by Steve Gordon
Production Companies Are Not Labels!
Production companies usually consist of one or two individuals with limited resourcesÂ who would like to make a few demos for an artist in order to shop her to a real recordÂ company. Â Unfortunately, more than occasionally, such a company will present anÂ agreement that locks the artist into a long term deal, makes the company the artistâ€™sÂ music publisher, and takes a substantial cut of all the income that the artist may make inÂ the entire entertainment business, as well as other horrors.
The first agreement we will examine in this installment is typical of a contract offered toÂ an artist by a production company masquerading as a â€œlabel.â€ Â Be warned: ThisÂ agreement is a terrible deal for artists.Â It presents all the negative terms typicallyÂ contained in an exclusive recording agreement offered by a major label includingÂ multiple options for additional albums that could extend the duration of the agreementÂ indefinitely and 360 provisions designed to give the company a significant portion of theÂ artistâ€™s income from any of her activities in the entertainment business. Â (See discussion ofÂ 360 deals below, and How to Avoid Getting Completely Screwed by a 360 Degree DealÂ available at ).
But the firstÂ agreement offers none of the benefits that a major label deal contains, such as a recordingÂ budget and advance.
There are many differences between a production company and a real label, but they haveÂ at least the following in common: Both production companies and labels own or haveÂ access to recording studios and equipment, and they both have producers on payroll orÂ relationships with indie producers who they can call on to make professional recordings.
A real label, however, has the following additional assets:
â€¢ Staffers and/or freelancers who provide both traditional marketing and publicityÂ as well as online social networking support;
â€¢ Staffers and/or freelancers that continually pitch records to terrestrial radio â€“ stillÂ a crucial element in breaking a new artist especially in pop, R&B, hip hop, rock,Â and country;
â€¢ A video department to produce, oversee and pay for the production of promoÂ videos and electronic press kits (EPKs);
â€¢ Relationships with popular TV shows such as Saturday Night Live, The TonightÂ Show and Last Call to help the artist garner invaluable exposure;
â€¢ Relationships with leading digital services to promote an artist â€“ for instance, byÂ continually lobbying iTunes to feature the artist on its home page;
â€¢ Relationships with music supervisors and ad agencies to secure placements in TVÂ shows, movies and ad campaigns;
â€¢ Distribution channels through all the big-box chains, such as Walmart, Best BuyÂ and Target to sell physical copies of records;
â€¢ The ability to coordinate digital distribution to hundreds of digital music servicesÂ throughout the world;
â€¢ The money necessary to pay staffers and freelancers to do the all the work above;Â and
â€¢ Perhaps most importantly, the financial capacity to pay the artist an advance onÂ top of production costs so she can quit her day gig.
First Agreement: Production Company Posing As Label
This form agreement came from an actual production company that presented anÂ agreement that only a real label should offer. As we just discussed, a productionÂ company has almost none of the resources of a true record label. The productionÂ company should have offered a â€œshopping dealâ€ under which they would have a limitedÂ time to find a suitable label deal for the artist. Instead, this agreement includes provisionsÂ that are completely unfair and unjustifiable. Here is an overview of the key provisionsÂ and why they should be changed:
The term of this agreement is an initial period of 15 months followed by options for theâ€œdeliveryâ€ of four additional albums. Since delivery depends on when the companyÂ decides to record each album, the contract could continue indefinitely. The artist couldÂ hire a lawyer to try to get out of this contract, but at the end of the day, the productionÂ company could contend that the contract was valid which could impede the artist fromÂ securing another deal.
If a company is merely a production company and not a real label, it should offer aÂ shopping deal under which it has a limited amount of time to produce at least five or sixÂ tracks (sometimes referred to as â€œdemosâ€) that feature the artistâ€™s best work and shopÂ those tracks to real labels to help the artist get to the next level. Generally, a productionÂ company has nine months to shop the demos. If the production company cannot secureÂ such a deal, the artist should be free to terminate the agreement.
A production company does not have the resources to help the artist as a real label could,Â and therefore, it should not try to trap an artist in a multiple album deal. On the otherÂ hand, if the production company secures a good deal for the artist with a reputable label,Â they should share with the artist in monies the record label pays to the artist, includingÂ advances and royalties for the artistâ€™s exclusive recording services. A fair deal mayÂ provide that the company will share in such revenues for the first several albums releasedÂ by the label.
A reasonable royalty for producing demos and shopping an artist for a deal with a label isÂ 5% to 20%. The percentage should be based on what the label pays the artist, so if theÂ artistâ€™s advance is $100,000 the production company would receive $5,000 to $20,000.Â And if the artistâ€™s royalty was 15% the production company would get 5% to 20% of thatÂ royalty, that is, .75% to 3%.
The lower royalty of 5% would be appropriate for shoppingÂ an artist who already has professionally produced recordings and the production companyÂ doesnâ€™t have to do anything but shop the artist. The higher royalty of 20% would beÂ appropriate when the production company has to produce all new demos and perhapsÂ even release tracks on social networks and possibly iTunes to get a â€œbuzzâ€ going.
YetÂ many production companies will try take to advantage of a naive artist and demand 40%Â or 50% or even more. The production companyâ€™s royalty should also be limited toÂ advances and royalties payable by the label for the artistâ€™s exclusive recording services;Â in a terrible deal for the artist, such as the first one analyzed in this installment, theÂ company will also try to secure a percentage of any income the artist receives in theÂ entertainment business including live performance and publishing.
It is fair, though, that a production company be compensated for expenses if it secures aÂ suitable label deal. But the companyâ€™s expenses should be reasonable, documented, andÂ approved by the artist. And the amount should be deductible â€œoff the top.â€ ThisÂ means that if the companyâ€™s expenses were $10,000 and a label is paying an advance ofÂ $100,000 for the artistâ€™s recording services, the $10,000 should be deducted from theÂ $100,000, and the company should receive 20% of $90,000 ($18,000), and the artistÂ should receive 80% of $90,000 ($72,000). If the expenses are not taken off the top, theÂ company would receive 20% of $100,000 and the $10,000, that is, $30,000. The artistÂ would only receive 80% of the balance of $70,000, that is, $56,000.
Since income from recorded music has drastically declined in the last 15 years, labelsÂ have changed their standard deal to share in money from other income streams includingÂ merchandise, endorsements, live performances and touring, and even appearances in TVÂ programs or movies. Because labels wish to share in all of the artistâ€™s income streams,Â these deals are known as â€œ360.â€ A major label that can provide the marketing muscle toÂ make an artist a household name arguably deserves to share in those income streams, butÂ a production company has not earned that. However, if the production company actuallyÂ does something to help the artist make money from other activities than record sales,Â there is nothing wrong in rewarding them for that success. For instance, if the companyÂ finds a good paying gig playing at a private event, the company may deserve a percentageÂ of the fee payable to the artist.
Also, if the major record label demands 360 payments from various artistâ€™s incomeÂ streams, the production company and artist may be able to negotiate separate advancesÂ against all those income streams. For example, if the record company wanted aÂ percentage of the artistâ€™s touring revenue, the production company and the artist couldÂ demand a significant advance payment from the record company in exchange for thatÂ royalty. In that case, both the production company and the artist would benefit from theÂ advance.