Are major label record deals designed so that most artists won't earn any master royalties from them unless they receive an advance?
Record labels have normalized taking the vast majority of the master royalties. Major label artists often get less than 20%. The discrepancy is exacerbated because labels have also normalized recouping a disproportionately high amount of the expenses from the artist's share.
Here is a simplified example to illustrate the effect of this.
An artist wants to record an album but needs a record label to help to market it. A record label wants to market an album but needs an artist to record it. The cost to record an album is $50,000 and the cost to market it is $50,000, so $100,000 total.
Scenario 1:
- The record label puts up $80,000 and the artist puts up $20,000 to cover $50,000 in recording expenses and $50,000 in marketing expenses.
- The label and artist split the master royalties 80/20.
- Both parties would break even when the album generates $100,000 in master royalties.
In Scenario 1, they agree that the label will put up $80,000 and the artist will put up $20,000. They also agree to split the master royalties 80/20. When the album generates $100,000 in master royalties, then they have both broken even. After that, they would each begin to profit.
Scenario 2 @ 20% of Expenses Counted Against Artist:
- The record label puts up $100,000 to cover $50,000 in recording expenses and $50,000 in marketing expenses.
- The label and artist split the master royalties 80/20.
- 20% of recording expenses and 20% of marketing expenses are recoupable from the artist's share. (So $20,000 in total recoupable expenses.)
- The label would break even when the album generates $100,000 in master royalties.
- The artist would fully recoup when the album generates $100,000 in master royalties. ($20,000 is 20% of $100,000).
In Scenario 2, they agree that the label will put up $100,000 but they will split the master royalties 80/20. The 20% provides the artist with an incentive to record the album. The label will still want to break even before the artist begins to profit. To do so, it would pocket some of the artist's royalties.
The question would then become, "How much of the $100,000 in expenses will count against the artist's share of the royalties?" Since the artist is only getting 20% of the royalties, it would make sense for 20% of the expenses to count against them. In that case, the label would pocket the first $20,000 in master royalties that would have otherwise gone to the artist. Combined with the label's 80%, then like in Scenario 1, the label would break even when the album generates $100,000 in master royalties. The artist would be fully recouped at that same point. After that, they would each begin to profit.
However, this is not what record labels typically do. A major record label will typically count 100% of the recording expenses and around 50% or more of the marketing and promotion expenses against the artist's share.
Scenario 2 @ 75% of Expenses Counted Against Artist:
- The record label puts up $100,000 to cover $50,000 in recording expenses and $50,000 in marketing expenses.
- The label and artist split the master royalties 80/20.
- 100% of recording expenses and 50% of marketing expenses are recoupable from the artist's share. (So $75,000 in total recoupable expenses.)
- The label would break even when the album generates $100,000 in master royalties.
- The artist would fully recoup when the album generates $375,000 in master royalties. ($75,000 is 20% of $375,000.)
- At the time the artist fully recoups, the label would have a $275,000 profit.
So in this example, about 75% of the expenses would count against the artist's share. So the label would pocket the first $75,000 in master royalties that would have otherwise gone to the artist. The label would still break even when the album generates $100,000 in master royalties, but the artist wouldn't be fully recouped until the album generated $375,000 in master royalties. At the time the artist fully recoups, the label would have a $275,000 profit.
Putting a disproportionately high amount of the expenses on the artist's share creates a scenario where the record label may not only break even, but potentially turn a significant profit and still tell the artist that they owe the label money.
Major record labels will typically also make the artist's royalty "all-in", so if a music producer or audio engineer also receives master royalties, then their shares would come entirely out of the artist's share. This reduction in the artist's share of the royalties would increase the money that the album would have to earn for the artist to fully recoup.
Going back to my earlier question, are major label record deals designed so that most artists won't earn any master royalties from them unless they receive an advance?
If the music doesn't generate enough master royalties for the artist to fully recoup, then the artist might not receive any master royalties. To avoid this, a record label might offer to pay the artist some money upfront, an advance, that the artist can put in their own pocket. That advance is typically 100% recoupable from the artist's share of the master royalties. (An artist may need to pay a lawyer, manager, and taxes from that advance.)
According to various sources, around 90 to 98 percent of major label artists don't fully recoup. Given that so few major label artists fully recoup, it is likely that even if they didn't receive an advance that went directly to them, and thus had lower recoupable expenses, that most of them, perhaps the vast majority of them, would still not fully recoup.
That might indicate a core problem with this business model. It might indicate that this business model is so lopsided in the record label's favor that most artists would not receive any master royalties under it unless they accept an advance. If the major record labels refuse to adjust this business model to enable more of the artists they sign to fully recoup and they instead continue to look for new and naive artists to agree to this business model, then would that be predatory?
The advances are often the primary inventive for an artist to grant a record label complete ownership of the sound recording copyrights aka the masters of the tracks that the artist records. (A sound recording copyright owner has a lot of control over the commercial usage of that sound recording.) However, that advance is fully recoupable. The artist is supposed to pay it back from their future royalties. But even if the artist fully recoups, they typically don't get that copyright ownership back. That's kind of like selling a car to someone, then giving them back the money they paid, but not receiving the car back.
So it seems that offering an advance is critical to the types of record deals that major record labels want the artists they sign to agree to. Without those advances, there might be hundreds or thousands of artists that could truthfully say that they signed a record deal, the label got 100% ownership of the sound recording copyrights and either made made a profit or has the life of those copyrights to make a profit, but the artist has yet to receive any master royalties from the deal yet somehow still owes the record label money. That would be bad PR. Offering advances has likely kept a lot of people from looking closely at the structure of these record deals.
So if an artist is seeking to sign a record deal, it is important for them to not just understand the royalty splits; they should also understand the expense splits. If the percentage of expenses that are counted against the artist is higher than their percentage of the master royalties, then in my opinion they should question it and push back against it.
Three notes:
1. I've mentioned the major labels a lot in this article and these types of royalty structures are common with them, but there are many of indie record labels (including some big labels outside of the U.S.) that use the same or similar royalty structures.
2. This is not the only royalty structures available in record deals. An artist dealing with an indie record label or an artist with significant leverage that is dealing with a major record label may might receive a percentage of net profits (typically 40 to 60 percent of the profits) or net proceeds. Net proceeds typically accompany a distribution deal where an artist licenses ownership of the sound recording copyrights to the label instead of assigning/selling them. Net proceeds are typically a more complex formula but basically break down to Revenue - Fee(s) - Expenses = Net Proceeds. (The fees typically include a distribution fee and perhaps one or two others and combine to around 10 to 30 percent of the revenue.)
3. A few years ago, the major labels forgave unrecouped balances from deals made prior to 2000, thus allowing those artists to receive royalties from those deals. A nice gesture. But that there were still unrecouped balances from record deals made over 2 decades prior indicates a lot about those deals.
The major labels have purchased a bunch of smaller labels over the years and taken on those labels' record deals. The record labels may have been operating more like charities and giving artists bigger advances than they deserved or the structure of the deals enabled the record labels to profit even if artists didn't fully recoup.
Given that these were businesses and not charities, I suspect that most of those older deals were still unrecouped due to a lopsided deal structure rather than label generosity.
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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