The Basics of the Music Business and Musical IP Protection
“I wish there had been a music business 101 course I could have taken.” — Kurt Cobain
“I wish I didn’t know now what I didn’t know then” — Bob Seger
“The music business is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs. There’s also a negative side.” — Hunter S. Thompson
The Music Business
From the outside, the rock star1 has it all – limos, money, adoring fans, everything. Gets to take the stage and rock out every night. They get their face all over magazines and TV, they get to date other stars, etc. The best of everything.
Well, maybe. As any artist will tell you, the one thing they all hate is the business part of the “music business.” Making and playing the music – the stuff that the general public sees – is the easy part. What most of us don’t see are the onerous management agreements an artist enters into because they don’t know any better. The various accounting “intricacies” (shall we say) used in the business. The number of artists that sue their labels/managers/partners/whomever because they are bankrupt is eye-opening.
“What??”, you say. “How can those people go bankrupt?? They’re out there making millions, aren’t they??”
Again – maybe. What most folks don’t understand is how relatively little a performer can make, even if they are selling a zillion copies of their CD. Let’s use a purely fictitious (and yet eerily accurate) example. Your band, “The Weasels”, has just been signed to Nursery Rhyme Records. They love you so much, they have given you a $250,000 advance on a five-album deal that also will pay you a 12.5 percent royalty. Woo-hoo! But wait – you have to pay that manager her 20%. OK, still there’s $200,000. But, that is split between the four of you, so while it’s a nice chunk of change, it isn’t going to buy you a mansion.
So then Nursery Rhyme sets you up to record your first album. You call it “Pop Go”. They hire a really great, top-line producer (who costs at least 4%). Because your royalty rate is “all in”, you are responsible for covering the Producer’s points. But, all is well because “Pop Go” sells a million copies. So you’re rich, right?
Wrong. Those producer’s points come out of your royalty rate, making your rate effectively 8.5%. But that rate, when applied to the price of the CD ($10) times 1 million leaves you with $850,000 . So hey – not bad, even when divided by four! But wait – that advance? subtract that. Fees for the recording studio? Subtract that. Manager’s hotel expenses when meeting with you while recording? Subtract those. Fees for the video you made (conservatively $200,000)? Subtract that. Now that $850,0002 is a heck of a lot less, and you may not even be in a break-even position yet.
CASE STUDY: VAN HALEN
Everyone recognizes that Van Halen is one of the world’s top-selling rock groups. But to hear Eddie and Alex tell it, they experienced something exactly like what is described above. They had a contract with Warner Brothers, recorded their first album relatively quickly and toured the worlds a few times over. The album sold over ten million copies. When it came time to record the second album, they sat down with their label (Warner Brothers at that time) and were told they still owed the label $2 million even after all of the above3.
Now, our example with ‘The Weasels’ is clearly simplified, and a lot of things are not accounted for here – performance or merchandising income, for example. But you can begin to get a taste for why it is a million-selling artist can either never make money or can go broke. And you also see why some of these artists who had a few semi-hits ten years ago are still out there on the concert circuit – simply put, they have to be if they want to eat. Granted, some artists go out because they like to – Paul McCartney is an example of somebody who long ago never needed another dime. But, Sir Paul is not only one who loves to perform – he long ago got into music publishing and has made a good part of his vast fortune in that area4.
So where is the money in this business, then? In a word – publishing. Songwriters make if not all the money, then most of it. Those who write the songs get a tidy 9.1 cents per copy sold. If you write all the songs on a 10-song, $10 CD, and it sells a million, you are looking at nearly a million dollars, just for the songwriter’s royalties.
This is only if you are not performing your own songs. If you ARE recording your own songs, and you are thus the songwriter AND the performer, in which case the label may have inserted a “controlled composition” clause into your agreement. In that case, the clause limits the amount of money they have to pay you as both performer and songwriter – usually 75% of the applicable rate, and usually accompanied by a “cap” on the number of songs of yours and/or the total amount they will pay on. Let’s say that you have a “cap” and then also record cover tunes on your label. The label will have to pay the full rate to the writers of those cover tunes, because they have no reduced agreement with those artists. But doing that may eat up your “cap” and thus your songs on your own album may make you little no money.
Fun, eh? You may have notice me using terms like “album” which are rapidly becoming antiquated in this age of downloading. The entire music business was built and relies on the concept of the old “recording agreement” and what are called “mechanical sales”, i.e., actual sales of physical product. But nowadays, such physical sales are way, way down, and the business and major labels are having a really difficult time adjusting their business model. In fact, a very good friend of mine (who is a very successful songwriter as well as a former studio musician, record label exec and also headed up a Performing Rights Society) remarked well over a year ago that the major labels had no real business model to deal with the changing ways of the music business is changing, and dang if he wasn’t spot on.
What we have been seeing is the evolution of the “360 deal” in which a label becomes what appears to be a 50/50 partner with the artist on all revenue streams – music sales, merchandising, touring, everything. Previously, all a label really wanted was a cut of sales – but no more. Now, they are tapping into all the streams they can, mostly because the old system isn’t working anymore – labels are losing money when simply tapping sales of product as a source. If you are a new artist, odds are exceptionally high that you have signed a “360 deal”, and you are giving up a good chunk of everything you are making to your label (and to your manager, and to your booking agent, etc.)
Now, in fairness to the labels, no one ever sees the acts that are financed but never break even. Most artists are money ‘black holes’ for labels and never recoup a label’s initial investment. That same friend I mentioned above told me that basically 5% of a label’s talent roster makes the money that allows them both to operate profitably and to try to develop the other 95% of the roster.
If you are astute (which you are showing by reading this far), you have identified this as yet another flaw in the old system. And you are right. Bands (and very successful bands) have been doing a lot of the work themselves, working with “indie” labels or distribution companies. And technology has certainly made it easier to make a good quality recording with nothing more than a laptop or an iPad®5. But a new crop of evil-doers has crept in – those labels that latch (or leech, more properly) onto a slew of young bands that don’t know any better, sign them to 360 deals, take half of their hard-earned touring/merchandise money, and basically rip the acts off. In addition, they will claim outrageous administrative costs (passed on to the bands of course, without pro-rating), and the bands are left out in the cold – usually less money than they would have had in the first place and are locked into contracts for a period of several years. And there is not a lot the bands can do, because they lack the money to fight thus new breed.
But there is hope – great music is popping up all over, and new revenue streams are being exploited every day. Ten years ago who would have thought that ringtones would be so popular or bring in so much money? All a band really needs is what they’ve always needed – talent and or a good promotional machine and some patience. And a good lawyer – preferably before they sign anything.
Or country star, salsa star, or any other kind of music star for that matter.
That’s only if your royalty agreement is calculated on 100% of sales, which historically, most are not.
I can only guess how well that went over with the Van Halen boys, who are not known for their subtlety.
Side note: Paul and Michael Jackson were once very good friends. Paul even counseled Michael to get into music publishing as a way to make money. Michael did just that – he outbid Paul for The Beatles catalog, and the two rarely spoke again afterward.
“iPad” is a registered trademark of Apple, in which sadly I have no financial part.