When presented with a record deal, it is extremely important to understand (or have someone on your team understand) what terms are standard for major label recording contracts, and how those might differ for an independent label (“indie”). This article will describe the most important standard recording contract terms, where one might find differences in an indie deal, the pros and cons of such deal points, and how to negotiate and compromise if necessary.
8 Major Label Recording Contracts
We will discuss these first, because often a deal offered by an indie label will look a lot like a major label deal. This can be for several reasons: 1) Indies distributed by a major will have to sign major—label deals themselves with that major. The indie would therefore want to make sure the same issues are covered in its contracts with its artists as are covered in its contract with the major. Such contracts will also require the artist to sign a “side letter” or “inducement” letter directly with the major. 2) Some indies just want to look professional and serious to their artists, or figure that, if this contract works for the big guys, it will work for them! 3) Some indies might have signed a particular artist that has garnered critical or media attention, or might have a well-known producer associated with it such that it could eventually be dealing with a major or major distributor. Record contracts often last quite a long time, so an indie that thinks it will eventually be dealing with majors might want their contracts to look similar to avoid too much re-drafting later. Alternatively, indies often desire a friendlier, less adversarial relationship with their artists, or want to distinguish themselves from majors as much as possible. Therefore, indie deals can sometimes bare no resemblance to recording contracts at all, and some indies don’t even have written contracts!
All that being said, here are the most common recording contract terms and the differences to expect between majors and indies:
Term, Options
Major label deals are usually only for a term as long as it takes to record and release one album, with the label then having many options to renew the contract and release more albums for the artist. Options are not a commitment from the label to record more albums with the artist, but are just what they sound like – an option for the label to record more. Options bind the artist, but not the label, so artists will always want to commit to the fewest options possible to give that artist more flexibility and bargaining power down the road.
Indies may offer similar terms and options. Especially with an unestablished indie, an artist should not want to be tied down for too long in case the label does not do well. From the label’s point of view, it will want some flexibility to keep working with an artist if they show promise, and will want to avoid the scenario where it puts much time, effort, and money into an artist and helps that artist achieve some recognition, only to have that artist skip out and sign with a major (or bigger indie), leaving the indie unrecouped. Alternatively, indies might automatically offer fewer options, or even a set term of years (i.e. 3-5 years).
Artists trying to negotiate fewer options with a label without success could ask for a buy-out clause. A buy-out clause sets forth the rules that will apply should a bigger label want to sign the artist. Buy-out clauses can include pre-negotiated dollar figures that the major will have to pay the indie for the indie to release that artist, or they can simply state that the indie will negotiate in good faith should a better deal for the artist come along. This way everybody wins: The artist can take the better deal, but the indie will have the right to make a nice exit deal for itself to compensate for all the time and money it spent.
Royalties
Most major labels still offer a royalty that is a percent of Standard Retail List Price (SRLP), usually ranging from 10-15%, sometimes depending on whether the deal is “all-in” (artist pays producer royalty out of artist’s royalty). Major labels then deduct for packaging expenses, free goods (explained later), and other items, and also list a multitude of situations where those royalties will be reduced (i.e. foreign sales, record clubs, etc.). Some major labels have recently tried offering royalties that are a lower percent, but on the wholesale price, with no packaging or other deductions, with some limited success. Once in a blue moon, a major label will offer a profit-sharing deal (see below), but these are still pretty rare.
Indies, as with the other terms, may try to emulate the majors and offer typical royalties of 10-15% of SRLP, or a percent of wholesale. Becoming much more common, however, is a profit-sharing deal, with a range of 40-75% of net profits going to the artist. The advantage of this kind of deal is that this royalty structure is more understandable to the average person. Money comes in, expenses and costs are taken out, and the profits are split between the label and the artist according to the percentages they agreed upon. All of the pages and pages in a recording contract about the packaging deduction, the free-good deduction, and all the reduced royalty situations become unnecessary – it is a much cleaner system. The disadvantage of this type of deal is that more expenses and costs are taken out of the gross revenue before the profit-sharing begins. In typical deals, costs of manufacturing, publicity, marketing, and other such costs are not passed on to the artist but are considered part of the label’s overhead. In profit-sharing deals, all expenses are taken into account, so it might take a while (if ever) for an album to show a profit, and, therefore, longer for an artist to actually receive any share. Once an artist is more successful, these deals become more lucrative for the artist.
Artists unhappy with whatever percentage is offered to them could negotiate for “escalations,” where the royalty increases upon certain sales milestones, or for subsequent albums.
Advances
Artists should first realize that advances, or funds, are not gifts. Advances are more like loans, except that the label will not try to collect the money back except through the artist’s record royalties – a process called recouping.
Major label advances are naturally going to be much bigger than what indies offer – typically in the $150,000-$300,000 range. The advances offered to artist by indies, if any, will be more in the $5,000-$125,000, depending on the size and affiliation of the indie. Indies often will simply agree to pay a certain amount in recording costs, with no actual “advance” going to the artist. These recording costs still have to be recouped by the label before it pays the artist any royalties. The advantage of having a small or nonexistent advance is that the artist will have less to pay back from his or her royalties, and could be earning record royalties more quickly. The disadvantage is that since there are so many costs for the label to recoup before paying the artist their royalties, an advance is often the only money an artist will see for some time. The size of an advance can also depend on the artist’s leverage (bargaining power). An artist who has more than one label interested in him might be able to get things such as a bigger advance, but just remember that it all has to be paid back.
Free Goods, Compilations
Free goods are the records that labels have to give away in order to promote the album and keep its retailers happy. This is important to artists, because artists do not receive royalties on records given away for free. Major label deals usually limit free goods to 10-15%, but indies may have to give away more records to successfully promote an artist. Artists signing with an indie should be prepared to agree to allow the label more free goods. Indies, as well as marketing and promotion companies, will also want to put songs on compilation CDs to showcase the artists on that label, or artists in a particular area. Major labels want the right to put individual songs on compilations also, but these are often sold and bear royalties. Compilation CDs put out by indies are usually given away, and artists should not expect any income from this.
Publishing, Merchandise
Most major label deals still do not include publishing, because the major labels all have affiliated or subsidiary publishing companies that will often offer their own deals. Major label deals usually do not include merchandising rights, either. Conversely, many indie deals will include a clause giving the indie publishing or co-publishing rights. Publishing simply means licensing the songs (the compositions/lyrics) themselves (not the recordings – this is separate and the subject of another article) and administering those licenses, which means collecting the licensing fees, doing all the paperwork, and paying the artist his or her share. A publishing deal normally grants the publisher the copyrights in the songs in exchange for 50% of whatever income that publisher receives from licensing the longs. More common today are co-publishing deals, where the artist and the publisher co-own the copyrights and the artist receives 75% of all income received. Indies are also more often requesting merchandising rights, both because the artist might not have another way to do the merchandising and as another way for the label to start making money back from that artist.
New artists should decide whether they want to try to find a separate, established publisher, self-publish, or let the indie do it. The artist’s decision here will depend on many factors — the quality of the artist’s songwriting and licensing potential of the songs; the indie’s funding, plan for publishing, and connections to performers and the television and film worlds; and the artist’s ability or connection to find license opportunities himself, etc. Artists who think the indie can do the publishing or who do not have another option can always start out with the indie but have a buy-out clause covering publishing should a better publishing opportunity come along, or just an “out” should the indie not meet certain goals within a certain time frame. The same principles apply to merchandise.
The main issue to watch out for when granting other rights such as publishing or merchandising to an indie is cross-collateralization. Cross-collateralization is the label practice of recouping the debts of one album from other sources of income – typically the sales of a later, more successful album. What artists should not allow is the cross-collateralization of their records with their publishing or merchandise, or with the artist’s mechanical royalties for controlled compositions. Artists giving an indie their publishing and/or merchandising should watch out for language in the contract such as “recording costs and other advances may be recouped from any royalties owed artist under this contract or any other contract with Indie.” Artists should ensure that recording costs and other recoupable amounts are only recouped from the artist’s recording royalties.
Other Types of Deals
In the record label world, there are a few other types of deals out there that you should be aware of that involve indies or may look different for indies.
Pressing & Distribution (P&D)
This is a deal only to manufacture and distribute the records. This is ideal for artists who have the means to record their albums themselves. Indies may also enter into P&Ds with major labels instead of a full-blown deal (which would typically include promotion, etc.).
Joint Ventures
This is a similar situation as described above where the artist and the label share the net profits, but these can be between an indie and an artist or an indie and a major. Such deals resemble partnerships, but are really not because the label will want to have control. If the deal is between an indie and a major, there may be some sharing of duties, along with the sharing of the net profits. For deals between an artist and an indie, one major issue with this kind of deal is that the artist has to agree to forego her mechanical royalties (the fees paid by the label to the artist for the use of the underlying songs), because otherwise the artist will actually receive more than 50% of the net profits. This can be a sticking point in such a deal, because most artists hate to give up their mechanicals!
Licensing Deals
Indies may also strike licensing deals with artists instead of the usual contracts. Like P&D deals, this type of deal might work for artists who can pay for their own recording. The artist would record the songs themselves, and then license the recordings to an indie for the indie to do the release, promotion, and distribution, with some kind of revenue-sharing arrangement.
This list is by no means inclusive – there are, of course, many other factors to consider and deal points to understand and decide upon. Again, the nice thing about independent labels is that unless they are linked to a major or are otherwise required to structure their deals just like that major, indies are often more flexible with their deals, and are more willing to take chances and be creative. Now that more independent distribution options exist, an indie can offer an unknown or off-beat artist a chance at getting their music heard, or at least be a kinder, gentler alternative to seeking a major label deal. µ
Suggested Resources:
Kalmar, Veronika, Label Launch: A Guide to Independent Record Recording, Promotion & Distribution, St. Martin’s Press, NY, 2002.
Passman, Donald S., All You Need to Know About the Music Business, Fifth Ed., Simon & Schuster, NY, 2003.
Schwartz, Daylle Deanna, Start & Run Your Own Record Label, Billboard Books, NY, 1998.
Thall, Peter M., What They’ll Never Tell You About the Music Business: The Myths, the Secrets, the Lies (& a Few Truths), Watson-Guptill Publications, NY, 2002