MAJOR LABELS & MINOR CHANGES

by Chip Cox

There were two announcements made by major labels that have the potential to greatly simplify the calculation of royalties for musicians. First, BMG said that from here on, they will do away with the packaging and manufacturing deductions. This was the part of the contract where typically, the label would offer the band a royalty of X% but then almost immediately, state that there would be a 25% reduction of the royalty as a packaging and/or manufacturing expense. Therefore, a 12% royalty really was a 9% royalty. For example, if suggested manufacturer’s list price was $16.98, a 12% royalty would be 2.04, but with the packaging deduction, it was really $1.53, or $.51. That meant the artist was essentially funding the manufacturing.

Here’s a quote from BMG Chairman Rolf Harris: “One reason this industry has ended up with such a bad image is because we could not look a guy in the eye and tell him, as a partner, that the contract he was about to sign was fair. This is the first step in a larger plan by BMG to redefine our partnership with artists."

This doesn’t mean that BMG artists will begin to see bigger checks, as BMG is also reducing the price upon which they pay royalties. At present, royalties are based upon suggested manufacturer’s list price; the new plan will fix royalties upon a percentage of wholesale price. From what I’ve read of the reactions from the musician representation side, it’s a welcome change. Certainly the statements are going to be easier to read and without those old deductions, it does reduce the chance for some hanky-panky with the figures.

About a week later, Universal changed their policy to now permit auditors looking at accounts on behalf of artists to see manufacturing statements for the first time. As incredible as it will seem to some of you, many labels have long refused to permit auditors to know just how many compact discs (or vinyl or tapes) they manufactured. This led to the natural suspicion that there might have been some product manufactured and sold that did not make it into the artist’s royalty statements.

An internal memo from Universal, first reported in The Wall Street Journal, said, "...however, it became clear to us that not making manufacturing records available is causing unnecessary suspicion and adding a negative perception.” Universal is also eliminating some other clauses that made audits more difficult for artists.

When taken together, this is serious pro-artist progress. What the major labels decide is the best practice will filter down to the independent labels. I recently had the head of an indie label defend one clause in his standard contract as “Hey, that’s what the majors do, so it’s okay for us.” Note that there wasn’t a defense of the actual practice - just that it was industry standard, so therefore, okay.

If your band is in the process of negotiating a contract, look and see if these old provisions are a part of the document given to you by the label. If they are, try to convince the label to make the changes listed above.

Chip Cox is a former professor at the University of Missouri Law School and currently practices entertainment law in his hometown of Kansas City, Missouri. He can be reached via e-mail at chip@inspiratron2100.com