Spacebomb: Music Law 102

It’s time to get back to the legal side of the music business. Two weeks ago we discussed the basics of copyright law. Now we move into the relationship between artists and record labels, and the role of music publishers.

July 6, 2011; 12:00 PM • by Matt Rawls

It’s time to get back to the legal side of the music business. Two weeks ago we discussed the basics of copyright law. Now we move into the relationship between artists and record labels, and the role of music publishers.

What we’ve learned so far

As a quick recap, a recorded song has two basic copyrights: the copyright in the song itself, and the copyright in the recording of the song. Simple, right? Don’t worry. As with anything, when money comes into the picture, everything changes. And the music industry has seen a lot of money in the last 100 years, so the corporations and lawyers have had plenty of times to complicate things.

Record labels and the sound recording copyright

Simply put, record labels are in the business of selling sound recordings. Basically, a record label hires artists to make music, which the label sells. In exchange, the label pays the artists a royalty, which is a percentage of the revenue from each album, or “unit,” sold. Usually, the label also gives the artist a sum of money in advance to pay for the recording. This “advance” is basically a loan from the label, and is paid back out of the artist’s royalties.

Here’s an example of what that looks like. A record label signs a band and gives them a $100,000 advance to make an album.* The band records 11 songs and gives the master copies of the songs to the label. The label uses the masters to make CDs, vinyl records, mp3s, ringtones, etc., which are sold to the public.

In exchange for the right to sell the music, the label pays the band a royalty for each sale. In most modern contracts the royalty is a percentage of the wholesale price, which is usually called the “published price to dealers,” or “PPD.” Royalty rates generally range from about 13% of PPD for new bands, up to about 20% of PPD for superstars. To make the math easy, we’ll use 15% of PPD as the royalty rate for our example, and use a PPD of $10**. So, for each album sold, the label pays the band 15% of $10, or $1.50.

As we saw earlier, though, the label uses the artist’s royalties to recoup the advance. In our example, that means the band will not receive royalty payments until it sells enough albums to repay the $100,000 advance. Since the band is making $1.50 for each CD sold, they need to sell about 67,000 CDs before they see a penny from their royalties.***

Thankfully, the royalty formula is simpler for digital sales. Typically, the label and the artist split the net proceeds of digital downloads 50/50 after the label deducts its expenses.

Songwriters and music publishers

While record labels are in the business of selling recordings, music publishers are in the business of selling the song itself, and that can be a significant source of income. Every time the song is played – whether on the radio, in the nightclub, bar, at a concert, or anywhere else – the owner of the song is entitled to payment. If the song is recorded by another artist, every time the cover is played the original song owner is entitled to money. In the immortal words of Randy Moss, that’s straight cash, homey.

Publishing companies make sure that money gets to the songwriter. Here’s how it works. Songwriters, the original copyright owners, sell their songs to a publisher. Then, the publisher’s goal is simple: to get the songs played. The publisher markets the songs and takes care of the administration. They make sure the money is paid when the song is played, and that the money goes to the right person.

The division of revenues from songs is much simpler than the royalty system used by record labels. While there can be variations, the industry standard is for the songwriter and publisher split the money 50/50. Amazingly, the terminology is even simpler: the publisher’s half is called the “publisher’s share,” and the writer’s half is called the “writer’s share.”

The controlled composition clause

We already know the songwriter is paid every time their song is played. They’re also paid every time their song is duplicated.

To understand the significance of this point, let’s go back to our example. Assume that one member of our band writes all the songs. The label has to pay that member for the right to make copies of each of those songs. As we learned two weeks ago, Congress has set a statutory maximum rate for this of 9.1 cents per song.**** The label owes this money as soon as the song duplicated. If there are 11 songs on the album, and the label initially presses 100,000 units, the statutory rate would be over $100,000. The label owes the song owner this money before a single copy is ever sold. This can make it almost unfeasible for a label to take risks on unproven songwriters or new bands.

To get around this problem, recording contracts use the “controlled composition clause,” which limits what a label pays for each song. Typically the adjusted price is about 75% of the statutory rate. Also, it usually makes payment due only when the music is actually sold.

The Spacebomb way

Here at Spacebomb, we are excited about trying to do things the right way. So, now that we’ve covered the basics of music law, let’s take a quick look at how we go about the business side of things.

This spring, Matt White explained how labels like Motown and Stax used a house band model. We’re convinced this model is great for both the creative and business sides of what we do. By keeping so much of the process in-house, we can efficiently and effectively make music. This keeps the artist’s advance down, and hopefully will allow everyone to profit in the long run.

We don’t use complicated royalty systems, with unnecessary deductions. We simply divide the album’s net revenues, and distribute the proceeds accordingly. As a general rule, the money is split 50/50 between the label and the artist. This plan is not unique to us. A large – and growing – number of independent labels use this type of royalty system. Like us, they think it’s fairer to the artists, and it also makes accounting much easier. You won’t find this system at the major labels, though.

From the musician’s share of the proceeds, the primary musician receives the largest share. Drummer Pinson Chanselle and bassist Cameron Ralston also receive a share. As our house band, they not only earn royalties for albums, but they also own a part of the company.

Conclusion

Those are the basics of music law, and a brief look at some of the stuff that we’re doing at Spacebomb. Hopefully, these articles have shed light on some of the inner-workings of the music industry. Obviously, legal teams are not the people making great music. The legal and business side of this industry, though, is an interesting, and in some ways important, part of the process. I’ve always found that the more I understand the process of making art – whether music, movies, theater, or anything – the more I appreciate the final product. I also just like to know how things work.

All of us here at Spacebomb are excited about what we’re doing. We’re excited to make music, and we’re excited to try our hand at the business side, too. We hope you like what we have in store.

Lastly, a disclaimer

The Virginia State Bar would probably be upset if I left this out. This is obviously a very general overview of music law and the music business, and should not be construed as specific legal advice. Remember, every situation is different, and you should always consult a knowledgeable, attorney in your state before signing any contract.

*$100,000 is a larger advance that most bands would get starting out. But it’s a nice round number that makes the example easy to understand.

**Currently, the average wholesale price for CDs is somewhere around $10-12, so the example is relevant.

***In the real world, many labels will also deduct a plethora of things from the artist’s royalty earnings. Most of the time, they will automatically deduct about 10% of record sales to account for “damaged goods” — which historically was put in contracts because a good number of vinyl records would break during the shipping process. Nowadays, this shouldn’t really be a concern: CD’s aren’t that breakable, and even if an mp3 could “break,” the label wouldn’t really lose anything. Nonetheless, the damaged goods deduction is still standard in any major label contract, and plenty of independents, as well. Labels also deduct for promotional copies, packaging, and the like. Things get worse if the artist has a multi-album deal. In order to make sure it gets its money back, the label will “cross-collateralize” the advance over multiple albums. That means if the band doesn’t sell enough copies of its first album, it will still be paying that advance back out of royalty earnings from its next albums.

****The rate also increases incrementally on songs longer than 5 minutes.

— ∮∮∮ —

Spacebomb Records presents Fight the Big Bull and Scott Clark 4tet on Wednesday, July 6, at Balliceaux.  Ages 21+, free. Balliceaux is located at 203 N. Lombardy St. in Richmond, VA. balliceauxrva.com (804) 355 3008

For more information, visit spacebombrecords.com

July 6, 2011 12:00 PM 0