percent of retail) then you'd need to double the artist's royalty to about 20 percent to come up with the same $1.50.


Deductions. Forget about packaging deductions which has been common but unnecessary since CDs have been typically issued in jewel cases. This provision is a throwback to the 60's when such a deduction might have been necessary when artists commonly requested expensive packaging including gatefold jackets and booklets with lyrics and lots of photos. I can see some rationale for a deduction for expensive Digipaks®. But that's about it.


There's also no need for deductions for such standard configurations as CDs, cassettes, etc. The CD deduction dates back to the early 80's when it was a new and unproved configuration and the actual cost of manufacture was about three times higher than the then-prevailing LP. That's when the "new technology" clause started creeping into contracts.


And of course there should certainly be no deductions for downloaded sales. I've seen contracts where there's a packaging deduction taken even for these sales that have no package at all!


Territory. Clearly state the territories that are covered. If it's the World then say so. But "parallel universes" -- as in some contracts? Get real!


Ownership of masters is frequently another sore point. It's my opinion that masters should always revert to the artist in the case where a label closes shop and hasn't sold its assets. Some agreements stipulate that, should the label go under or be in default for not paying royalties, ownership of the masters will revert to the artist.


If the recording is a "work for hire" then that should be stated as such, with a clear explanation what the term means.


Royalty percentages should be clearly stated for each configuration and price category, particularly for digital sales.


Free Goods. I'm not a great believer in using free goods to promote the sale of CDs because this practice has been severely abused by many labels and accounts. If you must utilize free goods, I recommend you limit their use contractually to a defined amount, but in any event no more than 10 percent, which I believe is itself too high.


Controlled Compositions are those that are written by the artist or producer, and for which most labels prefer to pay less -- typically 75 percent of the statutory amount. This can be very unfair to an artist and his publisher, but it's one way for a label to control its costs.


Co-publishing. Many labels try to obtain a portion of a writing artist's publishing. This is typically 50 percent of the publisher's portion, allowing the artist to retain the other 50 percent of the publisher's portion as well as 100 percent of the writer's portion. Therefore the writing artist would own three quarters of all the publishing with the label retaining the other quarter. I believe this is a fair provision, provided that the label's publishing division actively works to promote the copyrights involved.


Cross Collateralization between publishing and record royalties is attempted in some contracts, but this is a no-no and is extremely unfair to an artist who writes his own material. More common is crossing multiple releases so that positive royalties from higher selling albums are crossed with losses from poorer selling ones. This is not unreasonable in cases where a label has actively been developing an artist's career and is thus an opportunity for a label to try to recoup some of its losses.


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Label executives regularly deal with a great many complex problems and situations, and after many years of record industry experience at labels large and small, I've learned how to guide them over the many hurdles the business is prone to.


Let me help you as I've helped so many other labels "manage for success." Email me at <mailto:keith@holzmansolutions.com> so we can discuss how I can improve your business.


Should you be thinking of starting your own label, I suggest you get my book "The Complete Guide To Starting A Record Company" which can be ordered as a downloadable eBook in PDF form, or as a printed, spiral-bound volume. Download the Introduction and read the complete Table of Contents at <http://www.recordcompanystartup.com/>.


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Tour Support. Most independent labels can't afford to spend much in the way of assisting an artist's touring, other than through use of the label's publicity department to support the artist's efforts. However, if a label helps support the artist while on tour, then it's reasonable that it be a recoupable cost.


Independent Publicity, Promotion, and Marketing. Many small labels don't have fully staffed departments to handle these functions so in the event they hire outside specialists, it's not unreasonable that a portion -- no more than 50 percent -- be recoupable from the artist's royalties.


Merchandising. It's becoming quite common for labels to negotiate for a percentage of an artist's merchandising income. I don't think this is unreasonable for those labels who actively work to develop their artists' careers, but I think it very unreasonable otherwise.


Artist Approvals should be requested whenever feasible, but these should not be contractually offered. I've seen too many occasions where artist's unreasonably withheld approvals and impaired a project and its release.


I don't recommend that a label contracts with an artist who is underage. This can create untold problems, even when parents sign an agreement. I suggest waiting until the artist has reached majority.


Profit Splitting. There are many occasions when an artist or group will record an entire album paying for all the costs as they proceed, without requesting funds from the label. This is particularly common when an artist is not yet signed and records an album on his own. In this event a label and the artist may enter into a simple profit-sharing plan, where all recording, manufacturing and marketing costs from both sides are pooled. Then net income after accounting for expenses is split, usually on a 50/50 basis.


You might include in your contract a comment recommending that the artist seek the advice of a competent attorney thoroughly familiar with record industry practice.


In order to keep an agreement reasonably simple, some attorneys put all of the definitions, and certain other boilerplate, in a discrete part of the contract. These are items that will usually remain standard for all of a label’s agreements and simplifies the negotiating person’s work and reduces the amount of typing by an assistant or paralegal. The definitions will include all of the standard words that require strict explanation so that there will be no confusion over terminology.


In sum, I believe that a label should be as fair as possible in signing an artist. After all, this should be like a partnership where both artist and label share any bounty. Contracts should be just that — an agreement between both parties that is fair and equitable, creating a win-win situation for all. In short, don’t be greedy.


Until next month,

Keith Holzman -- Solutions Unlimited

Helping Record Labels Manage for Success.


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Copyright 2007 by Keith Holzman, Solutions Unlimited. All rights reserved.