Understanding the music business might help you make money.
The music business is like any other business--it's based on the bottom dollar. With the advent of downloadable music files, it's becoming more difficult for record labels to not only keep track of what's being downloaded, but to make sure their artists receive the royalty money they are due. Because of the Internet, music contracts have changed over the years and it is more important than ever for working musicians to understand royalty agreements.
Performing Rights Organizations
The best way for a performing musician to make sure he is collecting earned royalties is by joining a performing rights organization such as ASCAP or BMI. These organizations collect licensing fees from television and radio stations, nightclubs and bars, digital jukeboxes, live concerts, podcasts, ringtones and anywhere an artist's music is performed. It then distributes the fees as royalties to its members. ASCAP and BMI collected nearly $1 billion each in royalties in 2009.
Your Track Record
How much your royalties will be depends on a number of factors, the first of which is clout, according to entertainment lawyer Ivan Hoffman. Have you or your band been around a while and developed a following, a fan base that consistently buys your CDs or digital downloads? Do they come to your shows and buy merchandise? Do you have a mailing list of several thousand people? If you answered yes to these questions, then you will likely have a much better bargaining position than a band starting at ground zero.
The Deal
Artist's royalties are based on the suggested retail list price (SRLP), or published price to dealers (PPD), which is anywhere from 6 percent to 10 percent. Though there is still a small market for vinyl records purchased mainly by DJs and audiophiles, the SRLP applies to the wholesale price of CDs. If the sales of the CD do well, artists can bargain for a higher royalty rate. The "all in" deal can also be included in this, which gives a 3 percent to 5 percent royalty to the album's producer.
Other Factors
Though an artist may sign a contract for anywhere from 6 percent to 10 percent, because of things like reductions in rates for foreign sales, club sales, sales at a discount and for free goods, which are CDs given away to customers of the label as an inducement to purchase, an artist may not always get what she expects. Digital downloads should also be paid as a license fee and not as a normal sale, which is paid at a much lower rate.
Good Representation
Before any royalties can even be paid, the record label must first recoup the expenses of recording an actual album. The amount of this payback should be firmly determined before anything is signed, and nothing should be signed until it has been thoroughly looked over by an entertainment attorney that you trust. There are plenty of horror stories from bands that jumped into bad deals because of an impatience to get signed. Don't be one of those. Understand what you're getting into before you sign your life away.
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