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Free Goods

by Ben McLane, Esq.

This article will discuss the concept of "free goods" as it relates to the sale of records. Whether an artist is signed to a label, or is putting out an independent release for sale to the public, free goods is an important issue to understand because it affects the artist's bottom line. This is because royalties are paid only for records sold. As the name implies, there are no royalties payable on free goods. The information herein is applicable to both the signed and the independent artist.

In theory, the stated purpose of free goods is to help establish an artist, which hopefully translates to the sale of more records. Actually, free goods exist on a few different levels, all of which need to be understood. The three main types are set forth below:

Normal Sales. Generally, these are free goods that exist when a label is trying to push a record. In order to get the stores to stock the record, the label agrees to give away (i.e., not charge a wholesale price) 10% to 20% of all the records shipped to the store. For example, if the label ships 100 records by an artist, it will only charge the store for 85. This is to encourage the stores to buy the record. It often works, too, because the store can then turn around and sell the 15 free goods for 100% profit. For protection, the artist needs to put a restriction in the record contract that fixes a limit on the number of records considered free goods. Most labels will agree to a limit of 15% on albums and 30% on singles, with the artist to be paid a royalty on any excess given away for free. A major issue associated with free goods sold in stores is what are known as "returns". Returns are simply records which have been sent back to the label by the stores because they did not sell. The problem arises because royalties are only paid on records sold, not records returned. Many labels will wrongly lump the free goods in with the real returns, and then subtract the full returns from the total records sold, which is what the royalty is based upon. Since the free goods were never "sold" by the label in the first place, is unfair to deduct them later. For protection, the artist needs to have language in the record contract that the artist will receive a "credit" against returns for free goods.

Record Club. It is quite common for a record club to offer records for free as an incentive for a new member to join. The problem is, since new members are given a choice of which artist's record they want for free, there is no way to really control how many copies will be given away. The only way to handle this dilemma is for the artist to restrict the number of free records which can be given away without paying a royalty. The protective language included in the record contract should provide that the number of free records given away through record clubs will not exceed the number of records sold (i.e., royalty shall be payable on not less than 50% of records distributed through record clubs).

Promos. A promotional record, or "promo", is often lumped together with the free goods because it is, in essence, also a free good since there is no royalty paid. A promo is generally a record given away to a radio station to promote airplay. It is not meant to be sold in stores and will contain a stamp on the record that reads: "not for sale". A big problem with promos is that they often ultimately wind up being sold in used record stores anyway, with the artist not being paid a royalty. Since airplay is so important to the success of a record, there generally are not restrictions placed on the number of promos sent to radio stations, etc. because in theory they are not intended for sale.

Since the number of free goods given away can substantially lower the royalty payable to the artist, the artist needs to be keenly aware of a label's policy and make sure this area is well defined in the contract.

Copyright 1998, Ben McLane
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