Record Deal vs DIY

– Posted in: Recording

In response to recent information floating around the blogosphere about the old record deal model versus the new DIY model being more profitable for the artist, I thought I’d throw in some aspects that might not have been considered.

There are 4-pieces of this puzzle that must be weighed before making an official judgment one way or another.

  1. The business of a record label
  2. The record contract and ultimately, the individual deal
  3. Ownership of the master recording and the mechanical rights
  4. Comparison costs Label vs. DIY

The Business of a Record Label

Let’s begin with an understanding of the business of being a label. Most labels focus on building their catalog of master recordings and ownership of publishing rights to the original music. You may think they are in the business of developing artists and certainly that plays a role, but ultimately they are building their catalog of music. The value of the company comes from their catalog in case they are bought out or absorbed by a larger company. The labels look for artists that may prove to be potentially hot sellers, which purposefully increases the value of their catalog.

It’s important to view a record deal from this perspective to understand what any advance money, large or small, if any, is actually buying. They are buying your master recording. And every label also wants a piece of the publishing, whether you own your own publishing or another publisher owns the rights to your music. Most deals won’t happen unless you or your publisher, share the ownership of the original material, the copyright. As a songwriter, this is huge and must be taken into consideration as you weigh and compare the value of any deal.

The Record Contract and Deal

As you consider all those perceived benefits of working with a label, you think, great, they’ll pay for the artwork, the manufacturing, the radio promotion, the print media promotion and maybe even some tour support to help get the act on the road promoting the new recording. And then you and hopefully your lawyer actually read the record contract. In the contract, any standard record contract, you will find the Packaging Clause that tells you that the artwork and the photo shoot are recoupable items. The Manufacturing Clause also indicates that manufacturing the CD is a recoupable item along with the Promotional Budgets—all recoupable.

A recoupable expense is one that the label lays out up front, but in the end, you pay them back as CDs get sold before you get paid any royalties. As you go through that contract, pretty much everything they pay for up front is recoupable; tour support and even that fabulous advance to record the CD in the first place.

One of my favorite clauses in any record contract is the Cross Collateralization Clause. Say you sign a 2 or 3 record deal and you do the first recording. Since it’s your first CD and you’re just growing your fan base, you sell some but not yet enough to pay back all those recoupable expenses. But it’s time to do the second CD and the label feels good enough about how the first one is going so they give you another advance for the recording, they manufacture the second CD, promote it and it starts selling. BUT, the first CD hasn’t yet recouped all of its expenses, so any sales from the second CD as well as the first CD will now all go to pay off the expenses from the first CD. The result—No royalties to you from the first CD yet because the contract says the label can take any money from the second CD to help pay off expenses from the first. This then continues for as long as the contract is in effect, CD after CD.

So when do you make money? You can make some money from selling your CDs from the stage or your website while you’re on tour IF the label allows you to sell from the stage or your website. Sometimes you may not, since that would cut into label sales at distribution points. Oh, and did I mention you have to buy the CDs from the label to sell at a slightly better price than a distributor, but not much. And if you want to have your record sales count as royalty units (sales counted towards your royalties), then the artist price goes up a few bucks.

While we are talking royalties, they are generally calculated on the wholesale price of the recording. Let’s just use $15 as the retail price. Wholesale would be about $9.25 which is where your royalty might begin to be calculated. But, then there is distributor pricing which is usually 55% off retail, so now we are down to about $8.25. Now what did you or your lawyer, negotiate for your royalty rate? If you are a hot artist already, this rate might be 10% or a bit higher, but mostly you’ll find royalty rates from 7%, 8% or 9% of the royalty rate, $9.25 or the distribution rate, $8.25. This will vary, but it IS that low.

Now when might you get paid, if there happens to be anything to be paid? Contracts are usually set up to pay twice a year. You’ll get your royalty statement and any amount due thirty, sixty and sometimes ninety days after the close of their accounting period. Then you open the statement and look at what you might have gotten paid, and you are shocked. Where’s all the money? And what is that 20% that is being withheld to cover returns?

Ah, yes, the Returns Clause that says, even though they shipped 1000 CDs to some distributor, the distributor could ship them back even after a year if they don’t sell. So your label doesn’t want to pay you for something they may not get paid for, so they withhold a percentage to cover that possibility. You only get paid for what is actually sold through, not shipped.

Ownership of Master Recording & Mechanical Rights

As mentioned above, the label owns your master recording in most label deals as well as a portion of the copyright or mechanical rights. Let’s say you record a CD with ten songs, just to make this simple. Nine of those songs are your own originals and one is a cover of another artist. The label has to pay the other artist or the artist’s publisher for their mechanical rights. Somewhere in your contract, there is the Mechanical Rights Clause that describes exactly how many songs the label will pay rights for and it is usually not 100% of the songs on the CD, but more like 70%. If one of those songs is a cover; that means you will get mechanical royalties on six of your songs instead of seven. You just won’t get paid for two of your songs at all.

That isn’t even the most important aspect of the ownership portion. The most important piece is that if and when your contract is over or if and when they cancel your contract, or you try to cancel your contract, depending on how the contract is written, the label still owns those masters and a portion of the copyrights, sometimes “in perpetuity” (forever). There are those situations when the artist is offered a deal, they begin to record the music which the label is paying for, and then midway through a shift in leadership of the label occurs and the new president doesn’t like some of the acts already signed. They can and do shuffle the decks, once in a while, as it happened at RCA a number of years ago. New leadership came in and canceled 30 act’s contracts. But what happened to the music, those fledgling recordings, still being worked on in the studio? They went into the label’s vault. The creations of the artists were now no longer available to them because the deals said the label owned the rights to that music, whether it was released or not.

Cost Comparison Label vs DIY

I love to present these comparisons in terms of getting a loan since essentially that is exactly what a record deal is, a loan to cover the expenses of recording. Now that you have some of the royalty figures from above, you could say that with a very generous 10% royalty rate, and 100% of the potential pie at stake, your loan is costing you 90% interest.

Compare that to most loans you might deal with in life, a car loan or a home loan where now interest rates are at all-time lows of 3.99% – 4.35%. Even the exorbitant credit card interest rates at their highest of 35% are even better. At least, when you pay off your car or your house, you own it. In the case of the label deal, you do not.

The DIY Scenario

Continuing with the loan analogy, perhaps you borrow the recording money from your folks or Uncle Joe or a really great friend or even an investor and they agree to a 10% interest rate. That means that on every CD you sell, you keep 90% of retail, wholesale, whatever. Once the loan is paid off plus the 10%, or to use similar terminology as a label, once the investor recoups their initial investment plus interest, you own the master and all of the publishing on your original material. Now on every sale, you keep 100%.

Yes, the cost to record, manufacture, promote the CD, and tour is yours. Now with Kickstarter campaigns as well as borrowing, your CD is also yours along with the rights to your music.

Now there are the costs for distribution. Most distribution companies charge 55%. Some actually get your music out there, and it sells, but some just hold your product in warehouses waiting for enough demand for the music to make a sale. Just because your label has a distribution deal and has delivered product to the distributor, doesn’t mean it is going to sell. Just because you have a distribution deal, it also doesn’t mean it’s going to sell.

In today’s online world, the companies distributing your music do take what might seem a large cut for seemingly doing very little. But even if they take 30%, they only take that percentage on actual sales, and you get paid on a regular basis every single month. Plus your music is available worldwide depending on to which online services you can gain access. If you are using a company like CDBABY to disseminate your music to the various online sales points like iTunes, and get it to others like the Orchard or TuneCore for example, then you have your membership costs, but again, that is very small comparatively, and again they pay you monthly.

You may think that these online companies are doing very little to get a piece of your pie. Again, they make your music available to a huge online world. Their expenses lie in keeping their technology updated and ahead of the techno-wave. This allows you to reach a far wider audience than ever anticipated. Now with some savvy marketing and focus on your particular niche audience, you could be selling very well without even touring. But, throw in a great CD Release concert, some well-managed tours and your ability to sell at each gig and you’ll be recouping any expenses and paying off any loans in no time. And when you do, you will own your master, own your publishing and be making money to save for your next recording, month after month after month.

Weigh the facts and the real costs of this recording business, either doing it on your own or with a record deal. Take the emotion out of the equation and deal with the numbers that are actually involved. When you take all of this into account, then and only then, can you make an educated decision as to which works best for you. When you understand what you have to gain and what you have to lose in each scenario only then can you be comfortable either way. One scenario may be good for one artist and not for another. Begin this process with a complete understanding of what is at stake, and you will simply make a better decision.

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