In recent years there has been a rapidly increasing use of
so-called “Net Profit Deals,” as an alternative to the traditional type of
record deal. This is particularly true in the case of indie label record deals.
basic idea is that any net profits
will be split between the artist and the record label, after ALL expenses connected with the artist’s records have first
been recouped by the label from record sales income.
this with the traditional record
deal, where the artist is paid on a royalty basis, with a typical artist royalty
rate in the range of 12 to 16% (of the retail price), but sometimes higher.
The Basics of Net Profit Deals
compute the net profits in a Net Profit Deal, the record company deducts off
the top ALL of its actual out-of-pocket costs for recording,
manufacturing, promotion, marketing, etc. Some labels also deduct a
so-called “Overhead Fee” of 10 to 15% of the gross record sales income. After
the record company deducts all of those
expenses and reimburses itself, the label then pays the artist whatever
percentage of the profits the contract requires (usually 50%).
this percentage is obviously much larger than the 12 to 15% royalty range
mentioned above for traditional record deals, the artist in a Net Profit Deal
is getting 50% of the income from records sold, but only what’s left after ALL expenses are paid.
traditional record deals, on the other hand, the artist starts getting their
artist royalties after the record company has recouped the recording costs (and any cash advances to the artist) from the artist’s royalties. The record company
pays all other costs out of its own
pocket – such as duplication, shipping and promotion costs – and those costs
don’t factor into the calculations of what is to be paid to the artist.
Net Profit Deals Combined with Other
Kinds of Deals
a Net Profit Deal is just a component of another broader, more encompassing
type of deal, and/or there is another kind
of contract presented to you along with a Net Profit Deal contract.
good example is the so-called “360 Deal,” which is discussed in more detail
elsewhere in this book. A “360 Deal” is essentially an agreement between an artist
and a label which gives the label a percentage of not only record sales income,
but also a percentage of the artist’s merchandising income, tour income, and
all other entertainment industry income earned by the artist. A recording
contract is essentially just one of several components of the overall “360
labels, when doing a 360 Deal, usually (but not always) include the terms and
structure of a traditional recording
contract in the overall terms of that 360 Deal. But smaller labels, if doing a 360 Deal with an artist, often use a Net
Profit Deal as the recording contract component, instead of a traditional
a label will demand that the artist also enter into a co-publishing deal (usually a separate contract) in addition to the
360 Deal, giving the label a part-ownership interest in the artist’s songs, and
hence the right to share in the publishing income earned from outside sources,
such as when an artist’s songs are used in a film or TV show.
general rule, it is not in an artist’s best interests to give away
co-publishing rights to the label, particularly if the artist is not receiving
a substantial cash advance for giving away those particular rights.
too, a smaller label will present an artist with not only a Net Profit Deal,
but ALSO a management agreement on
top of that. In that scenario, the label will be taking a management commission
of 15 to 20% of the artist’s income (sometimes
even including the artist’s share of income from the Net Profit Deal).
it to say, signing a management agreement with your own label is almost always
a terrible idea, not only because of the financial consequences, but also
because you are losing the independent advice and judgment, and the protection,
which a good manager can provide.
Advantages and Disadvantages of Net
Profit Deals for Labels
Advantages (for Labels)
many Net Profit deals, the label doesn’t have to pay the artist anything
(including, under many contracts, even mechanical
royalties) until the label has recouped all
costs fronted by the label. This is, of course, appealing to labels, especially
in these days of declining record sales and the increased risk of losing money.
Disadvantages (for Labels)
main disadvantage of Net Profit Deals for labels
is on the back end – that is, if the records are successful and if the costs
relatively small in comparison. In that scenario, the deal will be less
profitable for the label than a traditional record deal would be
Advantages and Disadvantages of Net
Profit Deals for Artists
Advantages (for Artists)
Profit deals can be attractive to artists, but for completely different reasons.
For one thing, if record sales are
quite substantial and if the costs
involved are reasonably low in comparison to the income from sales, the artist
may come out significantly better with a Net Profit Deal than with the
traditional record deal.
to many artists the idea of a 50-50 split of net profits seems inherently more
fair and understandable than the voodoo economics of the traditional record
deal. Plus, some artists prefer the general feel of a profit split situation,
which can feel more like a partnering relationship and a more collaborative relationship
with the label than is the case with the traditional artist-label relationship.
the appeal of a 50-50 relationship is somewhat dampened by the fact that even
if the contract states that there is to be a 50-50 income split, in reality the
label may be receiving more that 50% of the net income. This is because, as
mentioned above, some labels also deduct an “Overhead Fee” off the top, along with all other costs (i.e., on top of recording,
duplication, promotion costs, etc.). Then, whatever is left is divided 50-50. And so, the label is receiving an Overhead
Fee off the top, AND then, 50-50
of whatever the “Net Income” is determined to be. (See the sample calculations
below to see exactly how those calculations are done and how the “Overhead Fee”
results in the label receiving more that 50% of the net profits.)
is just one example of some of the subtle financial issues under the surface
with Net Profit Deals. As a result, it is not always easy to determine in
advance whether a Net Profit Deal will be more or less advantageous than a
traditional record deal. Comparing the economics of Net Profit Deals to
traditional record deals can be very confusing, and to a large extent, like
comparing “apples and oranges.”
only way to really analyze the financial ramifications of a Net Profit Deal
versus a traditional record deal is to “spreadsheet it,” based on a ballpark
estimate of what the total expenses will be and what the sales levels will be
in your particular situation. It is always
crucial to “crunch the numbers.” That being said, those calculations can be
difficult and problematical for an untested new artist with no prior record
releases. On the other hand, for artists with prior record releases, they can use the income and expense history
of their prior records as an indicator of the likely income and expenses for
their next record and do the necessary projections accordingly.
Disadvantages (for Artists)
Profit Deals also present certain disadvantages
for artists, including the following:
traditional record deal situation, artists who write songs for their own
records are entitled to receive mechanical royalties (“mechanicals”) for those
songs, calculated on the number of records sold, and those royalties are
usually paid on a quarterly or semi-annual basis. These mechanical royalties
are paid by the label in addition to
the 12-16% artist royalties mentioned
above and are a crucial source of cash flow for most artists, since in the
usual case the artist starts receiving mechanical
royalties sooner than artist
royalties. (With the traditional record deal, the record company is usually
entitled to recoup recording costs from artist royalties, but not from
mechanical royalties, and as a result the mechanical royalties start flowing to
the artist sooner.)
Net Profit Deals, though, mechanical royalties are handled differently,
and usually in one of two ways:
Either the mechanical royalties will be paid similarly to how they are paid in
a Traditional Record Deal context, but the amount of mechanical royalties paid
to the artist will then be treated as an advance
to the artist and later deducted either off
the top as a general expense, or may
be deducted from solely the artist’s
share of the net profits (if any); OR
(2) No separate mechanical royalties
will be paid to the artist for their original material. Instead, the artist
will receive only a share of net profits, and no separate mechanical royalty
payments. The contract will usually say something like; “All monies payable to Artist
hereunder shall be inclusive of any mechanical royalties which would otherwise
be payable to Artist.”
case, the artist does not have the benefit of the cash flow from mechanical
royalties that would be paid in the case of a traditional recording agreement.
problems caused by this lack of cash flow are compounded by the fact that
usually the label is spending money faster than it comes in. Therefore, even if
there are eventually net profits from
the record, it will likely take quite some time before the artist actually receives a share of the net profits. (Part
of the reason for this is that the label is, more often than not, spending
money faster than it is coming in, just to keep the momentum of record sales
going.) And in the worst case scenario – i.e., if net profits never materialize – the artist will receive
ZERO money from the deal (i.e., no ARTIST royalties and no MECHANICAL royalties).
if you are an artist considering signing a Net Profit Deal, you need to first
discuss the pending Net Profit Deal with your publisher (if you have been
signed to a publishing deal), and with any co-writers outside your band, since
the mechanical royalty provisions in Net Profit Deals may seriously affect
their income from your record sales. You also need to clear the royalty
provisions with any producers whom you have hired directly (as opposed to a
situation in which the record company
has hired the producer and has agreed to pay the producer separately from any
monies owed to you as an artist). If you don’t do so, you are jeopardizing your
future relationship and business dealings with those people.
potential disadvantage of Net Profit Deals for artists is that it is much more
difficult and cumbersome for artists to do a royalty audit with Net Profit
Deals than with traditional record deals, all things being equal. This is
because, in the case of Net Profit Deals, the only way that an artist can know
whether they have been paid the proper amount is by verifying ALL income and
ALL expenses that the label incurred.
On the other hand, in the case of the traditional record deal, the artist needs
to verify only the income received and only certain
limited kinds of expenses (primarily just recording costs and independent
marketing and promotion costs), and not all
expenses. Remember too that audits can be very expensive, easily costing around
$15,000 to $20,000 dollars (and often much more, particularly in the case of
major label artists having substantial sales).
any event, it is still wise for artists to try to make sure that their Net
Profit Deal contract provides strong audit rights and provides that if the
label’s accounting statements are off by a certain percentage, the label will
then be obligated to reimburse the artist for any audit costs incurred.
in Net Profit Deals the label will have the right, for example, to create and
sell at least one new T-shirt for each record released during the term of the
deal and sometimes other merchandise as well. Those T-shirts (and other
merchandise) are then sold from the label’s website and the other usual
channels. The band then shares in the net profits from those sales.
the label’s sale of such merchandise can reduce/cannibalize the artist’s sale of his or her own merchandise. And since merchandise
income is such a big part of surviving on the road, any band entering into a
Net Profit Deal needs to either try to avoid giving the label the right to sell
such merchandise, or at the very least, negotiate the best possible contractual
rights and protections in regards to label-created merchandise.
Fees” (aka “Administration Fees” and “Marketing Fees”)
an artist’s point of view, “Overhead Fees” are questionable, since the label is
already entitled to receive 50% of any net profits. Sometimes these fees can either
be removed entirely from the contract, or the percentage reduced when the deal
is being negotiated.
Some Sample Calculations: (Comparing Traditional Recording
Contract Royalty Calculations to “Net Profit Deal” Calculations)
purposes of these sample calculations I am just plugging in some sample (and admittedly
very random) numbers here. Certainly all of these numbers will vary
substantially from one artist-label situation to the next.
to try to keep things as simple as possible in the sample calculations below, I
am not factoring in any numbers for
such things as income from the digital distribution of single songs or income
from licensing masters for films and TV shows. I am also drastically oversimplifying how royalties are calculated in the
case of the traditional record deal.
this major point: I’m not taking into consideration here the fact that major
labels generally spend substantially more on recording costs, marketing etc.
than indie labels do.
so, I’m not trying to base these calculations on realistic numbers of what
either an indie label or major label would spend. Instead, the purpose of these
sample calculations is just to show the methodology
of the calculations of the net profit deal versus the traditional deal, using
the same set of numbers for both deals.
now the fun begins:
TRADITIONAL-TYPE RECORDING CONTRACT
SAMPLE CALCULATION OF ARTIST ROYALTIES
ROYALTIES (Traditional-type Recording Contract):
– RETAIL price per record
10% net artist royalty rate
artist royalty rate (for each record sold)
30,000 records sold
=$45,000 in artist royalties
(minus) $20,000 in recording costs (recouped/deducted by the record company from the
(50% of independent marketing and promotion costs, and tour support given the
band). (Normally the label is entitled to
recoup from artist royalties 100% of the amount given to the artist as tour
support, and 50% of the money spent on independent (outside) marketing and
promotion costs (as opposed to the cost of the label’s own staff doing marketing and promotion).
= $15,000 in ARTIST royalties
ROYALTIES (Traditional-type Recording Contract):
there are 10 songs on the album and
the artist wrote all ten songs)
and 83/100 CENTS (6.83 CENTS) per song for each record sold. (Explanation: In
most recording contracts, the artist/songwriter is not paid the full
“statutory rate” provided for by the U.S. copyright law, but instead
75% of that amount. As of January 1, 2009, the statutory rate is nine and
one/tenth (9.1) cents per song for each record sold. This 6.83 CENTS equals
75% of this so-called “statutory rate” of Nine and one/tenth cents per song
for each record sold.
$68.3 in mechanical royalties per album
= $20,490 total SONGWRITING/PUBLISHING royalties
COMBINED ARTIST ROYALTIES AND
MECHANICAL ROYALTIES (under Traditional-type Recording
- Artist Royalties
$20,490 - Mechanical Royalties
TOTAL Received by Artist
compare those numbers to the following Net Profit Deal calculations.
Calculation of Artist Royalties (assuming that the contract does not require
the separate payment of mechanical royalties to the artist)
RETAIL price per record =$15
if WHOLESALE price per record (the price actually received by record company
from distributor) = $9
records sold @ $9 per record = $270,000 gross income from distributor
$20,000 recording costs
$40,500 “Overhead Fee” deducted by label (based on 15% of the $270,000)
$30,000 in duplication and printing costs (calculated at $1/per record) for
$20,000 costs incurred by label to advertise,
market, promote the record
$159,500 net received by record company from record distributor(s)
of this amount is payable to Artist = $79,750
to the Label = = $79,750 (IN ADDITION TO the $40,500 “Overhead Fee”
deducted and retained by the Label)
– these are only sample calculations. Any significant changes in the numbers
plugged into these calculations will obviously have a large impact on the final
totals in these calculations.
in no way should these calculations be interpreted to mean that an artist will
come out better financially with a Net Profit Deal than with a traditional-type
recording contract. Every situation has its own unique numbers, and which type
of contract is better will depend on the exact numbers that are used. This is
one reason why it is so important for artists to do – IN ADVANCE – the best possible income/expense
projections for their particular situation.
if a record is a big flop it won’t really matter much which kind of deal was
used, since in either scenario there will usually be no artist royalties owed
to the artist, and no net profits for the artist to share in. The one exception
to this general comment is the fact that under the traditional record deal (and
some Net Profit Deals), the artist will have at least received some mechanical royalties along the way. That
being said, if the record is a really big flop, mechanical royalties will be
minimal anyway, no matter what kind of contract had been signed between the
artist and the label.
Other Typical Deal Points
the various differences between Net Profit Deals and traditional record deals,
there is a certain amount of overlap between the two. This is because many of
the issues that need to be addressed in a traditional record contract also need
to be addressed in a Net Profit Deal – for example, how much the recording
budgets will be, who will be in charge of the artist’s official website, and so
recording contract parlance, both in traditional deals and Net Profit Deals, “the
Term” means how long the artist will be recording for the label, and how many
albums the artist will be obligated to record for the label.
both traditional deals AND Net Profit Deals, “the Term” is usually for one initial
album, with the label entitled to a series of options for a certain number of
follow-up albums. The contract usually contains complex provisions that
essentially create a timetable for the recording and release of those albums.
particularly in indie deals, a contract is occasionally for only one record
(aka a “one off deal”). But this very rarely (as in ‘almost
never’) happens with major labels.
any event, after a label has released all of the albums it’s going to release
under the terms of the contract, the so-called “Term” ends. But even after the
end of “the Term,” the label is usually entitled under the contract to continue
selling the albums which had been recorded
during “the Term” and to continue owning the copyrights in those albums. (See
the “Ownership of Masters” section below.)
is crucial, from an artist’s point of view, that the recording agreement
contain clearly defined termination provisions in case the deal is unproductive
or if the label fails to perform its obligations. The contract should specify
what the artist’s rights will be if the record doesn’t get released, or if it
goes out of print, or if the label ceases to have bona fide national
distribution, or if the label defaults on certain other obligations stated in
traditional record deals and Net Profit Deals typically allow the record
company to sell records worldwide, though not always so. Sometime the
“Territory” is limited to certain countries.
Ownership of Masters
traditional record deals (major and indie), the label usually owns the masters and the copyrights in those masters. The ownership will typically continue
for the full life of the copyrights of the masters, i.e., a very long time, and
long after the parties are actively working together.
Net Profit Deals, the masters are either co-owned by the artist and label
jointly, or far more commonly, by the record company alone.
an artist has already financed a recording, then the artist has a strong
argument for owning any such masters. This is based on a working assumption
common in the entertainment industry that whoever is paying for the production
costs should own the resulting work - i.e. the master recordings. And, if the
artist will own the masters (and the copyrights in the masters), then the
artist will usually only be licensing
the masters to the label, giving the label the right to sell copies of the
record for a certain specified period of time.
Marketing and Promotion Issues
either a traditional deal or a Net Profit Deal, the artist should seek the
right to approve (or at least be consulted
about) major marketing and promotion decisions, and to have the contract
guarantee that the label will spend at least a certain specified amount of
money each year for marketing and promotion.
the contract will also provide that if the label fails to make the guaranteed
“spends,” the label will not be entitled to exercise any options for follow-up
kinds of clauses can be hard to obtain sometimes, especially without some
significant negotiating leverage.
also an issue of what the artist would do to legally enforce the provisions.
Not only is there the legal expense, but if an artist sues his or her own
label, it generally doesn’t do a lot for either the parties’ relationship or
the artist’s career.
traditional deals and Net Profit Deals usually contain other clauses relating
to the artist’s approval rights – for example, whether the artist has a right
of approval over the studios and producers to be used, and over the label’s issuance
of licenses to third parties allowing them to use the artist’s music in film
and television productions, commercials, compilation records, computer games,
normally requires the label to regularly provide (usually semi-annually)
artists with an itemized accounting for record sales, along with payment of any
monies (if any) then owed to the artist.
Profit Deals have become common fairly recently, and so there are not yet the
entrenched deal terms and parameters that you find with traditional record
deals, especially major label record
deals. With Net Profit Deals, there is often a fair amount of improvising done
during the contract negotiations, in terms of exactly how any particular deal will be structured or exactly what terms will be included in
an artist considering the advisability of entering into a Net Profit Deal, and
particularly when comparing a Net Profit Deal offer from one label and a
traditional deal offer from another label, it is crucial to “crunch the
numbers” and evaluate carefully all of the various financial, legal and
logistical issues lurking under the surface.
[This article is a new chapter in the 2012 edition of the
book “Music Is Your Business: The Musician's FourFront Strategy for Success,”
to be published later this year.]
Note: Bart Day is a partner at the Portland,
Oregon law firm of Day and Koch
LLP and has a national entertainment law and copyright/trademark practice. He
has been involved for over twenty years in a wide array of music, film, and
television productions, and previously worked as an attorney for a Honolulu
concert promotion company, as VP of Business
Affairs for a Los Angeles entertainment company, and as outside counsel for
Universal Studios. Bart co-authored a chapter about record companies in The
Musician's Business and Legal Guide (Prentice-Hall Publishing) and the book
“Music Is Your Business: The Musician's FourFront Strategy for Success.” Bart
was recently elected as a member of the Board of Governors of the Recording Academy
(Pacific Northwest Chapter), presenter of the
He can be reached at email@example.com and at 503.224.4900.