OK but the artist will make pretty good money from the sales of the album. All of that recoupable stuff is not a major issue, is it? Well, it is, considering the artist’s cut from the sales, or the artist royalty, as it is referred to in the contract. How much is the artist royalty anyway? Again remember we are talking about majors and their standards here. Indies and micro indies are a whole other story. Standard artist royalty of course varies, but is generally 10 to 15 percent of the retail price of the recording. Stars and superstars get more than that, but let’s stay with mortals here. So 10 to 15 percent of the retail is the norm. So if an album is 10 dollars, the artist who has 15 percent royalty gets 1 point 5 dollars for every album. Right? Hate to disappoint you, but surely you are used to it by now. No. OK so how is 1 point 5 dollars not 15 percent of 10 dollars. The same way as a one year term is not 12 months, remember? Or, if we are to learn from politics, depending on what your definition of IS is. Those of you who are not old enough to remember that infamous brilliant question, and the circumstances around it, believe me you are blessed beyond measure. Any way, just like in that sad reference, it all depends on what the definition of the royalty base is. If the base really is 10 dollars then 15 percent would be 1 point 5 dollars. But there are a clauses in the recording contract referred to as the deduction clauses that modify and redefine the royalty base. Meaning, of course, they diminish it. Predictable, right? So how do they do that? How do they make a 10-dollar album, which is the original royalty base, not ten dollars, but less, so the artist royalty becomes smaller because of it? Well, first, the royalty base gets reduced for the so called free goods. OK, so if they give some albums away as a promotion or something, they count how many they gave away, and those don’t count as sales, so no artist’s royalty for those. That sounds OK. Except that’s not how the math goes. The standard contract stipulates that the number of the units sold will be diminished by 15 percent in the royalty calculations, on the account of the free goods. There is no counting how many units are actually given away. 15 percent is deducted from the sales, and that’s it. So now, 100 units sold count only as 85. The royalty base is thus down to 85 percent. Then, the royalty base is further diminished by additional 25 percent for the so-called container charge, or the packaging cost. So now the artist’s royalty base is 10 dollars time 85 percent times 75 percent, which comes out to 6 point 375 dollars. 15 percent artist royalty on that royalty base is 96 cents. So the artist’s 1 point 5 dollars is now down to 96 cents. Plus remember what we said about the controlled composition clause? How the artist owes the difference in the mechanical licensing fees if the publisher insists on the full mechanicals? That came to 22 point 75 cents per 10 song album, remember? So the artist’s 96 cents gets further diminished by those 22 point 75 cents, and that’s how the artist’s royalty, through the sheer magic of a standard recording contract, goes from 1 point 5 dollars, to 73 point 25 cents; or it get’s cut in half, from 15 percent, to 7 and a half percent, faster than you can say recoupables. By the way, you remember those recoupable expenses we spoke about? All those expenses that the contract stipulates are recoupable by the company from the artist’s royalties? Well, the royalties clauses also stipulate that the artist will start receiving royalties when the company has recouped all its recoupable expenses. Other words, the artist does not receive his, by now, cut in half royalty rate of 7 and a half percent of retail, until the company recoups. OK so when is that? Well, since the contract defines recoupment as accumulating from the artist’s royalties, when the sum of the royalties exceeds all the recoupable expenses, then the artist starts receiving the royalties. Do you realize the implication of that? No? Well, think. Let’s say the cost of the recording production for the album, which is a recoupable cost as we said, was 50,000 dollars. And let’s say that the artist received a 20,000 dollars advance, which is also recoupable. And that the video production for one of the singles from the album costs 100,000 dollars, half of which is recoupable. Plus the company will kick in 50,000 for the tour support, and 50,000 for independent promotion, both of which are fully recoupable expenses. So, we’ll stay with our artist’s royalty example of 15 percent, the album unit price of 10 dollars, and all the contractual royalty base deductions we outlined earlier. Our artist’s royalty per unit thus came down to 73 point 25 cents, remember? So how many units of the album need to be sold before the artist receives his first royalty check from this album? Let’s see. The total amount that the company is recouping is 50,000 dollars for the recording production, plus 20,000 for the artist’s advance, plus 50,000 for the video (half of the 100,000 dollars cost), plus 50,000 for the tour support, and plus 50,000 for the independent promotion. Which comes to 220,000 dollars. So you would perhaps guess that 22,000 units need to be sold in order for the company to recoup and for the artist to start receiving royalties. Meaning, each unit is 10 dollars, time 22,000 units is 220,000 which is how much the expenses were. Right? Wrong. The recoupable expenses are collected from the artist’s royalties, not from the price of the album. That’s the real rub. And since the artist’s royalty is 73 point 25 cents per unit sold, that means that - 220,000 divided by point 7325 - 330,341 albums have to be sold before the company is officially recouped, and the artist starts receiving his royalties. Over 330 thousand units, not 22,000. How likely is that to happen? Not very. And we used a middle of the road recoupment numbers here, nothing really extraordinary. Those can be much, much larger than that of course, the higher you go in the industry ranks. Or they can be somewhat smaller, lower on the ranks, but we generally stayed within the lines in our example.
