If a recording artist signs a record deal and receives an advance, how much of that advance would the artist get to keep and how much money would their music have to generate in order to fully recoup that advance?
Here is a scenario: a new artist signs a record deal with a major record label and receives an all-in master royalty of 18% and a $100,000 advance. An advance is a prepayment of the musician's share of the royalties. Typically, the record label will pocket the artist's share of the master royalties until that share fully recoups the $100,000 that was advanced.
The way lawyers get paid can vary, but some of them may take 5% of the advance, so that would leave the artist with $95,000.
Artist managers typically take 10 to 15 percent. If this artist has a manager that takes 15% of that $95,000, then the artist would be left with $80,750.
Advances are not loans. They are considered taxable income. So if state income taxes, federal income taxes, and FICA taxes take a combined 25% of the $80,750, then the artist would be left with about $60,563.
But they would still owe the record label $100,000 and they are only recouping at 18%.
If the artist doesn't produce their own music and they give music producers an average of 4 points on the master, then since the artist's royalty is all-in, those 4 points would come out of the artist's share which means the artist is now recouping at 14%.
So for the artist to fully recoup $100,000 from their 14% share, their music would have to generate about $714,286 in master royalties. ($100,000 is about 14% of $714,286.) However, the total royalties that the music would have to generate would usually be even higher than that because a portion of the royalties generated would likely be publishing royalties which would typically go to songwriters, music producers, and music publishers and thus wouldn't count towards the artist recouping their record deal advance.
So if the artist was trying to recoup their record deal advance entirely from interactive streams alone, how many streams would they need and how much in total royalties would those streams generate?
Typically, around 18 to 25% of the royalties for an interactive stream are considered publishing royalties, the rest would be considered master royalties. (Non-interactive streams are calculated differently and typically pay less than interactive streams.)
So if the average interactive stream pays half a cent and 78.5% of that is master royalties and 14% of that would go towards recoupment, then the artist's music would have to generate around 181,983,621 streams in order to fully recoup the $100,000 advance. In the process, their music would have generated about $714,286 in master royalties, most of which would've gone to the record label. Their music would've also generated about $195,632 in publishing royalties.
So at that point, the artist's music would've have generated a total of about $909,918 in combined master royalties and publishing royalties and the artist would've pocketed the $60,563 that was left over from the $100,000 record deal advance. If the artist also contributed to the writing or production of some of the music, then they might have also received a portion of the publishing royalties.
Here are 4 notes:
1. A portion of the artist's advance might be treated as a recording fund to actually create the music, in which case our example artist might pocket even less than $60,563
2. If the artist was recouping from physical record sales, then there may be additional deductions to their share of the royalties which would increase the total amount of money that their music would need to generate in order to fully recoup. (For example, the artist may receive a lower royalty percentage for foreign sales, sales made via non-normal retail channels, records sold for a wholesale discount, or sales in mediums other than CD.)
3. Major record labels often use the advance as an incentive to get artists to give up ownership of the sound recording copyrights aka the "masters" of the sound recordings they create. So in effect, the advance is used to purchase the masters. However, the artist is required to pay back that advance from their future royalties, but even if they fully recoup, they do not typically receive that master ownership back.
(In my opinion, if the record label is receiving ownership of the masters, then either 1) some or all of the advance should be considered a non-recoupable payment for those masters or 2) if the artist fully recoups, they receive their master ownership back.)
This is a practice that the major record labels and their precursors have used for decades to gain many of the millions of copyrights that grant them an outsized influence over the laws and economics of the music business. The major record labels are allowed to benefit from a concentrated bargaining power backed millions of copyrights. Meanwhile, U.S. musicians are hindered from doing the same due to anti-union laws that limit their right to unionize and collectively bargain. As a result, the rules that shape the music industry, whether they be official laws or streaming service policies, are largely shaped by the major record labels and designed to work in their favor, often to the detriment of musicians.
4. If the artist doesn't fully recoup, they usually don't have to pay the record label back out of their own pocket. So a record label does take on some risk in giving an advance. However, a record label can still turn a hefty profit even if the artist hasn't fully recouped. And, if the record label owns the masters, they could make the money back over the life of the copyright.
To learn how the publishing royalties and master royalties for music streaming are calculated, check out my ebook, How Interactive Streaming Royalties Are Calculated & Paid (2nd Edition).
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