Let’s face it. The music business is all about money! Yes, the entertainment industry seems fun and exciting, but people are in it to make money. As an artist the most important contract in the music industry is the record contract. The royalty is a portion of money from record sales paid to the artist for his/her music. The record contract which is a negotiated legal agreement between the record label and artist will state how much royalty an artist is entitled to among other things.
An artist should have a good understanding of how royalties are calculated. A good music attorney will help with this process by making sure the artist is paid what he/she deserves. A 13% royalty for one artist may be a lot of money, however a 13% royalty for another maybe chump change.
So this is how the numbers work. An artist successfully signs a record contract. The artist goes to the studio and works diligently to create a CD that the record company fully supports. The record company via its distributor sells the CD with a suggested retail list price (SRLP) of $17.98 to a retailer for about $10.99. The distributor will take 10% – 14% of the $10.99. Independent record companies may receive less . Major record companies will pay artist royalty as a percentage of SRLP.
Rates will vary of each artist depending on how successful their record sells. For a new artist who never had a record deal or has sold less than 100,000 albums will get a typical royalty rate of 12% to 14% of the SRLP. For an independent record label it maybe 10% to 14% of the SRLP. For established artists who have a track record of selling 200,000 to 500,000 albums the royalty rate maybe 14% to 16%. For artists who have sold over 750,000 albums the royalty rates maybe 16% to 18%. As you can see, the more successful the artist is, the higher the royalty. Additionally, royalty maybe based on how well the record sells. For instance, the record contract may state that an artist will get 12% for the first 100,000 units sold, 14% for 100,001 to 300,000 units sold, and 16% for over 300,000 units sold.
But hold your horses. If you sell 500,000 albums and have a royalty rate of 12%, it doesn’t mean you will get 12% of 500,000 at a SRLP of $17.98 which would equal $1,078,800. This is because as specified in the record contract, there are expenses that have to be deducted.
To start off the bat, the record company will deduct a packaging charge from the SRLP which is typically 20% for cassettes and 25% for CDs (Digital media = N/a)
Second, more often than not, the artist is responsible for paying the record producer a portion of his/her royalties. Typically, a producer will receive 3% to 4% of the SRLP.
Third, in the record business, the contract may state that the artist only generates royalties on 85% of the unit sales. For every 100 albums sold, 15 albums sold, the artist gets no royalty.
Forth, the record company will hold a portion of the royalty money because the distributor typically has an agreement with the retail outlets to take back and credit the retail stores money from unsold units. This is very important, because a good portion of your album could be returned to the record company if the album doesn’t sell! The money that’s held back is called a reserve. Reserves maybe held for 2 years before it’s paid to the artist. Typically a major record label will hold a reserve of 25% to 40% of the royalties.
Fifth, advances paid from the record company to the artist are deducted from the artist’s royalty. Advances include but are not limited to the:
1. Recording studio expenses (new artists to an independent my get an advancement of $0 to $80,000, new artist to a major record label $50,000 up to $400,000
2. Hiring independent promoters to help sell the albums
3. Cost of making a music video (promotions and an inexpensive music video can cost $5,000 up to $200,000.
When money is made for the record sales, these costs are deducted from the artist’s royalties. This is called recoupment. Therefore, if the artist’s record isn’t successful, the artist may never see a dime. If the royalties are less than the deductions, they artists may well owe the record company money by being in the red! This negative cost maybe carried over to the next album release. A good record contract will not allow a negative cost from one album to be carried over to another album (cross collateralization). If there isn’t another album the record company generally eats the loss.
There are many other costs that the record company may or may not charge the artists. This includes marketing and in-house promotions (free CD give away, etc.).
So how much does an artist make for a gold album (500,000 albums sold).
Check out the math:
CD (suggested retail list price SRLP) = $ 17.98 Less CD Packaging of 20% = $ -4.50 NET = $ 13.49 Times: Net artist royalty rate (12% – 3% to producer) = X 9% Gross royalty per CD (9% of $13.48) = $ 1.21 Times 500,000 albums = $ 500,000 SUB TOTAL = $ 605,00 Times: Royalty bearing % (15% o = no royalty) = X 85% Gross Royalty = $ 514,250 Less advances: Recording, promo, music video, tour = $ -350,000 TOTAL ROYALTY TO ARTIST = $ 164,250 – Reserves (35%) returned by retailer) = $ -57,487.50 (1) ACTUAL ROYALTY PAID TO ARTIST = $ 106,762.50
(1)Reserves will be paid to artist in 2 years if no CDs returned by retailer
Remember the artist still has to pay TAXES! Don’t forget Uncle Sam has to get his cut! Also, don’t forget the Personal Manger, the Attorney, the Accountant, the Agent and other numerous expenses.
However, there are many other royalties that an artist can acquire. They include, Record Clubs, Compilation CDs, Samplers (low-priced albums in which a few artists are featured), Premiums (albums sold with other products, such as cereal), Film Soundtrack Album, Music Video Sales, Greatest Hits Album, Foreign Royalties (song played in some foreign country radio stations pay royalties, unlike the US), Master Use License (music used in a movie, television, commercial, the Internet, CD and DVD), etc.
Of course because of the Internet, the royalties rules are changing. Many people now buy their music online. Just think, no packaging required and no distribution to traditional retail stores needed. Websites like iTunes, allow customers to buy individual songs as opposed to an album. Changes are currently taking place on how royalties are calculated because of the Internet.