Recording Agreements

Recording agreements come in every different shape and size. What follows is a very general look at the basic terms which you can expect to find in most types of agreement. It is by no means exhaustive.

Term or Duration of Agreement

The length of most agreements tends to be linked to the recording process. An agreement will probably last for "an initial period" of one year during which the artist will be obliged to record an album or series of singles. Once the artist has recorded the album the record company will have a set period of time to consider the likely success of the album before deciding whether or not to exercise its option over the next album.

The record company will have anything between 2 and 5 options over the artist's future albums. It is important to note that options are at the record company's sole discretion. Accordingly, if the record company decides not to exercise an option, the artist is released from the agreement, or "dropped", and free to record elsewhere for another company.

Territory

Most artists will sign a recording agreement for the world. This enables the record company to exploit the artist's material and receive income from all sources worldwide. Accordingly, an album which sells well in the US can make up any losses which the record company suffers if the album sells poorly elsewhere. A successful artist may be able to negotiate a split territory deal so that income from one territory is paid to the artist notwithstanding that the album has sold poorly elsewhere.

Product or Minimum Commitment

This is the extent of the artist's and the record company's commitment to each other to record material during each period of the recording agreement. A new artist may have a "singles deal", in which case he/she will be obliged to record, say, three singles during the initial period. If one or more of the singles is successful, the record company will probably exercise its option for an album to be recorded during the first option period (the second period of the contract after the initial period) and so on, depending on how many options the record company has.

An artist in a stronger negotiating position will have an "album deal", thus obliging the record company to spend more money on recording costs and hence increasing its risk if the album fails to sell. An established artist, in a strong negotiating position, may be able to secure a "two albums firm" deal. This obliges the record company to commit to two albums irrespective of the success of the first album. This is a true test of the record company's faith in the artist.

Advances

It is very difficult to give ball park figures because every artist/record company relationship is different. In some cases, no advance is paid. In others, where superstar bands are concerned the advance could be millions of pounds. In our opinion the size of the advance should not be seen as a measure of the artist's worth to the record company. Small record companies and labels simply cannot afford large advances, however, they often try to make up for this in other areas of the agreement.

The most important point to note about advances is that they are "recoupable" from the artist's royalties. Accordingly, an advance is simply a pre-payment of royalties otherwise due to the artist. The higher the advance, the more albums which need to be sold before the artist receives any royalties. Very generally, an artist with a typical contract, can expect to receive royalties equal to about £1 per CD album sold. Accordingly, a £100,000 advance means that 100,000 albums must be sold before the artist receives any royalty. Furthermore, unrecouped advances paid by the record company for one album are usually carried forward and set off against royalties on a subsequent album. This is called "cross collateralisation" and can mean that the artist never receives any royalties and survives solely on advances. This can be difficult if the advance has been spent and the next advance is not due for a year.

Advances are either paid "inclusive" or "exclusive" of recording costs, either way, the recording costs will be recoupable by the record company from the artist's royalties. If the former, it is up to the artist to ensure that recording costs are kept to a minimum if there is to be any of the advance left. If the latter, the record company will have more control over the recording budget but the artist will still want some control over costs as, in due course, they will be recouped from the artist's royalties.

Royalties

Broadly there are two types of royalties; the artist can receive either a fixed percentage of an agreed price for records sold, or a share of the record company's overall "net receipts" from the sale of the artist's recordings. We shall concentrate on the former.

The calculation, and hence the value, of a particular royalty rate is not straightforward. Royalties tend to be calculated on either "dealer" or "retail" price. Neither price is a genuine reflection of the price the record sells in the shops or is sold to "dealers". It is an artificial price agreed within the industry in order to provide uniformity for, amongst other things, royalty calculations.

In addition, the retail or dealer price will be reduced by "packaging deductions". For a CD, these can be as much as 30% of the retail or dealer price. Accordingly if, for example, we assume that the current industry agreed retail price is £10 for a CD, this will be reduced by the 30% packaging deduction thereby leaving £7 as the basis for the royalty calculation. A 14% royalty on retail would therefore equate to £0.98p per CD sold.

There are many other issues in a recording agreement which will be the subject of negotiation between the artist and the record company. For example, ownership of the recordings, creative issues, leaving members and the extent of the record company's obligations to release an album recorded by the artist. These are all matters upon which we are able to advise.