The recording contract series; (Part 13) Cross-Colleralisation

Royalty Statements

It is absolutely vital that the artist not only be given regular royalty statements by the label, but also that he is given reasonable access to the label’s sales accounts and other information concerning his sales. The label must be contractually required to account accurately and transparently to the artist, failing which problems will no doubt occur.

Accounting periods

In most contracts, royalty accountings are usually delivered on 31 March (for sales in the six-month period ending 31 December) and 30 September (for sales in the six-month period ending 30th June). However, bear in mind that a Record Company in South Africa will only be able to account for sales outside its own territory after those royalties have been received by it from its overseas licensees. This can often take time. Accounting of local sales should not carry the same delays, and there is no reason for delays in the accounting of online download sales, which should be immediate.

Cross-collateralisation

Very often, the label provides for the following in the contract: that royalties in respect of one album are recouped not just against advances (and other recoupable costs) paid for that album but against advances (and other recoupable costs) for all the albums that are the subject of the recording agreement.

This is the infamous “cross-collateralisation clause”, and it could be the reason for your financial downfall. Be very careful of it.

Essentially, the cross-collateralisation clause allows the label to spread its financial risk throughout a series of albums, so that, let’s say, your first album does well and you start earning royalties from it, but the second album is a failure, your royalty income from the first album will be taken to pay the label’s expenses in respect of the second. This clause is a very nasty little trap, sitting hidden away somewhere in your contract. This is often dressed up in complicated ‘age-analysis accounting’ terms which you should not let confuse you. Here’s an example of how it may look on your royalty statement:

1. The royalties accrued due on sales of the first album between 1st July 2015 and 31st December 2016 total, say, R300,000;

2. But the previous (i.e. on 1st July 2016) un-recouped balance was, say, R200,000 from a prior accounting period;

3. And on, say, 1st February 2017 the Record Company exercised its option for a second album and undertook to pay a further advance of R50,000;

4. Recoupable expenses were incurred between February and July of R100,000 on the new album;

5. Then, on 1 July 2017, the Artist will not receive the cheque for R350,000 that he might be expecting, but only one for R50,000.

This kind of ‘roll-over’ accounting can look very confusing to artists and their managers. But it simply would not be possible without the cross-collateralisation clause that allows expenses from one album to be recouped from the artist royalties of another album. Crucially, cross-collateralisation also allows the label to generally reduce its risk on an artist by recouping expenses related to poor-selling albums, out of royalties from strong-selling albums.

Cross-collateralisation And The 360 Degree Contract

And now the kicker – with the advent of the 360 Degree Contract, labels are starting to cross-collateralise between recording income and the other revenue streams. In the last six years or so, record companies have started to use the cross-collateralisation concept on all the artist’s form of income. So, suppose you owe the label R100,000 from the poor sales of the last album. If you have a 360 deal with them (and there is a “new” cross-collateralisation clause in it), the label can recoup those costs from your touring. Or your publishing and synchronisation.

Or your merchandising. Or all of them. Imagine you are a successful composer but your records don’t sell. Another artist records one of your songs and has a worldwide hit with it and it even ends up on a movie. You should be a wealthy man/woman, right? Not if there is a general cross-collateralisation clause in your 360 contract. All the millions earned in mechanical and synchronisation royalties will go to the label to recoup their recording costs. You get the picture – the new 360 cross-collateralisation clause simply allows the label to take its advance back from absolutely any income stream in your career. Avoid it like the plague.