Recording Contracts Explained

Recording Contracts Explained

So you have done all the hard work needed to get a record label interested in singing you or your music. You arrive at the labels head office and are lead to the conference room. All that stands between you and your dreams is the voluminous recording contract that has been thrown down in front of you. You start to read through it......uh oh!

You have absolutely no idea what half the stuff means!

Before this happens to you I suggest you read through this section. It will explain everything you need to know about recording contracts. You will learn about how recording contracts work, the common terminology used and the different types of recording contracts used in the industry today.

By the end you will have the knowledge and confidence to understand and negotiate your own recording contract.

And If you're not lucky enough to have been offered a recording contract yet then I suggest you read How Do I Get A Recording Contract?. In it I discuss some of the things which record labels are looking for.

How Recording Contracts Work

Recording contracts are an agreement between the artist and the record label, allowing the record label to exploit the artist’s work in return for royalty, in a legally recognized format.

Most artists are under the mistaken assumption that the job of recording labels is to make them millionaires, while their job is to make music. They consider signing a contract with a recording label as the ultimate goal of their musical journey; as something which instantly monetizes and validates all the hard work that they have put in.

Nothing can be further from the truth for it is when you sign a record deal with a label that the hard work actually begins.

When you sign a record contract with a label, you are basically asking the label to fund:

• the cost of producing your music album (and video),
• the cost of printing and distributing CDs,
• the cost of shipping it to retail stores,
• the cost of promoting your music,
• the cost of promotional campaigns, freebies, breakage, packaging etc. besides any other investments they may have made in providing you with facilities, lavish or otherwise.

The record label has to earn back all of this money, with interest and profits added to it.

After all it is a company which has money to make. They earn all of this off the royalties that your music makes.

A record label always makes money before you do. The money they invest in you is simply an advance against the royalties you will generate for them. If you don’t give them enough hit songs, and if they are unable to earn back from you the money they have spent, they will cancel your deal.

Hence, once you sign a deal with a label, you have to continually give them the re-assurance that you will keep generating royalties for them by making hit songs and albums.

If your CDs don’t sell, or if the radio stations don’t play your music enough to generate enough royalties to recoup the expenses that the recording label has incurred on you, you can kiss your contract goodbye.

A recording contract will usually spell out contract periods. You will receive an advance for each contract period as stipulated in the contract. Each contract period will require you to deliver a certain amount of work, usually measured in terms of number of songs or albums. You are obliged to meet the deadlines.

Once the artist or the band goes into the studio and records an album, it belongs to the label, forever. There will also be a lock-in clause with a duration of around 10 years which prevents the artist or band from re-creating or re-recording the songs, from the end of the contract.

The label can reject an album that it does not like, in which case the artist or band is obliged to record another. It can also accept the album, but never do anything with it. The lock-in clause still applies.

At this point you will be wondering how much money you will get?

The typical figure for royalties ranges from 10 to 20% of sales. If you are an unknown, you will probably earn on the low end of the range. Also make sure you know what the wholesale price and the retail price per unit is, for sometimes the royalties are paid on the wholesale price, and not the retail price, which is often jacked up by about 80%.

Once the recording label recoups all the investment that it has made on the artist, by deducting all the expenses (real or imaginary) it has incurred on the artist from the proceeds earned from sales of the music, it cuts the band or the artist a royalty check for the balance amount. Out of this check about 20% is pocketed by your manager, while the rest of the money goes to the artist or is distributed between the band members.

So what does a recording label do, if you are giving them everything on a platter?

To be fair to these companies, they give you exposure on a scale you could never have managed on your own. They have the financial muscle and the necessary influence to market you to a world-wide audience. They have the organizational resources to organize humongous tours for you. They give you the publicity required to expand your fan-base exponentially and drive your album sales into millions.

They have the resources required to handle all your business deals, from promotional deals, to copyright protection and from collection of royalties to sales of merchandise. They have the risk-appetite required to give you all the facilities that you’ve hitherto dreamed of, before you’ve earned them a single penny.

To summarize, recording labels do have the upper hand in the business. But remember, if they want to give you a contract, they think you are a good prospect. Try to negotiate as hard as you can for higher rates and clear terms and always have a lawyer handy, and you will be fine.

A Recording Contracts Terminology Explained...

Below are some of the clauses you will find in recording contracts.

• The Exclusivity Clause
  The Exclusivity Clause obliges the artist to work only for the recording label they sign the contract with. Under the exclusivity clause you cannot record with another label, nor terminate a contract if someone else offers you a better deal. The recording label is however free to sign on and pay attention to other artists.  
• The Term Clause
  The Term Clause spells out the duration for which the contract is legally enforceable. It is usually divided into contract periods of 12 months each. The work an artist is required to produce per contract period is also usually spelled out.
  Within the term clause is nested the Masters Clause. If the recording label stipulates that a masters must be commercially acceptable, it may force the artist to re-do the work he submits within a contract period. This could delay the onset of the next contract period by as much as 5-6 months, which automatically extends the term clause by that period. For this reason, it is wise to also negotiate a Maximum Term Clause beyond which the contract is automatically terminated.
• The Rights Granted Clause
  The artist will hand over all his copyrights in perpetuity to the record company in most exclusive recording deals. In real terms, this usually means 50 years from the year of release.
• The Territory Clause
  The Territory Clause obliges the artist to submit to the recording label’s control in the jurisdictions which the contract covers. Most recording labels will sign worldwide deals, allowing them to use the artist’s work anywhere in the world.  If you have a split-territory deal, for e.g. you have signed a deal with a recording label which is applicable only to the U.S., you may sign a deal with another label for the U.K.
• The Artist Warranties Clause
  Under this clause, the artist declares that he/she is not bound by a legal agreement to any other label. They also promise to produce and perform their work without compromising on its quality. The artist agrees to perform all duties required to publicize the work and to make the album successful. Besides, the artist confirms that the work produced is original and they have the copyright to it.
• The Re-recording Restrictions Clause
  This clause prevents the artist from re-recording their work with any other label after the expiry or termination of the original contract, for a certain period. Make sure to negotiate this only applies to records that have been actually released.
• The Creative Control Clause
  Some of the ‘creative control’ issues that you will encounter and negotiate are: Music videos, Recording studio costs, Recording costs, Remix rights, Singles Songs selection, Name and Likeness Rights, Artwork, Merchandising Rights etc. Make sure you have a right of approval clause inserted to over-rule any decisions made by the studio in this regard.
• The Advances Clause
  This is the loan that the recording company pays you to cover the expenses of producing and publicizing your work. This is recouped from the royalties that you make from sale of music. Try to negotiate for bigger advances for every subsequent album that you release after the first one.
• The Royalties Clause
  Typically Royalties range between 10-20%. Most recording labels will calculate your royalty based on the wholesale price of the units, rather than on the retail price, which is jacked up by around 80% of the wholesale price. So even if you sell $100 million of music, your royalty will only be 10% of $20 million, which is $2 million dollars. Your producer will take 3% of this and your manager will take about 20%. The remaining will split between members of your band. From this amount, the recording label will deduct all the expenses it has incurred on you, real or imaginary, and then cut you a check for the remaining amount. 
• The Accounting Clause
  Be sure to insert a clause that obliges the studio to give you detailed reports tracking all expenses and payments due to you. Auditing the companies’ records later will be a costly and time-consuming affair.
• The Termination Clause
  The contract should be terminable under certain scenarios like if the recording label goes bankrupt, if a key member of the band dies, if the company is merged or taken over etc. Your copyrights should revert to you in such a case.
  Each contract is tailored specifically to the parties involved in the negotiation. Remember to hire a competent attorney who can thoroughly scrutinize the document for you, before you commit to anything.

Types of Recording Contracts

No two contracts are alike. Recording contracts are tailored to keep in view the needs of the negotiating parties concerned. Below is an overview of the different types of recording contracts you can expect to encounter while signing on with a record label. 

The main types of Recording Contracts are:

• The Exclusive Deal
  The Exclusive Deal is what artists hunger for. In an Exclusive Deal, the recording label will invest in the artist and his music for a certain period of time. In return the artist agrees to make music only for the recording label during the period. Since the recording label is investing in the artist, it will want to dictate terms in what kind of music the artist should make, that the recording label can sell to recoup their investment. The chief negotiating point is usually the degree of creative freedom that the artist will enjoy.  The recording label will usually retain the copyright for the music in perpetuity.
• The Licensing Deal
  The Licensing Deal is a contract where the artist licenses his music to the recording label for a certain period of time. During that period, the recording label is free to use the music as it sees fit. The recording label pays the artist an advance up front. If the recording label cannot recover the amount of this advance during the period in which the song is licenses to it, it is not the artist’s problem. If the music becomes a hit, the artist is in a position to exploit the music fully for business purposes, when the copyright reverts back to him at the end of the licensing period.
• The Development Deal
  The Development Deal is a contract where the recording label invests in training you to become a full-fledged artist if they see potential in you. The label will likely give you some small advance, and invest in providing you the equipment and set-up required. Instead of an entire album, they will agree to produce a few songs. Under a Development Deal, you do not receive tour support, or music videos and other bells and whistles.  Your copyright will be retained by the label.

Apart from the above three, there are other types of deals like:

• The Distribution Deal
  The Distribution Deal is a contract usually assigned only to indie artists or labels who have created a fan-following for themselves or a buzz around their music. The recording label will take on the expenses associated with giving the music “shelf-space” by selling it through its stores. The indie artist or label is responsible for all other costs, the most significant of which will be marketing your CDs.  The copyright remains with the artist. Advances for this type of contract are rare. The recording label will retain about a quarter of the profits, while the rest goes to the artist.
• The Production Deal
  In a Production Deal, a contract is signed not between an artist and a recording label, but between an artist and a producer. The producer negotiates his own contract with a recording label to record projects for them. The artist will be given projects to work on, that he must complete for the producer, who will in turn sell it to the recording label.  The Masters are usually owned by the producer, or shared between the producer and the recording label. Most producers will share the profit from projects with the artists in a 50/50 deal.
• The Major Label Deal
  This is the same as the Exclusive Deal. The record label basically gives you a loan to cover every expense. From Recording, Production, Distribution and Promotion, to Music Videos, Touring Support and Promotional Deals, you will have money to cover everything. You must repay this loan with interest and profit to the recording label. The recording label collects all the money earned from your music, deducts all the investments it has made on you, and then pays you a royalty check, if there is any money left over. They will own the copyrights to the music forever, and will also have you sign a lock-out clause which prevents you from re-recording the music for say 10-15 years.
• The 360 Deal
  Also known as “Multiple Rights Deal”, the 360 Deal, as the name implies, gives the recording label a share of the profits out of everything that an artist makes, be it CDs, Concerts, Merchandise, Books, Lyrics, Songs, Promotional Deals, anything! The recording label pays the artist a huge advance and enters into a partnership to run the artist’s business.

Remember, a recording label is out to make profit, not to promote your music, so always have a competent lawyer at hand who will thoroughly vet the contract before you sign anything.

How Do I Get A Recording Contract?

So now that you know the major types of recording contracts that exist in the music industry. Lets work on getting yourself one.

Check out my article "How Do I Get A Record Label Contract?" for some great advice and tips on how to get labels interested in you and your music.

Have you got a story about how you got a recording contract? Why not Share your story with the world. Use this form to let me know and I will share your experiences with other songwriters.