The recording contract series; (Part 11) Recoupment (continued)

Recoupable Deductions

As you saw in the previous articles, lots of recoupable deductions are possible, and the label will try to make this list as long as possible. (Producers, for example, usually get paid from your royalties, so the more expensive they are, the less you will get from your royalties.) Where does all this leave the artist, financially? Let’s try to create an example of a Record Label spending the required money on a particular Artist:

Even though the individual figures are not that high, the total adds up doesn’t it? Applying the “rule of thumb” of R11.00 per album (which is a good cut), this means that the record company would have to sell about 55,000 albums for the artist to recoup this R600,000 and for royalties to come “on stream”. This, in South Africa, would be practically impossible, and in bigger markets would be, to say the least, no easy task. UK record companies have been known to spend as much as £500,000 on a (new) Artist’s first album, but in any one year, typically only a handful of new artists sell more than 500,000 copies of an album.

In South Africa, the above calculation would not raise an eyebrow, but the numbers simply do not add up. The reality is that a true “break-even” figure in South Africa would be closer to 5-6,000 physical units. This is what the labels expect a reasonably successful product to sell, so realistic record agreements will contain figures of investment and turnover that will work around a break-even of 5,000 to 6,000 sales. This has become accepted industry practice. Thus, advances and expenses like those reflected above, are simply too high for new artists. This is the simple economics of the matter. A better course (unless you have a very favourable contract, with few recoupments and no commitment to pay back) is to limit the expenses, and reduce the expenditures by up to 90%.

The moral of the story? Be VERY careful when negotiating a recoupment! It is clearly in the Artist’s interests to keep the recoupable costs down to a minimum. Artists should remember that in a normal contract, for every R10,000 the Record Company spends on recording and video costs etc, another 1000 albums or so have to be sold for that figure to be recouped. To put it another way, if there is a big recoupment clause, artists are effectively spending their own money when insisting on high expenditure, e.g. an expensive video budget.

But this problem goes away or is reduced if a favourable recoupment clause, with fewer items and lower numbers, has been negotiated. When negotiating your contract, the discussion you have on the recoupment clause should be one of the longest and most hard-fought. Get the list to be as small, and the numbers to be as low as you can.

Rock Band Nirvana --- Image by © Mark Seliger/CORBIS OUTLINE

Steve Albini’s Famous Nirvana-type Analysis

Here is a real-life American scenario provided by highly respected music producer Steve Albini (the ex-producer of Nirvana), concerning a band’s move from an independent label to a major-owned label. Disenchanted with their independent label Sub Pop and with the Smart Studios sessions generating interest, Nirvana decided to look for a deal with a major record label since no independent label could buy the band out of its contract with Sub Pop. Following recommendations by Sonic Youth’s Kim Gordon, Nirvana signed to DGC Records in 1990. Sub Pop wanted an override fee of 3% of PPD going forward. According to Albini, DGC did not mind at all, provided this was recoupable out of royalties, just like everything else.

Albini gives a hilarious (but scary and true) analysis by applying the Nirvana experience to a hypothetical new act moving from label A to label B, and tells its story. His conclusion is that, on sales of 250,000 units, the record label makes over $700,000, the industry makes $3 million, each member of the band makes $4,000, and the band is left with a debt of $14,000 owed to the label.

Here’s Albini’s story: ‘The band gets the final contract, and it’s not quite what they expected. They figure it’s better to be safe than sorry and they turn it over to a lawyer (one who says he’s experienced in entertainment law) and he hammers out a few bugs. They’re still not sure about it, but the lawyer says he’s seen a lot of contracts, and theirs is pretty good. They’ll be getting a great royalty: 13% (less a 10% packaging deduction.) Wasn’t it Buffalo Tom that were only getting 12% less 10? Whatever.

The old label only wants 50 grand, and no points. (Hell, Sub Pop wanted 3 points to release Nirvana.) They’re signed to the new label for four years, with options on each year, for a total of over a million dollars! That’s a lot of money in any man’s English. The first year’s advance alone is $250,000. Just think about it, a quarter million, just for being in a rock band! Their manager thinks it’s a great deal, especially the large advance. Besides, he knows a publishing company that will take the band on if they get signed, and even give them an advance of $20,000, so they’ll be making that money too. The manager says publishing is pretty mysterious, and nobody really knows where all the money comes from, but the lawyer can look that contract over too. Hell, it’s free money.

Their booking agent is excited about the band signing to a major. He says they can maybe average $1,000 or $2,000 a night from now on. That’s enough to justify a five-week tour, and with tour support, they can use a proper crew, buy some good equipment and even get a tour bus! Buses are pretty expensive, but if you figure in the price of a hotel room for everybody in the band and the crew, they’re actually about the same cost. Some bands like Therapy?, Sloan and Stereolab use buses on their tours even when they’re getting paid only a couple of hundred bucks a night, and this tour should earn at least a grand or two every night. It’ll be worth it. The band will be more comfortable and will play better.

The agent says a band on a major label can get a merchandising company to pay them an advance on T-shirt sales! Ridiculous! There’s a gold mine here! The lawyer should look over the merchandising contract, just to be safe. They get drunk at the signing party. Polaroids are taken and everybody looks thrilled. The label picked them up in a limo.

They decided to go with the producer who used to be in Letterman’s band. He had these technicians come in and tune the drums for them and tweak their amps and guitars. He had a guy bring in a slew of expensive old “vintage” microphones. Boy, were they “warm”. He even had a guy come in and check the phase of all the equipment in the control room! Man, was he professional. He used a bunch of equipment on them and by the end of it, they all agreed that it sounded very “punchy”, yet “warm”. All that hard work paid off.

With the help of a video, the album went like hotcakes! They sold a quarter million copies! Here is the math that will explain just how deep in the hole they are: These figures are representative of amounts that appear in record contracts daily. There’s no need to skew the figures to make the scenario look bad, since real-life examples more than abound. Income items are in bold, expenses are not.

The band is now ¼ of the way through the contract, has made the music industry more than 3 million dollars richer, but is in the hole $ 14,000 on royalties. The band members have each earned about 1/3 as much as they would working at a 7-11, but they got to ride in a tour bus for a month. The next album will be about the same, except that the record company will insist they spend more time and money on it. Since the previous one never “recouped”, the band will have no leverage, and will oblige. The next tour will be about the same, except the merchandising advance will have already been paid, and the band, strangely enough, won’t have earned any royalties from their T-shirts yet. Maybe the T-shirt guys have figured out how to count money like the record company guys. Some of your friends are probably already this deep in the hole.’

As I said – hilarious but scary and true.