Let’s examine what a record label deal for an artist might look like. Before we dive into the details that form a record label agreement, let’s have a look at the different agreement types. We can categorise the agreements in either a Distribution Deal, a Label Services Deal, a Full Label Deal, a 360 Deal or a Catalogue Acquisition. The differences in these five types come from the level of ownership that an artist transfers to the label (or distributor) and the level of services that the label (or distributor) provides in return.
Does the agreement come with a transfer of the copyright from the artist to the label? And if so, for how long will the copyright be retained by the label? The agreement may be limited to just a few years or may be valid for the full life of copyright. This means the label owns the copyright until it becomes part of the public domain (in many territories this lasts for up to 70 years after the recording date).
When the copyright is not transferred to the label, a minimum length of the agreement will still be agreed. The agreement may automatically extend until either party exits the agreement.
Territory refers to the geographical area within which the label can commercially exploit the catalogue. This could be for the world, or for a specific country only.
In a classic label deal, the agreement may state that the artist is bound exclusively to the label until a minimum commitment by the artist is fulfilled. During this time, the artist does not have the freedom to enter different projects with other labels. For example, it may state that the artist is exclusively bound to the label until three albums have been completed.
A royalty rate refers to the percentage of income that the label will share with the artist. There are two distinctive types of revenue share agreements, commonly referred to as a profit share style and a royalty style. We are providing a quick introduction to the two concepts below. Though considering this is a Royalties 101 course, we hope you’ll excuse us for adding additional chapters later in the course that dive deeper into the complexities of these two deal types.
With this type, the label will calculate the sum of all the sales and costs to find the project’s profit. An agreed percentage of this profit is then shared with the artist.
Take the example of a 50/50 profit share deal between label and artist, with the project having earned £50,000 in sales and the label having covered £30,000 in costs. The project has a profit of £20,000. The label will thus pay half of this amount to the artist and both parties walk away with £10,000 in profit.
In a royalty style deal, the artist will receive a percentage of the revenues generated. This may be one general percentage across the board or a different royalty rate may be agreed for revenues relating to different sales types, sources or territories. Additionally, the agreement will also state which percentage of upfront costs can be recouped from the artist’s balance. Again, this may be one general recoupment rate across the board or may state different recoupment rates for different cost types.
Take the basic example of a royalty style deal with one catch-all 50% royalty rate and one catch-all 100% cost recoupment rate. Again, let’s say there were £50,000 in sales and £30,000 in costs. The label will report £25,000 in sales to the artist, but will recoup £30,000 in costs from the artist, resulting in a balance of -£5,000 that the label can still recoup from the artist’s future royalties.
Though as mentioned, in practice, royalty style deals are not always as simple as the above example. The label may set different royalty percentages for the different sales types or territories. So they may agree a 30% royalty share for global digital revenue, but a 15% royalty rate for any physical sales in the United Kingdom, a 10% royalty rate for any physical sales outside of the United Kingdom, a 50% royalty rate for all sync revenue and a 60% royalty rate for all licensing income.
Which royalty rate is agreed will depend on which services the label will provide that may warrant a higher commission, the size of the advance, and eventually also the bargaining power of both parties. The royalty rates between sales types may also differ based on the complexity of the respective sales type. For example, physical sales in many ways are more complicated than digital: you need to produce the product, package it, send it to stores and get it on the (digital) shelves, not to mention all the different parties that can be involved in making this happen and taking a fee or commission. A lot can go wrong along the way: vinyl pressing factories can get backed-up (as has been the case recently), products can get damaged in transit, and worst of all: a label’s products might not sell. So physical royalty rates are generally lower than digital royalty rates and the label may apply additional deductions to cover for shipping or packaging costs.
Furthermore, the label may use different bases on which they assign this royalty rate. They may also apply reserves to physical sales to delay royalties to cover for potential returns. And some may even apply escalations that change the agreed royalty rate once certain conditions are met. By now we’re sure you’ll sympathise that we have written dedicated chapters in our royalties 101 course to discuss these concepts.
Advances are the lures of the music industry, drawing artists in with the promise of upfront cash. An advance is an upfront payment made by a label to an artist. This advance is recouped against the future royalties generated by the catalogue. The artist will not receive an additional share of the income until their advance has recouped. It is possible for writers to receive more than one advance from a label. For example, a new advance might be offered once the first one has recouped. It’s also possible to offer a new advance when a new album is released or as an incentive to extend the contract when it finishes its term.
The size of an advance is different for every deal, and is usually subject to calculations from the label’s legal or business affairs team. An established artist is more likely to get a high advance than someone who doesn’t have a proven track record of successful recordings. But you know what they say in the investment world: past performance is no guarantee of future results. Advances can also be used to secure a deal with a young and promising artist if there is a lot of competition from other labels trying to sign them.
An artist is usually locked into their contract until the advance is recouped. If the contract period ends but the advance is still outstanding, the contract may state the contract period is automatically extended until the advance recoups. The artist can’t move into another contract with another label, unless they are able (financially and contractually) to buy out of their advance and end the contract. Artists have historically been locked into contracts by accepting advances that were so high it was practically impossible to recoup them. The recording industry has recently made some shifts in their policies with companies like Beggars, Sony Music, Warner Music and Universal Music announcing they would waive existing advances for certain qualifying legacy artists.
A contract will specify how often the label reports sales to the artist in the form of a royalty statement. Reporting is done monthly, quarterly, half-yearly or yearly and will have an agreed accounting delay.
When calculating royalties for a 1, 3, 6 or 12 month time frame respectively, labels will look at all the statements that were reported and paid to them within that time period. They generally look at the payment date to decide whether certain sales will be included in the period or moved to the next. This to make sure a delay in one of the incoming payments does not delay an entire reporting responsibility to the artists.
For example, labels reporting half-yearly will include any royalties that were paid to them between January and June in their H1 reporting period. Anything paid between July and December will be reported in their H2 period. The below graph displays how labels that report Half-Yearly, Quarterly or Monthly may organise their periods.
The accounting delay refers to the time that labels contractually have to bring their affairs in order and calculate and send the statements.
A common reporting frequency is Half-Yearly with a 3 month accounting delay. This means that a label will report all sales between January and June by the last day of September, and will report all sales collected between June and December by the last day of March in the next year.