Bold Music Business Class CHAPTER 7 SIGNING TO A PHONOGRAM PRODUCER

Let us now consider the situation where a phonogram producer wishes to sign an artist with the intention of selling as many copies of the artist’s recordings as possible. Traditionally this was the way for an artist to be successful, but as we will see in the section on the Internet on page 100, there are now other avenues for an artist to consider. In the past major phonogram producers such as Sony-BMG, Warners and Universal would invest in an artist by providing advances, recording costs, marketing,tour support and distribution. The major phonogram producer would generally commit
to making and releasing one album with the artist but would want options on as many as eight further albums.
The other important feature of these investment-type recording agreements is that the phonogram producer will generally demand that all recordings made under the agreement are assigned to them for the life of copy protection in the country of residence, i.e. assignment will be sought for the full period of related right copy protection for sound
recordings in a particular territory, which could be anything from 50 to 100 years. This means that the artist will earn royalties from any sales during the period that the recordings enjoy protection, but he/she will never own their recordings. In some countries, particularly those governed by civil law, this kind of assignment for life of copy protection is prohibited and can only be transferred by license. However, in the common law countries such as the
UK, the US and Australia this assignment is lawful and is often the case. The major phonogram producers will argue that they need this assignment to justify their investment in the artist, which is highly speculative. From the artist’s perspective this may appear to be unreasonable, as in these agreements the artist invariably pays all the audio recording costs and usually 50 percent of any video production costs from his/her audio royalty account. This concept of the artist having paid all the recording costs but never owning the recordings is one that is constantly questioned in the music industry. The way for an artist to avoid this dilemma is to enter into a limited assignment of perhaps 10-25 years rather than the life of copy protection or, better still, to license his/her recordings to the phonogram producer for a limited term. The licensing approach is far better from the artist’s point of view and is becoming far more common, particularly in the case of the smaller independent phonogram producers. It is important to understand that if the artist licenses his/her recordings to a phonogram producer he/she retains ownership of the related rights in the recordings.
Even if the licence is for life of copy protection it is preferable to an assignment, as, if the phonogram producer went out of business, the related rights would revert to the artist. Similarly, any material breach of the licensing agreement by the phonogram producer could result in the rights in the recordings reverting to the artist. The advantage of signing to a major phonogram producer is that they are able to spend large sums of money on marketing campaigns for the artist such as, television and radio advertising, pluggers (people who work to get an artist’s records played on radio and television), in-store campaigns and print advertising. They are usually also prepared to spend larger sums on recording costs (even though these will usually be recouped from the artist’s royalty account), tour support (providing money to cover any loss on a tour, again usually recoupable from the artist’s royalty account) and video production (even though usually 50 percent of these costs will be recouped from the artist’s audio royalty account and the other 50 percent from the video account). Whilst the artist may receive lower royalties than can be paid by an independent phonogram producer, he/she could well be better off, purely because of the greater sales that a major phonogram producer can achieve. As mentioned earlier, it is far better to receive a smaller percentage of a large sum rather than a large percentage of a much smaller sum and this is something the artist and the manager will have to
consider before committing to a recording contract. The new digital royalty structures being offered by major phonogram producers to performers have been controversial as digital downloads and streaming replace physical sales. With digital downloads and streaming the phonogram producer has no manufacturing costs, no physical distribution costs such as shipping by road, rail or air, no faulty returns and no packaging costs. Despite these savings the major phonogram producers have continued to set performers’ royalty rates at the same level as the physical product. Some smaller independent phonogram producers have seen an opportunity here and are offering royalties of up to 50 percent of net receipts for digital sales on the Internet, thus giving them a considerable advantage in persuading artists to sign to them rather than to a major phonogram producer. An additional advantage of signing to a smaller ‘independent’ phonogram producer is that they are usually much more open to entering into a licensing agreement rather than an assignment agreement. The royalty rates and the royalty structures are also often considerably better than can be negotiated with a major company. For example a typical independent deal might be a licensing agreement for anything between three and 15 years, after which the rights in the recordings will revert to the artist and he/she will be free to either negotiate a further term with the same phonogram producer, negotiate a new agreement with another phonogram producer, or release the recordings on his/her own label. The disadvantage with a licensing agreement is that often the artist has to pay for the audio recording costs, i.e. the artist has to supply the phonogram producer with finished recordings. This can sometimes be financed from the advance that the independent phonogram producer pays. In any case, due to advances in home recording technology, it is far less expensive to record
an album than it was in the past. As we have seen above, it is important to consider carefully the royalty structures of a
recording agreement. In the past, major phonogram producers developed very complicated royalty payment structures for physical sales of recordings. These would usually be calculated on a royalty base rate which might increase at certain sales figures and with future albums if the options on them were taken up. These royalty rates could be based on the Published Price to Dealers or Dealer Price (PPD) or on the Recommended Retail Price (RRP), which is sometimes also called Suggested Retail List Price (SRLP). This often resulted in misunderstandings between artists, one of which was paid on a royalty rate based on PPD and another signed to a different company which based its royalties on RRP. The PPD royalty would always be higher than the RRP royalty for the same amount of income per unit sold. All sorts of
deductions are applicable to this base royalty rate. There is usually a ‘packaging’ deduction which is typically 25 percent for CDs. This means that the royalty is instantly reduced by 25 percent. Some phonogram producers have even substituted the packaging deductions for digital downloads and streaming (where there is no packaging) with ‘new technology deductions’. There will also typically be reductions for sales to libraries, the armed forces, record clubs, mail order, sales at budget and midprice (rather than full price), sales that involve special packaging, and sales when a
recording is included in a compilation album. In 2002, BMG, before they merged with Sony, spent a lot of time attempting to reform these royalty structures into one simple royalty payment which they set at 15 percent of PPD for every record sold. This royalty rate had no packaging deductions or any other deductions which meant a much more streamlined and efficient accounting system for the phonogram producer, and one which was also easier to understand by the artist and manager. This was a really sensible move for both parties, but the majority of major phonogram producers still use the old complex royalty contracts which can sometimes run to over 100 pages. Before a long-form recording agreement is negotiated the phonogram producer will usually put forward a suggested heads of agreement, which is a brief summary of the main points in the agreement, to start negotiations. An experienced manager will
negotiate this directly with the phonogram producer and then bring in a lawyer for the long-form agreement, which will include all the so-called ‘boiler plate’ legal text. An inexperienced manager or an artist without a manager would be advised to enlist the services of a lawyer as soon as the heads of agreement is received. An experienced manager may approach it the other way around by issuing the phonogram producer with a suggested heads of agreement. Here are the main issues to negotiate at this point:

1. Type of agreement: licence or assignment.
2. Territory: This could be one country, a group of countries, a continent, several continents or worldwide. Sometimes the world is extended still further to include the solar system or the universe.
3. Term: The length of time that the phonogram producer will have to exploit the recordings covered by the agreement. This could be anything from three years to life of copy protection available in law.
4. Albums: The number of albums in the agreement: usually one or two with options for more. Sometimes it is possible to negotiate guaranteed releases on the first two or even three albums. It is in the artist’s interest to have as few options in the agreement as possible.
5. Advances: The amount of money the phonogram producer will pay to the artist in advance of an album being made. This could be in addition to recording costs or it may include recording costs. Advances are usually fully recoupable from royalties. The phonogram producer will usually be obliged to pay additional, increasing advances at each option point if it is taken up. Sometimes the advance payable on option albums are linked to sales of the previous album. Also included here could be how the advances are to be paid, e.g. 50 percent on signature of the recording agreement and the remaining 50 percent on delivery of the album.
6. Recording Costs: A sum of money for making the first album, recoupable against royalties, which is usually increased for successive albums if the options are taken up. This is sometimes included in the album advance.
7. Royalties: The royalty rates payable by the phonogram producer for sales of full price albums, double albums, mid-price albums, budget price albums, singles, extended play singles, albums sold as part of a TV or radio advertising campaign, through a record club, by mail order, as sales to libraries or to the armed forces, for export, as sales in certain foreign countries included in the territory etc. There will also be royalty rates for sales of digital downloads, telephone ring tones and real tones and for sales as a result of streaming. Also the rates for master re-uses where a recording is synchronised with visual images in a film, TV programme or an advertisement.
8. Artistic Control: The uses of the recordings for which the phonogram producer needs approval from the artist and also whether or not a recording delivered by the artist can be rejected as technically or commercially unacceptable by the phonogram producer. Also as to whether or not the phonogram producer or the artist has the final approval over artwork, biographies, photographs and videos etc.
9. Accounting: How often the phonogram producer is obliged to send royalty statements to the artist and when royalties (if any) are payable.
10. Audit: How often, under what circumstances and in what parts of the territory the artist can send an auditor into the phonogram producer’s business or that of the phonogram producer’s licensees to check on whether royalties have been accounted and paid correctly.

Three of the most important issues from the above list are the type of agreement, the term and the audit arrangements.
The artist should always try to obtain a licensing agreement rather than an assignment with as short a term as possible. In regard to the audit rights, the artist not only needs to be able to audit the phonogram producer in the country of residence but also to audit his/her foreign licensees or sister corporations in other countries if those countries are included in the territory. This is unfortunately very difficult, but if not achieved it leaves a large area of unaccountability
in the agreement. Another approach is to sign a different recording licensing agreement in each part of the world. This makes for a lot more work on behalf of the artist and manager but some artists have done it very successfully. A typical arrangement here might be one agreement for Europe, another for North American Free Trade Association (NAFTA)
members (the US, Canada and Mexico), another in Japan and another in Australasia (Australia and New Zealand).

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