How to Sell a Million Records and Still Owe the Record Company Money

This article was originally published on Yahoo! Voices.

Record deals are traditionally oppressive deals for recording artists. With the advent of the Internet, illegal downloading and digital sales have put a squeeze on the industry. This has resulted in the even more oppressive “360 deal,” which captures income from every aspect of a recording artist’s career, regardless of whether the income has anything to do with album sales.

Unfortunately, recording artists anxious to have a chance to be multi-platinum selling superstars seldom pay attention to the contracts they are getting ready to sign. Even if they do, many are so determined to get a record deal that they would happily sign away their first born if that’s what it took to get signed. Instead, they sign away a substantial portion of their earnings.

If the artist is successful, they will sell a lot of albums. Let’s be conservative and say they sell a million units. It would seem the recording artist would be raking in the money, right? Wrong. A close review of a standard recording agreement is sobering. Following is a breakdown of how an artist can sell a million units and still owe the record company money:

First, let’s assume that the artist is expecting a 15% royalty. Let’s also assume that the full album retails for $11, which is the new reality for current releases. That’s $11,000,000. Not a bad start, right?

But if the artist assumes that means $1.6 million in royalties to him, then he’s in for a real eye opener. The record company sells albums at wholesale. And, considering that the current definition of “sales” is the price the record company receives after discounts, the artist won’t be paid on retail. So we reduce the $11,000,000 by half, which is roughly akin to what the record company will receive for sales.

Still, $5,500,000 is a substantial amount of money. Except the artist isn’t paid on that figure, either. The record industry operates on consignment, which means that retailers are constantly returning products for credit. The record company will not only reduce this figure by returns, they will also hold a reserve, usually 25%, as a hedge against whatever returns may happen in the future. They will also take out any amount that is uncollectable (for example, if retailers file for bankruptcy).

In addition, traditionally, record companies have taken the position that the artist is to be paid a percentage of the music, not the packaging it comes in. A 25% packaging deduction is not uncommon, although some record companies don’t do this anymore, especially in light of the fact that digital sales don’t use packaging at all. However, since the practice is still prevalent, we’ll assume it takes place for the purposes of this illustration. Now, the $5,500,000 in sales looks more like this:

Wholesale sales: $5,500,000
Less returns: $500,000
Less reserve: $1,375,000
Less uncollectable amounts: $385,000
Less packaging deduction: $1,375,000

Net sales: $1,865,000

Finally, we arrive at a figure that the artist can expect royalties from. It’s a far cry from the $11,000,000 the artist expected to start with, but at least there are $279,250 in royalties to split between the band now, right?

Wrong. While $279,250 is the figure that will be credited to the artist’s account, the record company will also assess the artist with a number of expenses. Recording costs are typically counted as advances against the artist’s account. Let’s assume the band spent $150,000 recording their album. One half of video costs are also considered advances against album royalties. Let’s assume they spent $50,000 on a video, half of which ($25,000) would be recouped from album royalties. If the record company gave the band an advance, that would be recouped, too. Let’s assume the band received a $150,000 advance either when they signed the agreement or when they finished the album. Even more alarming is that most record companies will consider half of all promotional costs to be advances to the artist, which means those get taken back from royalties, too. Let’s assume the record company spent $385,000 promoting the album, half of which ($192,500) would be deducted from the royalties. The math looks like this:

Royalties: $279,250
Less recording costs: $150,000
Less ½ video costs: $25,000
Less artist advance: $150,000
Less ½ promotional costs: $192,500

Net royalties to artist: -$238,250

Wow. For the artist that may have been expecting over a million dollars in royalties, this is a serious reality check. What’s worse, promotion will continue, meaning that cost is not fixed. The more albums that sell, the more promotional costs that will be assessed against the artist. And for the artist that signed a 360 deal, it is even more difficult to make up the loss with tour proceeds, music publishing income and merchandising, since record companies are now taking a significant piece of that, too.

Welcome to the big time. Hope you saved some of that advance.

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