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