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Royalties (Computing)

by Ben McLane, Esq.

Once an artist is fortunate enough to obtain a deal from a reputable record company, the artist is probably most interested in how much money will be made on sales of the records which are released. This article will briefly explain some of the elements of an artist royalty clause.

The artist royalty clause determines how much money an artist will receive from the sales of CDS, tapes, etc. In most contracts, the royalty is expressed in terms of a percentage, rather than an actual dollar or cent amount. The percentage is called the "rate".

Generally, for a new artist, the rate will range from 10% to 14% of the selling price. However, some smaller independent labels might offer even a lower percentage. As with most things in a contract, the rate is negotiable depending on the bargaining power of the artist. A new group with no proven sales record that has never toured will probably not be able to achieve a very high rate. However, if the A&R staff feels that an act has tremendous sales potential and/or there is a bidding war between labels, the rate will tend to increase.

Since new, unknown acts do not have a guaranteed audience, the label is hesitant to grant a high rate because there a is good chance that the artist will never even sell enough records to recoup all of the costs (i.e., recording, promotion, pressing, etc.) that go into releasing a record. In comparison, a well-known artist is almost assured of making a profit and hence would receive a higher rate.

The artist must be knowledgeable about what the royalty is based on. The base is usually the suggested retail list price, but oftentimes the wholesale price of the record acts as the base upon which the royalty is computed. Since the wholesale price is roughly one-half of the suggested retail list price, the artist should receive approximately twice the royalty that would be allowed under the retail base price system.

The artist should try to negotiate escalations for royalties. In essence, this means that the artist is rewarded in the future with a higher rate if the artist reaches certain sales levels. For example, it the artist has a 10% royalty, the rate would be bumped up a percentage point if 250,000 units were sold. Increases can continue for even further sales levels. Escalations can also be tied to when the label picks up an option for another year.

Royalties for sales outside of the United States are usually reduced. The reduced rates depend upon whether sales are in major foreign markets or not. For example, Canadian sales usually receive 85% of the U.S. rate; sales in the United Kingdom, Germany, France, Japan and Australia receive 75% of the U.S. rate; the remainder of the world receives 50% of the U.S. rate. The justification for the lower foreign rate is that the label is probably licensing the product to an independent foreign distributor that must also be compensated.

Other things which affect the rate but which were not discussed here consist of, but are not limited to, packaging deductions, free goods, and whether a record is a budget release or not.

Copyright 1998, Ben McLane
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