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Music Business Foundations: Understanding Royalty Provisions and Rates | Berklee Online 10/42 - YouTube
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All right.
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Let's talk about another provision that's of crucial concern to the
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artist, and that is the royalty provision.
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The artist assigns their copyright to the record company, and in exchange
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for that assignment, they receive royalties from various uses of those
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sound recordings.
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This provision, like all of the provisions, has evolved over a period
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of time and continues to evolve.
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Let's talk about the royalties for the various uses of the sound recordings.
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One of the uses of sound recordings is the sale of the recording--
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the sale through digital distribution, the sale of physical CDs.
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And the royalty rates for physical recordings are couched in terms of
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percentage points.
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In other words, 1% is considered one point.
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The norm for royalty rates for a new artist for albums is
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between 13% and 16%.
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Now, many contracts will have provisions stating that royalty rates
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for singles are 3/4 of the album rate, which means if you have a 16% royalty,
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your royalty for singles might be 12%.
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I personally have problems with that, but we're going to talk about it,
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particularly for digital singles.
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But we'll talk about that a little later.
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13% to 16% is a good royalty rate for new artists in today's market.
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But the question arises--
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13% and 16% of what?
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What does that 13% or 16% apply to?
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Let's say you have a 15-point deal.
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Well, this gets back into the evolution of recording agreements.
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In years past, some major labels would apply that percentage to the retail
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price, and some labels would apply it to the wholesale price.
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Now, what is the wholesale price?
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Record companies create configurations of sound recordings.
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Say a CD is a configuration of a sound recording.
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Multiple sound recordings are on a CD.
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They sell those to retailers for what is called the wholesale price, which
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is usually a few dollars less than the price that the retailer
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sells to the consumer.
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Record companies generally, particularly in the past in physical
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distribution days, did not sell to the public.
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They sold their records to retailers, who sold their records to the public.
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But when record companies would base their calculation of royalties on
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retail prices, it usually caused confusion.
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And here's the situation.
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Record companies suggest retail list prices to retailers to sell the
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product for.
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In other words, years ago-- let's go back to the '90s--
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a Jay Z album could come out.
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And the record company, although it would sell the album to the retailers
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for $12, they would suggest that the album be sold for $15.98.
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That was the suggested retail list price, sometimes called the SRLP, the
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Suggested Retail List Price.
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And that's a price that the record company suggests the
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retailers sell it for.
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Retailers don't have to sell it for that price.
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The retailers could sell it for $14, and they could determine
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their extent of profit.
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They paid $12 for it.
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They could sell it for $12.98 and make $1.
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They could sell it for $14.98 and make a greater profit.
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So it really depends on what the retailer sold it for.
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But that suggested retail list price would be the initial price for
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determining how that royalty rate would be applied.
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And here's where it creates a lot of confusion.
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In the early part of the contract, the royalty provision would say that the
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royalty rate will be applied to the retail royalty base price.
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Artists would assume that to be the suggested retail list price-- in this
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case, $15.98 or $16.
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But further on in the contract, there would be a provision defining what the
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retail royalty base price is, and that wouldn't be the
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suggested retail list price.
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There would be certain deductions taken from that suggested retail list
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price before that royalty rate was applied.
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And we're going to talk about some deductions that are taken from
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artists' royalties that really create confusion, lead to non-transparency,
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and have really evolved over a period of time.
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So the definition of the retail royalty base price would state that it
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is the suggested retail list price minus a packaging deduction.
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A packaging deduction.
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What is a packaging deduction?
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Well, record companies years ago really felt that the artwork on the
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album, which they paid for artists to create, really created value in the
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sale of the product.
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And they didn't want to pay the artists a royalty
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based on the artwork.
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They only wanted to pay the artist a royalty for the music.
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So they felt that from that suggested retail list price they should take a
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certain amount off of that to account for them paying for the artwork that
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helped sell the album.
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Here's the problem.
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At first, for vinyl albums, the packaging deduction was 15%.
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And once again, this goes into the evolution of technology.
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Each time a new technology, a new configuration, was introduced to the
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marketplace, it seemed that the packaging deduction
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went up more and more.
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So when cassettes came into the marketplace, the packaging deduction
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for cassettes was 20%.
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And then in the '80s, the packaging deduction was 25%.
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So what does this all mean?
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Let's go back to our example with Jay Z. Suggested retail list price back in
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the '90s might have been $15.98, $16.
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That was a suggested retail list price.
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The retail royalty base price, however, included a 25% deduction from
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that $16 price, which reduced that royalty base price from $16 to $12.
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It's kind of discounting the artist royalties so that the record company
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has to pay less for that.
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Now, how much did it cost for record companies to not only manufacture but
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package and seal CDs?
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They took $4 off with the packaging deduction, sometimes called a
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container deduction.
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But the record company only spent $0.60 to $0.75 not only to manufacture
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it but to package it, seal wrap the CD.
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$0.60 to $0.75.
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But they've taken a deduction of $4 off the suggested retail list price to
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get to the retail royalty base price.
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Very confusing, non-transparent.
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That's what artists were complaining about.
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Unfortunately, you find a lot of contracts that are still couched in
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terms of the retail price today.
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However, royalties for major labels aren't calculated on the retail price.
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They're calculated on the wholesale price.
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What is the wholesale price?
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The wholesale price is sometimes called the Published Price
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per Dealer, or PPD.
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So let's take an example here.
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Let's say that currently an album sells through iTunes for $9.99, and
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the record company gets paid $7.50.
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They sell it to iTunes for $7.50.
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Well, if you apply the royalty rate of 15% for that album, you'll find that
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that leaves the artist with a royalty of about $1.12 per album.
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When you talk about singles, it could be a different story.
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I mentioned earlier traditionally, singles royalty rates many times are
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only 3/4 of the album royalty rate.
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So to make it easy, if you had a 16-point deal for albums, you would
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have a 12-point deal for singles.
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But that's the historic way of paying royalties for singles.
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That was back in the day when CD singles were released.
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Record companies had to pay a lot of money to produce these CD singles, to
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distribute them to wholesalers, and wholesalers who sold to retailers.
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There was a lot involved, a big investment for the
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release of CD singles.
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But since 2003, the primary configuration of singles has
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not been the CD.
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It's been the digital download.
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Now, what are the costs to the record company to deliver these files to
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iTunes, to Amazon?
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They're not producing a CD.
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They're not having to distribute it and have warehouses to distribute it.
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They don't have all of those multiple costs.
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So should the royalty rate be less for a digital single than
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for a digital album?
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I argue no.
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And although your contract might have the original proposal from the record
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company stating that they want to pay you a 3/4 rate, I've found that if you
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really press the issue, the record companies will possibly agree to pay
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the album rate for digital singles.
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Why is that important?
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Singles are becoming a huge selling configuration for records, and you've
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got many multiple million-selling singles in today's market.
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So the single is becoming important again, just like it was back in the
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'50s, '60s, and '70s.
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So the packaging deduction created confusion, particularly when you deal
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with royalties being paid on the retail list price.
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And once again, some contracts you'll find out there today still state that
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they're paying royalties on the retail list price and will
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impose a packaging deduction.
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But there are other deductions that you need to be concerned about.
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