We have been told that any artist being considered for signing by a major record company will probably be known to other record companies. EMI estimates that at least 50 per cent of new artists it tries to sign receive competing offers from at least one other record company. There are two main reasons for this: first, the music industry is a close-knit community so that word would soon spread if a promising new artist had been found; secondly, the manager or lawyer representing the artist will often inform other record companies so as to initiate a bidding process. The advantage of being first to identify a talented artist is that it gives the A&R executive a chance to develop a rapport with the artist which may influence him to sign with that company rather than another.
For a talented artist judged to have potential earning power there is likely to be some kind of competitive bidding process between record companies. Such artists are almost invariably represented by an experienced lawyer and manager. Most record companies do not negotiate directly with the artist but with his or her representatives. The competition generally manifests itself in the terms (eg advances and royalties) which an artist is able to secure. Record companies also compete on their reputation and image. This is based on the history of the record company or label, the array of talent on the roster, and the personality and talent of the record company personnel.
Once a record company has found an artist it wishes to sign, representatives of the record company will negotiate with the artist or with his or her manager and legal representative on the commercial terms of the contract. After an artist is signed to a label, the A&R person is usually closely involved with the development of the artist’s career and provides liaison between the artist and the record company.
Most recording contracts include provisions for non-returnable advances which are recoupable against artists’ royalties. The advance is generally regarded by the record company as part of the consideration for the exclusive recording rights granted by the artist. It is expected to cover items such as the artist’s living expenses during the contract period, the costs of producing a video in conjunction with the recording and touring costs. The level of advance varies widely from contract to contract; at the top end of the scale, established artists can command sums well in excess of £1 million; while at the bottom end of the scale a new artist may receive in the region of £30,000. In addition, the record company will usually pay the recording costs (eg session musicians’ fees, studio hire, travel costs, editing costs, equipment rental, and producers’ fees) but these too will be regarded as advances on royalties and therefore recoupable.
The contract will provide for payment of royalties by the record company to the artist in respect of records sold. The royalty rate will vary depending on the bargaining power which the past or anticipated success of the artist gives him or her, and also on the territory where sales are taking place. In the UK, most record companies do not recommend retail prices and so royalties are usually calculated by reference to the Published Price to Dealers (PPD). Royalty rates range from 9 to 14 per cent for a new artist and from 15 to over 20 per cent for a top star.
However, in determining the actual remuneration due to the artist, the royalty rate is not the only factor. Once established, certain deductions are usually made from the royalty base price before royalties are calculated. These include any VAT or other tax, and a percentage deduction known as a `packaging deduction’ which has historically been taken into account when calculating the price per unit an artist receives. Packaging deductions vary from contract to contract and format to format and do not reflect the actual costs of packaging the individual recording concerned. The packaging deduction is not always insisted on by the record companies, although they find that artists usually prefer its inclusion because it enables them to claim that they receive a higher nominal royalty rate than would otherwise be offered.
Furthermore, royalties are calculated on actual records sold. This means that certain records shipped out by the record companies do not carry a royalty; these include records distributed free in order to promote sales, those given free in lieu of discounts to dealers and those returned to the record company as faulty or as part of a privileged return scheme. Most recording contracts also contain provisions for reduced royalty rates in respect of records sold through record clubs, by mail order, as compilation albums or as items used to promote the sale of other products. In addition, royalty rates are normally reduced to half rate in respect of records sold at mid- or budget price, since in this case, as in the others mentioned above, the margins to the record company are reduced. Finally, records which are supported by a substantial television advertising campaign usually attract a reduced rate royalty for a period of time. Most record company contracts provide for `escalations’ by virtue of which the royalty rate will either escalate automatically in later contract periods or will increase in respect of a particular record if a certain level of sales of that record has been achieved.
We have been told of the following trends in contract terms over the last few years:
- Advances and royalty rates have increased. A record company told us that a typical royalty rate for a new act has increased over the last ten years from 9 to 13.5 per cent of the dealer price, and for a superstar from 20 to 24 per cent.
- The period, or number of albums for which artists are signed to record companies on an exclusive basis has fallen.
- Artists have been given greater involvement in approving the recording process and its costs and more control over marketing.
- Contracts place greater obligations on record companies to release and market artists’ recordings.
- The outcome of a number of court cases covering restrictive clauses in artists’ contracts has led to some changes in contractual terms generally in favour of artists.
We have been told that the more difficult market conditions, caused partly by the recession, have led to intensified competition to sign or retain successful artists because they can provide a more reliable source of future revenue. The trend towards shortened exclusivity periods and the tendency of artists to seek to renegotiate their terms considerably before the contract is due to expire has increased the frequency of contract negotiations.
There has also been an increase in the number and sophistication of artists’ professional advisers who assist in the negotiation of contracts.
(Another highlight from the British 1994 report on recorded music by the Ministry of Mergers and Competition)