Advances and royalties

- I'm going to talk about how the artist is paid by the label using a system of advances and royalties. When a record label pays for a recording to be made, it usually does so via a process known as an advance. In that case, the label pays money to the artist that will be used to pay the recording costs. This is similar to a loan except that the musician is not personally liable. The money is paid back from incoming revenue. That is, the artist will not receive a royalty payment until the advance is repaid or recouped from the artist's share of revenue. So, for example, consider the artist who received a 10,000 dollar advance and earns a 12 percent royalty rate. Let's say that sales of the recording generate 50,000 dollars in revenue. According to the contract, the musician has earned 6,000 dollars, 12 percent of 50,000 dollars. However, the musician would not receive any money because the label keeps the 6,000 dollars in royalties to offset, or recoup, the 10,000 dollar advance. You'll notice that in this case, the label has revenue of 50,000 dollars while the musician is still in debt to the label for 4,000 dollars. So, is it better for the musician to seek a low advance in order to earn royalties sooner? Conventional wisdom says no. The more popular approach is that the musician should get as much money as possible in advance because the musician may never see any more checks from the company. Of course, the good news is that the artist does not have to pay the advance back if the album doesn't sell. The label can only recoup the advance in the manner described in the agreement, typically, from incoming revenue. It's sometimes recouped specifically from the album for which the advance was used, but in most agreements, from any recording made under the agreement. Some labels deduct a recording advance from non-recording revenue, for example from merchandise or music publishing revenue. The process of recouping from a source other than the album for which the money was used is sometimes known as cross-collateralization, or cross-recoupment. If possible, it's in a musician's best interest to avoid cross-collateralization, that is, it's always better for an artist to keep each recording discreet, and tie the recoupment only to the recording for which the advance was made. Royalties are based on a percentage of income. They're sometimes referred to as Points. Royalties are commonly determined in one of three ways, a percentage of retail price, a percentage of wholesale price, or a split of profits. Back in the day when music sales were of physical products only, for example, albums, cassettes, CDs, royalty payments were always based on a percentage of the suggested retail list price, or SRLP. Some record contracts still use this principle. For example, the SRLP for compact discs is usually 16 dollars, so if the musician's royalty rate were 12 percent of SRLP, the musician would earn 1.92 per each compact disc sold. Nowadays, most labels don't bother with the SRLP, and instead base the royalty on the wholesale price, or PPD, published price to dealers. In a third type of deal, commonly used by indie labels, known as profit splitting, or net profit deals, the label deducts direct expenses for making and marketing the album, and splits the rest with the musician. An artist usually doesn't have much choice as to which system is used, but as a general rule, royalty rates will be lower for retail SRLP deals, typically between 10 and 16 percent, and higher for wholesale PPD deals between 14 and 22 percent, or higher. As for profit splitting deals, which are most suitable for licensing existing recordings, the rate may be as high as 50 percent. Some labels may use a system in which royalties are tiered. For example, one set of royalties for physical products and another reduced royalty for digital products. Also keep in mind a final twist that applies primarily to major label deals. Record producers and some mixers are often given two or three royalty points that are subtracted from the artist's royalty. Except for 50/50 profit splitting deals, it's usually a good idea for the artist to seek a higher royalty rate than what's offered. Regardless of the bargaining dynamic, it doesn't hurt to ask. Next, I'll discuss deductions.