http://www.twolouiesmagazine.com/pdfs/1999/2L_3_1999.pdf
Recording Contract Royalty Rates
By Bart Day
As is common knowledge, the typical recording
contract provides for the recording artist to be paid
royalties at a certain specified percentage royalty rate.
Generally, when people say that a particular recording
contract is paying a particular royalty rate
(let’s say 12%), they are actually referring (knowingly
or unknowingly) to the so-called “base royalty rate.”
This is the royalty rate which applies to the sale of
records sold at or near full list price in the United States
through normal retail channels (i.e., record stores).
In recording contract parlance, this rate is usually referred
to as the “USNRC” rate (standing for “United
States Normal Retail Channels”).
Typically, recording contracts will provide for
an “all-in” royalty rate (i.e., a combined royalty rate
for the band and producer). For a new band (and its
producer), the USNRC “all-in” rate will most often
be in the range of twelve percent to fourteen percent
of the retail list price. For example, a recording contract
might provide for a USNRC royalty rate of twelve
percent (“twelve points”), with the band receiving
approximately nine of those twelve points, and the
producer receiving approximately three points. To
the extent that the band and/or producer have some
real bargaining power, these percentages will be somewhat
higher.
Sometimes, though, the stated royalty percentage
rate is higher than the twelve to fourteen percent
mentioned above, but the higher royalty rate will not
actually result in more money for the band or producer.
This is often because of the fact that even
though the recording contract provides for a higher
royalty rate, various royalty adjustment clauses have
been inserted elsewhere in the contract which reduce
or eliminate the ostensible benefit of the higher royalty
rate. More often than not, this is a way for a record
company to make a band feel that the contract is
wonderful (and to give the band some bragging
rights), without actually having to pay the band any
more money per record sold (and perhaps pay the
band even less money).
So....you have to be very careful and not just look
at the royalty rate by itself. The only real way to evaluate
the real financial consequences of the royalty
clauses in the contract is to just crunch the numbers
and determine the exact amount (in dollars and cents)
which will be paid per record sold, after including in
your calculations all of the various royalty adjustment
clauses in the contract.
NON-USNRC SALES
I mentioned above that the USNRC rate applies
only to sales in the United States at or near full price
through normal retail channels. A lesser royalty rate
is customarily paid for records sold at significantly
less than the full list price, and for records not sold
through so-called “normal retail channels,” and for
sales made outside the United States.
Here are some common examples of how royalties
are typically paid for different types of sales:
1. Budget Records and Mid-Priced Records.
For so-called “mid-priced” records (often defined in
recording contracts as records selling at between sixtysix
percent and eighty percent of the full list price),
the royalty will be seventy-five percent of the USNRC
rate. So if the USNRC royalty rate is ten percent, the
royalty paid for mid-priced records will be 7.5 (seven
and one-half) percent of the list price (i.e., seventyfive
percent of the ten percent USNRC royalty rate).
For “budget” records (often defined as records
sold at between fifty percent and sixty-six percent of
the full list price), the royalty rate will be fifty percent
of the USNRC rate. (Or, again using the example
above, fifty percent of ten percent, hence a royalty
rate of five percent).
2. Cutouts/Deletes. Usually the contract will
provide that no royalties will be paid for records sold
as cutouts, etc.
3. Promotional Records. No royalties are paid
on records given away for promotional purposes, such
as records given to radio stations, etc.
4. “Free Goods.” If a record company sells
records to a record store, the record store might get
ten percent in “free goods.” In other words, the record
store would get 110 records, but pay for only 100. No
royalties are paid to the artist on those ten records
which are, at least for accounting purposes, given to
the retailer as “free goods.”
Typically, in recording contract negotiations, the
artist will want to put some type of limit in the contract
on the percentage of records sold which can be
given away as “free goods”.
5. Record Club Sales. For record club sales, the
royalty rate is usually one-half of the USNRC royalty
rate. (Using the example above, fifty percent of ten
percent, hence five percent of the list price). For
records given away as bonus records under record club
programs, usually no royalties are paid, or at least that
is what the first draft of the contract will say.
6. Foreign Sales. Typically a reduced royalty
rate is usually paid for records sold outside the United
States. The exact royalty rates are typically a bone of
contention during recording contract negotiations.
Often a record company’s first draft of the recording
contract will provide that the artist will be paid only
fifty percent of the USNRC royalty rate for any records
sold outside the United States. (Again, using the example
mentioned above, we are talking here about
fifty percent of ten percent, hence five percent of the
list price).
Almost always the foreign royalty rates can be
negotiated upwards. Typically the royalties paid for
Canada can be negotiated to anywhere between twothirds
and one hundred percent of the USNRC royalty
rate, and for major territories (Europe, Australia
and Japan), typically sixty-six percent to seventy-five
percent, and then typically fifty percent of the USNRC
base royalty rate for all other countries.
7. Foreign Licensing. With respect to those situations
where the U.S. record company licenses a foreign
record company to sell the records outside the
United States, the royalty structure for the artist will
be different than as described above. In these foreign
licensing situations, the typical recording contract will
provide that the artist and the record company will
split the foreign licensing income 50-50. However,
that allocation can often be negotiated upwards, with
the artist getting more in the range of 60 or 75 percent.
CONCLUSION
While the above comments give a hint of the
differing royalty rates for different types of record
sales, the royalty provisions in the typical recording
contract are much more complicated than suggested
above. Also, there are various changes in the royalty
clauses of a contract which can be negotiated for, in
order to substantially improve those royalty clauses
to the band’s benefit.
Although the issue of royalty clauses is complicated,
and much too complicated to cover thoroughly
here, there are really two main things to remember
here. Number one, the royalty rate will vary, depending
on the circumstances of sale. Number two, there
are various contractual provisions which can be negotiated
for, that will significantly reduce the negative
financial impact on the artist of these various
reduced royalty rate provisions mentioned above.
Editor’s Note: Bart Day is a Portland-based entertainment
attorney in private practice. He is also the
co-owner of ALLMEDIA, Ltd., a company with offices
in Portland and Los Angeles. ALLMEDIA specializes in
administering the licensing of music for film, television,
commercials, and computer games.
Bart is also a co-author of the new edition of
The Musician’s Business and Legal Guide, a book
compiled by the Beverly Hills Bar Association and
published by Prentice-Hall Publishing (New York).
The reader is cautioned to seek the advice of the
reader’s own attorney concerning the applicability of
the general principles discussed in this column to the
reader’s own activities.
Recording Contract Royalty Rates
By Bart Day
As is common knowledge, the typical recording
contract provides for the recording artist to be paid
royalties at a certain specified percentage royalty rate.
Generally, when people say that a particular recording
contract is paying a particular royalty rate
(let’s say 12%), they are actually referring (knowingly
or unknowingly) to the so-called “base royalty rate.”
This is the royalty rate which applies to the sale of
records sold at or near full list price in the United States
through normal retail channels (i.e., record stores).
In recording contract parlance, this rate is usually referred
to as the “USNRC” rate (standing for “United
States Normal Retail Channels”).
Typically, recording contracts will provide for
an “all-in” royalty rate (i.e., a combined royalty rate
for the band and producer). For a new band (and its
producer), the USNRC “all-in” rate will most often
be in the range of twelve percent to fourteen percent
of the retail list price. For example, a recording contract
might provide for a USNRC royalty rate of twelve
percent (“twelve points”), with the band receiving
approximately nine of those twelve points, and the
producer receiving approximately three points. To
the extent that the band and/or producer have some
real bargaining power, these percentages will be somewhat
higher.
Sometimes, though, the stated royalty percentage
rate is higher than the twelve to fourteen percent
mentioned above, but the higher royalty rate will not
actually result in more money for the band or producer.
This is often because of the fact that even
though the recording contract provides for a higher
royalty rate, various royalty adjustment clauses have
been inserted elsewhere in the contract which reduce
or eliminate the ostensible benefit of the higher royalty
rate. More often than not, this is a way for a record
company to make a band feel that the contract is
wonderful (and to give the band some bragging
rights), without actually having to pay the band any
more money per record sold (and perhaps pay the
band even less money).
So....you have to be very careful and not just look
at the royalty rate by itself. The only real way to evaluate
the real financial consequences of the royalty
clauses in the contract is to just crunch the numbers
and determine the exact amount (in dollars and cents)
which will be paid per record sold, after including in
your calculations all of the various royalty adjustment
clauses in the contract.
NON-USNRC SALES
I mentioned above that the USNRC rate applies
only to sales in the United States at or near full price
through normal retail channels. A lesser royalty rate
is customarily paid for records sold at significantly
less than the full list price, and for records not sold
through so-called “normal retail channels,” and for
sales made outside the United States.
Here are some common examples of how royalties
are typically paid for different types of sales:
1. Budget Records and Mid-Priced Records.
For so-called “mid-priced” records (often defined in
recording contracts as records selling at between sixtysix
percent and eighty percent of the full list price),
the royalty will be seventy-five percent of the USNRC
rate. So if the USNRC royalty rate is ten percent, the
royalty paid for mid-priced records will be 7.5 (seven
and one-half) percent of the list price (i.e., seventyfive
percent of the ten percent USNRC royalty rate).
For “budget” records (often defined as records
sold at between fifty percent and sixty-six percent of
the full list price), the royalty rate will be fifty percent
of the USNRC rate. (Or, again using the example
above, fifty percent of ten percent, hence a royalty
rate of five percent).
2. Cutouts/Deletes. Usually the contract will
provide that no royalties will be paid for records sold
as cutouts, etc.
3. Promotional Records. No royalties are paid
on records given away for promotional purposes, such
as records given to radio stations, etc.
4. “Free Goods.” If a record company sells
records to a record store, the record store might get
ten percent in “free goods.” In other words, the record
store would get 110 records, but pay for only 100. No
royalties are paid to the artist on those ten records
which are, at least for accounting purposes, given to
the retailer as “free goods.”
Typically, in recording contract negotiations, the
artist will want to put some type of limit in the contract
on the percentage of records sold which can be
given away as “free goods”.
5. Record Club Sales. For record club sales, the
royalty rate is usually one-half of the USNRC royalty
rate. (Using the example above, fifty percent of ten
percent, hence five percent of the list price). For
records given away as bonus records under record club
programs, usually no royalties are paid, or at least that
is what the first draft of the contract will say.
6. Foreign Sales. Typically a reduced royalty
rate is usually paid for records sold outside the United
States. The exact royalty rates are typically a bone of
contention during recording contract negotiations.
Often a record company’s first draft of the recording
contract will provide that the artist will be paid only
fifty percent of the USNRC royalty rate for any records
sold outside the United States. (Again, using the example
mentioned above, we are talking here about
fifty percent of ten percent, hence five percent of the
list price).
Almost always the foreign royalty rates can be
negotiated upwards. Typically the royalties paid for
Canada can be negotiated to anywhere between twothirds
and one hundred percent of the USNRC royalty
rate, and for major territories (Europe, Australia
and Japan), typically sixty-six percent to seventy-five
percent, and then typically fifty percent of the USNRC
base royalty rate for all other countries.
7. Foreign Licensing. With respect to those situations
where the U.S. record company licenses a foreign
record company to sell the records outside the
United States, the royalty structure for the artist will
be different than as described above. In these foreign
licensing situations, the typical recording contract will
provide that the artist and the record company will
split the foreign licensing income 50-50. However,
that allocation can often be negotiated upwards, with
the artist getting more in the range of 60 or 75 percent.
CONCLUSION
While the above comments give a hint of the
differing royalty rates for different types of record
sales, the royalty provisions in the typical recording
contract are much more complicated than suggested
above. Also, there are various changes in the royalty
clauses of a contract which can be negotiated for, in
order to substantially improve those royalty clauses
to the band’s benefit.
Although the issue of royalty clauses is complicated,
and much too complicated to cover thoroughly
here, there are really two main things to remember
here. Number one, the royalty rate will vary, depending
on the circumstances of sale. Number two, there
are various contractual provisions which can be negotiated
for, that will significantly reduce the negative
financial impact on the artist of these various
reduced royalty rate provisions mentioned above.
Editor’s Note: Bart Day is a Portland-based entertainment
attorney in private practice. He is also the
co-owner of ALLMEDIA, Ltd., a company with offices
in Portland and Los Angeles. ALLMEDIA specializes in
administering the licensing of music for film, television,
commercials, and computer games.
Bart is also a co-author of the new edition of
The Musician’s Business and Legal Guide, a book
compiled by the Beverly Hills Bar Association and
published by Prentice-Hall Publishing (New York).
The reader is cautioned to seek the advice of the
reader’s own attorney concerning the applicability of
the general principles discussed in this column to the
reader’s own activities.