So, an artist who received a 20,000-dollar advance, with a label that spent a total of 220,000 dollars of the recoupable expenses on the project, will under a standard recording agreement, as we have seen, receive his first royalty after about 330,000 albums were sold. If 330,000 ever sell, of course. Until that time, the only funds the artist has to show for in this deal is the 20,000-dollar advance. And may be the only funds, period, if the company does not sell more than 330,000 albums of the project. And how about the label? If more than 330,000 albums do not sell they are losing money too, right? The artist and the label are in this together, right? Well, not exactly. Let’s see what the company’s income is if, let’s say, only 100,000 albums sell, and the company is contractually and officially unrecouped and “in the red” with this project. The album is selling for 10 dollars retail, so we have one million dollars in retail sales (100,000 unit sold = one million dollars). If the company has spent 30 percent on distribution (which is kind of standard), that’s leaves us with 700,000 dollars. Minus 220,000 dollars they spent on the things we listed earlier – the artist’s advance, recording production, and so on – brings us to 480,000 dollars. Minus whatever else you might throw in – promo material, graphics work, publicity, marketing – let’s give it another 180,000 dollars for that, to make it nice and even, and we have 300,000 dollars in the bank still. Of profit. On an album that is contractually and officially unrecouped and in the red, and will remain so until 330,000 units are sold. By the way, if that many units sell, you can just triple all this math and see what the company’s profit is at that point, where the artist is only about to start receiving his 73 cents per album sold. Let me help you with that. That’s about a million dollars of profits for the label before the artist has seen a single cent of the artist’s royalties. And that’s not all. If the album does not recoup, meaning if the artist’s royalties from which the recoupment is collected do not add up to the total amount of the recoupable expenses for the project, the standard recording contract includes the clause which defines and enables the company to do the so-called cross-collateral recoupment. Which means, that no recoupable expenses are tied to a particular artist’s album under contract, but to all the artist’s albums under contract. I know it’s not immediately obvious what this really means, but stay with me here, and you’ll see how amusing it is, again in a sad commentary on humanity kind of way. For the simplicity sake we will stay with the recording contract example we already used, and let’s stay with that hypothetical 100,000 units sold after all is said and done. As you remember, in our example, at 100,000 units sold the company is not contractually recouped…although it made 300,000 dollars in profits, but that’s beyond the point here, and doesn’t count. What does count is that it has collected about 73,000 dollars of official recoupments from the artist’s royalties (100,000 units sold times 73 cents of royalties), and since the recoupable expenses are 220,000 dollars, as you remember, the company is still owed 147,000 dollars from the artist’s royalties. 220,000 minus 73,000 is 147,000 dollars still owed. But no more units of that album are selling. No problem. Enter the cross-collateral recoupment clause. Which gives the company the right to collect the recoupable expenses for this album from the artist’s next album sales. Cross-collaterally. So instead the accounting for the next album starting from zero again, it will start with 147,000 dollars owed to the company, by the artist, for that previous album, before even the first unit is sold of the new album. So everything else being the same, the new album would have to sell not over 330,000 units before it is recouped and the artist sees the royalties, like the first album had to do, but over 530,000 units. How is that? Well you already know how we came up with over 330,000 units having to be sold for the original recoupment. We’ve done that math earlier. Here, in addition to that, we have 147,000 dollars owed by the artist to the company from the first album’s recoupments, which comes to over 200,000 additional units. 147,000 dollars divided by the artist’s royalty of 73 cents, comes to 200,682 units. So with this new album the company has to sell over 530,000 units before it is contractually fully recouped, and before the artist starts receiving the royalties. Which is again highly unlikely, and the only funds the artist we see is probably an additional 20,000 dollars advance, if he receives such an advance for this album, like he did for the last one. So all in all, the artist has 40,000 dollars total to show for, from both albums. 20,000 dollars advances times 2, right?. And how about the label? What’s the score there in this scenario of the second album and the cross-collateral recoupment? If the second album sold also just 100,000 units like the first one, and all the expenses stayed the same, we can just double what the company’s real profits are at this point. Which is about 600,000 dollars. Of course, officially, the company is unrecouped and in the red, remember? It needs to sell over 530,000 units of the second album to be officially recouped. So, although in our scenario the first album sold 100,000 units, and the second album sold 100,000 units, and the company made over 600,000 dollars in profits, the artists has only received 40,000 dollars in advances and has not seen a single cent, of the artist’s royalties, from the sales yet. If you pushed that math all the way to the edge, where the artist is about to receive the royalties, but has not receive them yet – to 330,000 units sold of each album, remember? – the numbers become tragi-comical. Just about triple everything, and there you have it. If each of the two albums really sold 330,000 units, a bit more than three times of our original 100,000 units scenario, the company would have about 2 million dollars in profits, while the artist still didn’t receive a cent from the artist’s royalties. Courtesy of the sheer magic of the standard, major-label-recording contract. So if you are ever offered a recording contract by a major record label, or have to consider one on behalf of your artists, keep all of this in mind before you sign on the dotted line, and make sure you know exactly what you are signing and what all the implications are. Is there any wonder the artists are unsatisfied and seek better contracts? Is there any wonder the majors are going though hard times, since this is how they have been treating their artists contractually for a long, long time now? Don’t you think it’s time to start changing these arcane and often unreasonable contractual standards, and stop selling the bridges in the Arizona desert as great bargains? And we are. The recording contracts are changing and becoming more realistic and reasonable. Throughout the industry. Especially in the indies world. We’ll look at that issue a little closer, later on in the course.
