Standard Royalty Deals

This will be the first blog post to a trilogy focused around record label deals. I've heard before of incidences between artists and record labels that got pretty heated, but I was never interested enough to understand why. Yes, of course I knew that the artists were complaining because of how horrible the contracts were, but I didn't know the in-depth version of it. But, as I started to gain more and more interest within the music business, and music industry, I learned some things that were quite mind-blowing to me. One being record deals.

Let's start with the standard deal.

When an artist is signed to the music label through the traditional royalty agreement, the artist receives an upfront payment, or advance, which is directly deposited into their bank account. This money serves two primary functions: it provides financial support for the artist during the album recording process, and it covers the production costs of the album itself, such as studio time, production, and mixing. Once the album is complete, the label typically retains the ownership rights to the final product, more specifically, the "master recordings." These master recordings are the definitive versions of the songs or tracks from which all the copies are made. Having ownership of these masters means the label controls how and where the music can be used, sold, or streamed, and they gain the lion's share of the profits generated from those activities. In fairness, however, the record label remunerates the artist with a percentage of the revenue generated from their music. This percentage, known as the "royalty rate," is essentially the artist's cut from the sales and streams of their songs. This arrangement allows the artist to benefit financially from the success of their music, even while the label retains the rights to the master recordings. It is worth noting, however, that the artist's royalty rate is usually set against the advance, meaning that the artist won't start earning royalties until they’ve paid back all the money they owe to the label—also known as their unrecouped balance. This might be a little difficult to understand, so I’ll explain it using a scenario.

Let’s begin by saying the artist received a $1 million advance from the label, and the production of the album costs $125,000. This means that the artist already has an unrecouped balance of $1.125 million to pay off. In other words, this artist, even before the first album has hit the shelves, has an obligation to generate revenues that can cover this substantial financial burden—then, and only then, will they see profit made from their work. According to the Copyright Royalty Board, the average artist receives a royalty rate of around 15%. This means that for every $1 the album makes, the artist receives 15% of it, which is 15 cents. If we were to do the math, the album would have to make $7.5 million in order for the artist to break even with a royalty fee of 15%.

$7.5 million is a substantial amount of money. In the contemporary music landscape, where physical album sales and digital downloads are replaced by streaming platforms, you might be thinking: how many streams are needed to make that amount? Let’s do math again.

As reported by Business Insider, streaming services such as Spotify and Apple Music remunerate artists with an average payment ranging between $0.003 and $0.005 per stream, around a 70/30 split between the artist receiving 70% and the platform receiving 30% of the streaming royalties. To delve deeper into this scenario, let's hypothesize that the average royalty per stream garnered by the artist is $0.004. This means that the artist’s album would have to generate an astronomical number of streams of 1.875 billion across all streaming platforms for the artist to reach a point of financial equilibrium.

But what if an artist fails to reach the break-even point despite their revenue from streams, sales, and digital downloads?

Although the artist retains their advance, the unrecouped balance, if they are under a multi-album agreement, gets carried forward to their subsequent records.

For instance, if the artist is still indebted to the label for $700,000 from their initial album, and the recording of their second album costs an additional $100,000, the break-even point for the artist on their second album elevates to $800,000. This just seems like a never-ending cycle of accumulating debt, right? Well, it is.

I was recently scrolling through Twitter and I came across this tweet from Mahalia, a British singer-songwriter who is signed to Asylum Records. In this tweet, she states, “I have been signed to since I was 13. I’m 25 now which basically means I’ve racked up 12 years of debt. I have never made a penny off of my own music. 100 million streams with all money made going to my label. This is pretty standard practice in most major label contracts.” It’s sad, but this is the day-to-day reality for a staggering number of artists chained to record labels. They're constantly fighting off an Everest of debt that began accumulating from the moment they penned their name on that contract.

So why do artists sign to record labels?

Despite how terrible standard royalty deals look from the outside and statistically, record deals have been important for up-and-coming artists because of the services record labels provide. When you sign to a record label, you’re gaining access to fame, A&R support, and distribution. In a physical-product world, if executed property, a record label would be able to develop the artist, elevate the artist by placing them alongside more accomplished acts, enhance their visibility, resulting in radioplay. Record labels were starmakers. However, as social media and streaming platforms such as Soundcloud and Spotify started to emerge, artists have been able to capitalize on these markets without requiring the support of a major label, making the benefits offered by a typical royalty deal—exposure, radio play, and development—lose a lot of their appeal.