Let’s Make a Deal – The Ins and Outs of Record Deals, Part 1

By Chris Marion

Ah, the elusive record deal – the end all benchmark for real success as a musician. Or is it? There’s an old joke that floats around the jaded road dogs of summer:  

How do you make a million dollars in the music business? Start with two…

While this is probably over simplified mathematics, you don’t have to dig too deep to find horror stories of artists selling hundreds of thousands of units but never seeing a penny of royalties in return. Signing your John Hancock on an 85-page document that only your hourly billing attorney can decipher may feel exhilarating in the moment, but it’s certainly no guarantee you’ll be compensated for seeing your name in the marquee lights. In this two part series, first we’ll look at some pros and cons of working with a record company with your music and some of the finer points of the proverbial record contract. Then, in part two, we’ll explore some feasible alternatives to record companies in terms of distribution and promotion. You might not have to start with two million.

I joined the elite fraternity of the contractually damned back in the '90s as a member of a country band in Nashville. We were quickly introduced to exciting new terms like recoupable - record company speak for “we get paid before you do.” Like most new artists, we ended up with a 15% royalty rate for retail sales. To date some 20 years later, our attorney is the only one in the organization that ever received actual compensation related to that two-inch pile of printed material. Over the next few years of two records, three videos and multiple charting singles, we racked up a half million dollars in debt with sales of just over 100,000 units.  Apparently it takes money to lose money.

Here’s an excellent pie chart from Root.com that illustrates how for every $1,000 of music sold, the average musician makes a mere $23.40:

You might read this and truly question why any person in their right mind would want to venture down this dark corridor of record label sadism. But, it’s worth acknowledging that the record company is taking all of the actual commercial risk here. In exchange for the exclusive right to exploit your music (to which they now summarily own the recording copyrights), the record company finances the recording, promotes your artistry, promotes your singles, finances the duplication of your product (any idea what it costs to duplicate 1 million CDs?) and negotiates the distribution of your product to retail locations. This is a gargantuan business model of which any one component could bankrupt the typical garage band. Just the duplication alone would typically be a deal breaker for the average musician in that duplicators require payment on 30 day net terms while distributors typically pay for product on a 90 – 120 day net basis. In other words, you have to pay for the CDs 2 to 3 months before you see one penny of proceeds from fulfillment. Platinum takes on a whole new meaning if you have to front the money to print a million units.

While the game has changed with the advent of the internet, digital distribution and social media, there is still no substitute for the commercial clout and marketing machinery that a global record company brings to the table for an artist. Let’s look at some of the basic components of a recording contract:

1. Term of Obligation – the contract specifies that the artist agrees to record a specific number of songs and turn over the mixes to the record company in a required period of time for reproduction.

2. Options – the contract will also specify that the record company has the option to require the artist to record subsequent projects upon notification.

3. Contractual Exclusivity – the contract stipulates that the artist is bound to record exclusively for the record company or with their permission on other projects.

4. Recording Budget and Advances – the contract will stipulate a specific budget for the recording process and usually outline what if any of this budget will be available to the artist as an advance.

5. Domestic and Foreign Distribution – the contract will define how product will be distributed and outline various rates of payment for domestic versus foreign product, retail pricing, and reserve terms. If product doesn’t sell, it is returned to the record company for refund.

6. Royalties – the contract stipulates what the royalty rate for the artist and or producers will be and defines the accounting process therein. The typical artist royalty rate is anywhere from 12 to 20 percent. Of course, royalties are disbursed after recoupable expenses are satisfied.

7. Cancellation – the contract usually outlines the mechanism for the termination of an artist contract and generic circumstances that would ensue termination. Examples might include failure of the artist to present recording projects in a timely fashion or breach of contract.

Obviously, successful companies need to choose artists wisely knowing that the investment is going to be the same whether they pick a winner or a loser. While your Americana Polka project might sell briskly in your polka circles, it might not be the right project for a record company to be able to exploit in the big way they need to for staying in business and keeping stockholders happy. A record deal is not for everyone.

In the next installment of Let’s Make a Deal, we’ll explore alternative models for the burgeoning garage band that just can’t snag that major label deal. Until then, “sign” wisely, my friends.

Chris Marion is an American musician best know as a member of Little River Band and for his contribution to the gospel and country music industries.  Although graduating college with a B.A. in Psychology, he is a classically trained pianist and has worked in the music industry professionally for over 35 years.  As a resident of Nashville, he is involved in the recording industry working in the genres of Gospel, Country and Rock.  Since 2004, he has toured globally with the classic rock act Little River Band as a keyboardist and vocalist.  For more useless trivia and minutiae, you can visit his personal website at http://www.chrismarionmusic.com.