The Cold, Hard Truth About Recording Contracts

Indentured Servitude

by Michael Bertin

   




llustration by Jason Stout

It's a conditioned response. "`We got a good deal,' yeah, everybody says that," affirms Davis McLarty, a local booking agent who has coached many young Austin artists through the process of negotiating recording contracts. "You're not going to walk away going, `Yeah, we got a bad deal.'" Because a recording contract - "a record deal" - remains the brass ring of the music industry, it fairly goes without saying that most musicians never met a record deal they didn't like. It's only natural, as well, that when asked about their contract, these same artists respond just as McLarty posited. Unfortunately, there's no such thing as a "good record deal." The numbers are so stacked against the people making the music that, as recent Atlantic Records signee David Garza noted, "It only works for the artist if more than a million copies are sold. Period."

The obvious problem with that, of course, is that of the approximate 30,000 albums released every year, less than one percent go platinum (certified sales of one million), meaning there are very few recording artists for whom the record deal is actually working.

This problem is further compounded by the fact that very few musicians know what their record contract actually says. Which is quite understandable; the average Egyptologist had a better shot at deciphering hieroglyphics before the discovery of the Rosetta Stone than the average musician today has of making heads or tails out of their recording contract. This turns out to be, perhaps, the worst problem of all since those pages upon pages of tediously rigid terminology, obscure even to the legally trained, hold the financial fate of an artist.

"When people bring their little record deals to me, they're always just stunned," says Cindi Lazzari, an Austin entertainment lawyer who has worked deals for local artists such as Eric Johnson, Charlie Robison, and Chris Duarte. "They're kids and they don't know. [They say], `I can never afford a lawyer, I'm just going to sign it, because this is what they do.' So they sign it, and then they're screwed forever - or at least for a long time."

Because a recording contract remains the brass ring of the music industry, it fairly goes without saying that most musicians never met a record deal they didn't like.

Suppose you do sign a deal. Sometime thereafter you will go into the studio and make an album, the label will then release it, and if all goes well, people will go to record stores and start buying it. Once that happens, money should start trickling in via two different revenue streams

The first source of revenue comes through artist royalties - what the band, singer, or whoever's name is on the CD spine gets for the performance on the recording. Royalties are often referred to as the "artist share," and that's a bit of a misnomer, because "share" isn't really an accurate description of how things get divided up, according to Ron Byrd of local band Prescott Curlywolf. "The terms for a record deal are not good," he grumbles.

In recording contracts, artist royalties are negotiated in "points." When industry people use that locution - "We'll give you 15 points" - they're referring to the percentage points they pay an artist on each album sold. If a band gets 15 points that means it gets 15 percent of the retail cost of each album.

Artist share is generally going to be in the vicinity of 15 points - occasionally more, usually less. Rob Bernard, also of Prescott Curlywolf (and the Damnations), recalls that P-Wolf got 13 points in their deal with Mercury Records. Like most facets of a recording contract, this is negotiable; if there's interest from multiple labels, a band can use that to try and leverage a greater artist share. Jason McMaster of the now defunct Austin metal outfit Dangerous Toys claims that so many labels were interested in his band once upon a time (circa 1988), they swung 15 points in their deal with Columbia.

That royalty rate, however, will be "all in." That means that if anyone else is getting points, say a producer, they will be paid out of the artist's share. In other words, if an artist who negotiated 15 points for themselves scores a big-name producer that commands a two-point fee, those two points are subtracted from the artist's share, leaving them with only 13 points.

Think about that for a moment. The musician who makes the damn album in the first place is doing well to get 15 percent of the take. It's axiomatic that the creative element in any endeavor is typically paid only slightly better than the interns, and yet the recording industry has many other ways of further reducing the artists' actual take and leaving them in something akin to indentured servitude - a term that just about everybody in the know on record deals uses to describe the situation.

First, almost all major label contracts stipulate that an artist be paid royalties on only 85 percent of the albums sold. This is actually a remnant deduction left over from the earliest days of vinyl. Occasionally said petroleum product would break during shipment. Since retailers couldn't sell broken records, the record companies decided not to pay royalties on them either. As a result, a 10 percent breakage factor became customary. Today, even though CDs generally don't break during shipment, the deduction has not only stayed, it's increased. So, for seemingly no reason other than they can, record companies are not going to pay you for every album you sell.

Moreover, a typical contract will also have a free goods deduction, reading something like "two shipped free for every 10." This is more entrenched language, like the damaged goods deduction; per an agreement through labels and distributors, record companies used to put two free records in every box of 10 shipped. Distributors got 12 records, but they only paid for 10, while artists only got royalties on the 10 that were paid for. It's a record contract fixture even though today most major labels are their own distributors. This means that with the free goods deduction, record companies are giving themselves two CDs gratis so they can avoid paying artist royalties on them.

Finally, there's what's called a packaging deduction; artwork, insert booklets, jewel boxes, and shrink wrap all cost money, and the labels don't want to pay artist royalties on those expenses, so they don't. Typically, labels deduct a whopping 25 percent off the retail price of a CD for the costs of packaging it. Again, royalty rates are generally paid on the list price, so with the packaging deduction alone, a recording artist can lose a full quarter of his "artist share." The massive deduction is something akin to theft.

"The fact is that it's a total myth," Lazzari admits. "Packaging doesn't cost them that much."

Free goods? Packaging deductions? How do record companies get away with depriving artists of a sizable portion of the money due them? Fastball guitarist Miles Zuniga explains:

"That, my friend, is what's called the industry standard. When you ask your attorney to take those out [of the contract], he will say, `Well it's an industry standard,' meaning standard for you but not for Madonna. In this way, record companies can screw new artists and not have to worry about it because everybody does it. As you become Madonna, you can renegotiate and have these things taken out."

What on the surface looks like a bad deal for artists - having their small share nickel and dimed even more - is actually worse than it seems. It's so bad that McLarty warns young bands right up front.

"I always tell bands you're not going to make money off of artist royalties on a major label, nobody does. Nobody does."

Why? Because there are all kinds of costs associated with being on a label and making records, and those costs are recoupable. In label lingo, "recoupable" simply means that the record company wants that money back. Not only do they want it back, but the artist is going to have to pay for it out of their share - those piddley 15 points less all the other percentage deductions - before seeing any cash themselves. As Dangerous Toys' McMaster attests, those recoupable costs add up fast.

"We got out of having to pay back about $1 million," admits McMaster. "It's pretty amazing to even be able to say that shit, but the stuff happens. The money exchanges hands like people change underwear. "

Among recoupable costs is the advance. That's the money an artist gets for signing with a label. Advances have a tremendous range - maybe as low as $30,000 for an artist that signs without much fanfare to $250,000 or better for bands caught up in a bidding war. In fact, in a bidding war, things can get downright out of hand. Radish, that kid grunge band from Dallas that sold approximately nothing, is rumored to have received around $800,000 for signing with Mercury.

If you're really hot property, however, you may get a signing bonus. This is not recoupable. This is free money - money for you to spend as you wish and not have to worry about paying back. Woo hoo! Almost nobody get this (D'oh!), although word has it that Kacy Crowley's advance from Atlantic Records was actually a bonus of this kind.

Typically, advance money will be what an artist uses to pay for recording their album - as well as covering living expenses. Even though all this money is recoupable, however, what you don't spend in the studio you can put in your pocket. And you will need it, too, because it's hard to keep your day job at Quack's when you're in a recording studio in Los Angeles.

And videos! That's recoupable money as well. And like anything else in the music business, costs can quickly get out of hand. As a self-described hippie without a perm during his Dangerous Toys hey-day, McMaster was somewhat bewildered when the band showed up to do its first video and saw a make-up artist and stylist on the set and on the payroll - their payroll.

"Those people were there to make us look good. I understand that," says McMaster. "But out of control is out of control. It would have been nice to go, `We don't need this, we don't need this, we don't need this. And we don't need this.' But I'm in Texas getting on a plane to go out there and start shooting a video. I show up and all of the shit i

"I always tell bands you're not going to make money off of artist royalties on a major label, nobody does. Nobody does."

- Davis McLarty

s there already. It's not in my hands. We spent $80,000 on the video. It was fucking stupid. You can make a great video for under $2,000. It's silly."

A decade later things haven't changed much. Abra Moore's video for "Four Leaf Clover," the one of her in front of that foresty backdrop (or is it an actual forest?), cost nearly $100,000 to make, and wow, it doesn't look like wardrobe was a huge expense.

Also recoupable is tour support. For its debut, Make Your Mama Proud, Fastball got $100,000 from their label Hollywood Records to help cover costs on the road.

"That may seem like a huge sum," notes Zuniga, "but that paid for almost a year of touring and when you think about it, that's the catering budget on Dumbo Drop 2, so for Hollywood and [its owner] Disney, it was no big deal."

What may be no big deal to Disney, though, results in huge amounts of red ink for artists. Between recording budgets and tour support for its first two albums, Fastball racked up a debt to Hollywood Records of almost $500,000. And that's not all; labels charge back to the artist anything they can get away with. McMaster, for instance, says he was being entertained by Columbia at his own expense.

"Every time they want to take you out and spend money on your band - take you out to dinner, bars, whatever - that's your money they're spending," he explains. "Here you go, five guys and you bring your friends or your girlfriends, and you're spending up to $1,500 on dinner and drinks and entertainment."

Worse still, Dangerous Toys was completely unaware they were paying for it until they saw the charges on accounting statements months later.

In their defense, labels are taking a huge risk when they sign a band. The vast majority of albums don't sell well. In 1995, SoundScan reported sales of over 146,724 titles, 91 percent of which sold less than 5,000 copies. Granted, this is a little misleading, because it includes all albums, even those catalogue nuggets like Pink Floyd's Dark Side of the Moon. It's only a little misleading, though. That year the average major label release sold only 9,134 copies.

Huge risks generally merit large returns, but there are aspects of recording contracts that go beyond the bounds of a reasonable return on an investment. When Austin's Spoon was negotiating its contract with Elektra Records, Britt Daniel discovered that he wouldn't even be able to own the very albums he would be making and paying for out of his royalties. According to Daniel:

"We told our lawyer that we wanted to own our own masters and he was like, `Okay, when the Easter bunny gets through blowing Santa Claus then what else do you want?' The fact that they give you an advance which you have to pay back to them, but you don't own your masters - that's completely bullshit. I don't know of any job where you have to pay back your own work expenses, because an advance is theoretically what they are giving you to make the product."

Since the band was shopping finished product, Spoon ultimately licensed its current album, A Series of Sneaks, to Elektra. After this one, however, they will all be owned by the label.

There are exceptions to this rule, of course. If the label has dropped you, deleted your catalogue, and has no future plans to do anything whatsoever with your music, then you're just taking up valuable vault space. For that reason, Prescott Curlywolf was able to get the masters from its major label debut, 6ix Ways to Sunday, back from Mercury. According to Bernard, once the above factors were in place, the rest wasn't too much of an ordeal.

"We had our lawyer basically go in and plead our case and they were happy to do it," says Bernard. "It wasn't going to make them any money, not in their plan, so I don't think they saw any harm in letting it go."

So, what does the record company do for you? Its end of the bargain comes in the form of an agreement to manufacture, distribute, and promote the product - your album. Of course, there's no guarantee that the label will even do the latter. Bernard estimates that Mercury's total promotional expenditures on 6ix Ways to Sunday was $400. He guesses that was spent on some posters he saw at the venues the band played during its sole, one-week tour.

"We didn't even consider, `Well shit, they don't have to promote you,'" admits Bernard. "They can sign you, but they don't have to promote you. Only after did we become aware of the evil truth that major labels just buy up acts to keep them off the market. That's the truth of the matter. They want to keep the market free and clear so they can push their big money makers."

Yes, the record industry could crush Mr. Rogers' spirit, but surprisingly, things aren't completely hopeless. Despite the fact that the terms of most recording contracts are generally not very artist-friendly, you can make money. Fastball's Zuniga estimates that the $500,000 debt his band racked up will be paid in full by the end of July. Claims the guitarist:

"If you have a hit single, everybody wants to play ball with you, and the money starts flowing in from several different rivers: record sales, publishing, live gigs, merchandising, etc."

Being on the radio makes getting paid elsewhere a little easier, but even without a hit there are ways to make a living making music for a record company. Remember, there are two sources from which the money flows; royalties are one, the other is through songwriting mechanical license fees - "mechanicals" in industry lingo.

Mechanicals are what the songwriter and the publisher get paid for the writing of the song, with the current rate hovering around seven cents per song per CD sold. Don't think that record companies don't want that, too. They do. They will often not pay the full seven cents per song rate, nor will they always pay on every song on an album. Nonetheless, there are fortunes to be made in songwriting royalties and an artist on a major label can sell all or part of their publishing for very good money. Zuniga and Fastball sold their publishing a few weeks ago for a huge sum.

Also, the money from mechanicals is generally not cross-collateralized. This means that, assuming a band or the members thereof wrote the material performed on the album, any money due them for songwriting will not be withheld to pay back all of the recoupable costs like the record royalties are. No matter how much you owe the label, you get paid your mechanicals if you wrote the song.

Publishing gets very tricky very quickly, but an artist who takes the time to understand it and manages his share of it wisely can make out well. If, however, you don't write your own material, then you're back in the familiar it-ain't-going-to-work-for-you-unless-you-sell-a-million-albums camp.

Whatever the case, it generally boils down to this: As long as artists are cognizant of the fact that most major label recording contracts favor the company with little or no regard for the creative force behind the whole endeavor, they can still play the game one of two ways and maybe come out ahead. First, there's the take-all-you-can-get-up-front tactic. Try to negotiate a huge advance, and sell off part of your publishing. Exploit any leverage you might have. Even though Prescott got dropped by Mercury after one album, which sold less than 5,000 units, they still pocketed money because they got such a big check up front. "We made out like bandits," says Ron Byrd. "We each probably made $20,000."

The band actually got $225,000 from the label. From that, $75,000 went to buying out the band's contract with local indie Doolittle Records, while another $70,000 went into making 6ix Ways to Sunday. The rest was money in their pockets. Of course, they're still in the hole to Mercury for $200,000, but because they were dropped, they don't have to worry about paying any of it back.

The other strategy is to keep costs down. That way, even if you're not a huge hit the first time up, it's not going to cost the label much to give you another attempt at bat. Hollywood didn't promote Fastball's first album much, so Zuniga acknowledges "it didn't cost them that much to keep us around." He credits that and having a few key people at the label who believed in them with allowing the band to make the now-gold album (sales of 500,000) All the Pain Money Can Buy.

As it turns out, there's actually a third strategy: Don't sign with a major label at all. Unfortunately, there's a perverse logic whereby musicians and fans alike infer that because independent labels are "cool" indie record deals are "cool," too. The truth of the matter is, however, that a lot of indie labels pattern their deals after what the majors do. There are some indie labels that have taken a major label contract, changed the names, and used it as their "standard agreement."

In fact, indie deals can be as bad or even worse than those set up by the majors. As dismal as Prescott Curlywolf's experience with Mercury was, the band was already quite unhappy with its deal with Doolittle, and viewed its signing with Mercury as a way to get them off Doolittle. For its latest release, Funanimal World, Prescott Curlywolf settled on another Austin indie, Freedom Records, a label where the arrangement is unlike anything else in the business. After label owner Matt Eskey recoups his costs, he splits everything 50-50 with the artist.

"He's 100% artist friendly." says Byrd, "We don't even have anything on paper with him."

Of course you can always not sign with anybody. David Garza made nine records by himself before inking his deal with Atlantic, and he's completely content with the Ani DiFranco-esque course he took.

"Most bands sign too early in their career," says Garza. "I thank God every day I didn't sign in 1991. I can't imagine it. I was nowhere near ready. I would have been thinking, `Okay, here's our big record deal, so now I'm going to make a lot of money.' That's not what happens when you get signed."

Because he had a career under his belt before negotiating with Atlantic, Garza brought a lot to the table and as a result got what he called "an incredible deal" with the label.

But remember, everybody gets an incredible deal, or at least everybody says they do - or better yet, think they do. How can any deal that doesn't make you money until you're threatening to go platinum be that good? It isn't. Obviously, the terms of most major label recording contracts are such that a crummy deal isn't even in the numbers.

McLarty explains: "In my mind a good deal is finding people at a record company who really dig what you're band is doing and really want to work hard to make the band a success. You have to factor that in to whether you got a good deal. The numbers are going to suck no matter how you look at it. That's just the way it is."