The recording contract series; (part 6) royalties and some classic rip-offs

What should the artist's royalty be worth? When asked, very often an artist will proudly declare that he is "on a 15% royalty" without knowing what this actually means in cash terms. There are two systems we need to study.

The "Old" system of artist royalty calculations:

Until the mid 1990's, the following formula was universally used, and is sometimes still used today:

(royalty base price - packaging deduction) X royalty rate

The royalty base price

The royalty base price (RBP) can either be the retail price (i.e. what consumers pay in the retail stores or on the web) or the dealer price (i.e. what the shop or website pays the distributor/record company). The dealer price is also known as "PPD" (or Published Price to Dealer - a British term (now used worldwide), to refer to the price to dealers, agreed to, set and published in a negotiation between the MCPS and the BPI. In South Africa, PPD simply means the price at which that record was sold to the dealer). VAT is not included in the royalty base price. (Obviously, dealer prices are lower than retail prices).

Please note, however, that the retail price of an album is not necessarily the price you see it selling for in the shops. Sometimes (particularly in the UK) it is fixed at a notional level by reference to industry agreements between the BPI, representing the record companies, and the MCPS (as the organisation that collects and distributes mechanical royalties generated from the recording of the music of its members, the writers and publishers of music).

As Donald Passman puts it, this means that "an organisation of people that control the songs on records (as opposed to the performances, which may or may not have been created by the same person), negotiated with an organisation of record companies to see how much they should get paid for the songs. So a nice, neat definition of "retail and wholesale" was hammered out by the two powerful groups.

In the US market, this never happened, so a suggested retail list price (or SRLP) is used. Essentially, this means that the record company has told the dealer what to charge for the record ). In South Africa, it is left to CAPASSO to negotiate the standard mechanical percentage for their respective members with RiSA (and to an extent AIRCO), and this varies from 5% to 10% depending on the use.

(The usual rate is 6.76% of PPD for physical, 8% of retail for downloads, and 9% of retail for iTunes). These tariff tables are too long and complicated to reflect here, but are available in detail on the respective Organisation's websites. As to the exact value of PPD or retail in South Africa, this depends on the individual price at which the CD is sold to the retailer (PPD) or to the consumer (retail/downloads).

Uplift

In such situations, the royalty rate was "uplifted" above what it would be to take account of the lower royalty base price, and to bring the rate to retail level. A typical "uplift" is 130% for the home market and 125% for overseas markets. In the UK, a dealer price was published (i.e. the price charged by the distributors to the retailers - called a PPD) after the BPI and MCPS had their negotiations. To determine "retail" for royalty computations, the PPD was "uplifted" by 129% to get to the approximate retail price. Note that in the UK and South Africa, the mark-up is much smaller than in the US, where wholesale prices are lower.

Packaging deductions - A big rip-off

Record companies invariably deduct "packaging costs" before calculating artist's royalties. Herein lies one of the biggest problems in record contracts - one that you need to be keenly aware of. Deductions made for packaging are typically 10% for 7" singles, 15% for albums, 20% for tapes and 25% for CDs. (These deductions are made against either the retail or the dealer price, depending on which formula is being used).

It is an unfortunate fact that these deductions are well in excess of what a record company actually spends on packaging (there is no realistic chance that a CD booklet and case cost R25 to R30 each - a more realistic figure would be R5). Yet packaging deductions of 25% of PPD are one of those so-called "standard terms" that will most likely never change unless we rant and rave about them in articles like these.

Some contracts even charge a packaging deduction against the recording artist for sales of records via internet download! In other words, the record company does not create any packaging at all, but nevertheless, charges the artist up to 25% for the non-existent packaging. Its incumbent upon the artist not to be naive and relinquish their power by allowing this to happen? In reality, most packaging deductions are artificial and in no way reflect the true cost to the label. Packaging on CDs manufactured in volume is cheap today. Similarly, as more records are sold through digital channels, a reserve for packaging (and also breakages and the allocation of free digital goods) does not make any sense at all, other than to boost the label's profits.

There is no way that anything like a deduction of 25% for packaging is justifiable today. And yet you see it in contracts everyday. Go figure.

Ad valour/Ad valorem

The phrase "ad valorem" means a duty calculated on the value of certain locally-manufactured goods and payable to the Receiver of Revenue. This duty used to be payable on the manufacturing cost of CD's, but has now been removed. It is still applicable to cell-phones, microphones, amps and speakers and other hardware. The tax is constantly being debated, so it might come back at some stage. But for now it is not applicable to music products (in South Africa), therefore it will, for now be left out of the royalty calculations below. But please bear it in mind, because if it comes back, it will comprise yet another deduction that will come off before the artist sees his royalties.

Basic calculation under the old system

Under the "old" system, a typical CD royalty calculation would be as follows:

Uplift (to approximate retail) X 129%

Retail price R135.45

Less packaging (25%) R33.86

Royalty base R101.59

10% royalty R10.15

The "New" system of artist royalty calculations:

As opposed to a retail price basis, a dealer price basis of royalty accounting has now become almost universally adopted by the major record companies in the UK and South Africa. The change occured in the UK when, in the mid 1990's, the BPI and MCPS could not find new common ground decided to use a percentage of PPD (Published Price to Dealer) instead of a percentage of retail.

Today, most UK and South African companies do not even attempt to approximate retail with the "uplift" exercise. They simply calculate royalties as a percentage of PPD. This is a much better and simpler system than "uplift", and is also a much better system than the American SRLP (Suggested Retail List Price), which is quite artificial and inaccurate.

Obviously, an artist on a PPD royalty needs a higher royalty rate than an artist on a retail rate. The old uplift system gives a very good indication of what these rates should be: For example, if an artist had a 10% retail rate, under the old system there was an uplift of 129%, he would need a PPD rate of 12,9% (129% of 10%)

Basic calculation under the new system

So on this system, a typical royalty calculation would be:

Less packaging (25%) R26.25

Royalty base R78.75

12.9% royalty x 12.9%

Royalty payable R10.15