Record Deals and Contract Tips (Part 2)

In my article Record Deals and Contract Tips (Part 1), I provided some thoughts on record deals in 2019 more generally. In short, the decision to enter into a recording agreement with a label is a commercial decision that should be considered VERY carefully. Even before looking at the contract, an artist should understand the business of recorded music in 2019, their goals, and determine whether the label is the right partner to assist in achieving those goals.

With that longwinded context aside, this article focuses on some common provisions within recording agreements and tips to consider. Of course, this overview is only meant to scratch the surface as there are many more issues to consider in every deal. Furthermore, there is no "one size fits all" recording agreement, so artists should always contact an entertainment lawyer before signing anything. Here we go:

The Term of the Deal

Although the "Term" of a contract doesn’t sound very sexy, it is a critically important part of a recording agreement and is often a negotiated deal point. 

Typically, the Term of the deal contemplates an “Initial Period” where the artist delivers one album (for example) by a certain period of time, plus a certain number of “Option Periods”. Each option, if exercised, typically requires the artist to deliver another album. If the Option Periods aren't exercised, the Term normally ends in accordance with the contract. The mechanics of these provisions can get a bit complicated as the “Initial Period" commences on a certain date (usually the date the contract is signed), and ends, for example, 6-12 months after the commercial release of the first album. Once that "Initial Period" is over, and if the next Option Period is exercised, that Option Period ends 6-12 months after the commercial release of the second album, and so on. These clauses can take various forms, but this is a common structure in recording agreements.

Something to consider from a practical perspective: Depending on when the artist delivers its masters/album to the label, AND depending on when the label is required to release the album/masters, AND depending on when any given contract period ends (i.e. 6-12 months after commercial release), will all dictate how long the Term of the deal runs from a practical perspective. For example, a Term of an Initial Period plus 2 Option Periods could easily take 3-5 years depending on the above factors.  

Tip: Assuming the Option Periods are the label's to exercise, artists typically seek shorter Terms while labels seek longer ones. If a short Term is negotiated, and if the artist and label are not seeing eye-to-eye for whatever reasons, the artist can walk after a reasonable period of time instead of begrudgingly releasing further albums with the label, as may otherwise be required to fulfill contractual commitments under a longer deal. On the other hand, if the artist is happy and making money (which probably means the label is as well), the artist will likely be in a good position to not only stay with the label, but renegotiate their deal upon more favorable terms.     

Exclusivity

A label is rarely, if ever, going to sign a deal with an artist that is not exclusive. This means that, for the Term of the contract (see above), the artist is required to provide recording services EXCLUSIVELY to the label. Subject to the language within the contract, the artist cannot release music with another label during the Term. If you ever hear about an artist getting 'stuck' in a record deal (e.g. Kesha), it's probably because the artist has not yet fulfilled their contractual commitments and the label has exclusive rights to the masters recorded under contract. This is less a tip than a contractual reality, which all artists should be mindful of before signing a record deal.        

Ownership of Masters

Some deals are an outright assignment of copyright/ownership of the masters to the label, where the label can exclusively control those masters for the life of copyright (see my Legal Guide for Musicians for a discussion on the length of copyright in a sound recording, pp. 1-2). For example, when Taylor Swift signed with Big Machine in 2005 (recently acquired by Ithaca Holdings LLC), she apparently assigned copyright in her masters (first 6 albums) to Big Machine. Because Big Machine owned the masters (not Taylor), title to the masters got transferred from Big Machine to Ithaca as part of that transaction, which Taylor was not pleased about. Other deals, for example, might instead be a license deal where the label is entitled to exclusively license (not own) the masters.

Tip: Although labels will, in general, exclusively control masters under a license deal in the same way they would under an assignment deal, artists continue to own their masters under a license deal. For that reason, license deals are typically viewed as more artist friendly, and provide some added comfort in the event things go wrong, such as bankruptcy of the label. In addition, whether the deal is an assignment or license deal, artists should determine whether exclusive rights in the masters will "revert" back to the artist after a certain period of time. This period of time is often referred to as an "Exploitation Period", and is the next item discussed.    

Exploitation Period

It is important for artists to understand the difference between the "Term" of the recording agreement (explained above), and what is sometimes referred to as the "Exploitation Period". As above, the Term of the contract outlines how long the artist is exclusively 'tied' to the label, which could be anywhere from a single, to an EP, to several albums. The label's exclusive right to manufacture, market, promote, sell, distribute, etc. artist's masters/albums applies to anything captured by the Term of the deal. Once the Term expires, and subject to the contract, the Artist should be able to work with a different label for all future masters/albums (or release music independently if it wishes). However, once the Term ends/expires, the label will likely still be able to exclusively control/exploit the masters that were delivered under the original contract, and continue to earn its revenue share related to the exploitation of those masters. This "Exploitation Period" is the period of time after the expiration of the Term in which the label can continue to exercise exclusive control over/earn revenue off of the masters under the contract.                 

Tip: As mentioned above, artists need to understand whether the exclusive rights it grants in the masters under the deal will ultimately "revert" back to the artist at some point following the Term. This would allow artists to regain control of their masters down the road. Whether rights to the masters revert back to the artist after a certain Exploitation Period following the Term will all depend on the artist's bargaining power (and potentially resilience of their lawyer).

Revenue Streams

In exchange for the label’s services (marketing, promotion, publicity, distribution, etc.), artists will be asked to give the label a share of all record revenues from 1 or more albums, and will be asked to assign or exclusively license copyright in the masters to the label for the life of copyright or a set/fixed period of time (see above discussion on Exploitation Period and Ownership). In addition to seeking a share in revenues from the exploitation of masters (e.g. physical sales, digital streams, master use licenses, performance/reproduction of sound recordings, etc.), the label may also seek a slice of other artist revenue streams. Some labels may, in addition to master revenue, seek a piece of publishing, touring, merch, and/or any other revenue stream artist earns in the entertainment business (acting, endorsements, books, fan club, etc.). The contract must be examined very carefully to determine whether revenue streams beyond the exploitation of masters are included in the deal.        

Tip: If the label is seeking revenue streams in addition to master revenue, it should be able to confirm a track record of earning money in that particular space. For example, if the label is seeking a piece of publishing revenue, confirm it has the expertise/resources to carry on business as a music publisher. The merits of "360 deals" and labels seeking other revenue streams in addition to master revenue exceeds the scope of this article, but all artists need to be crystal clear on the revenue streams they are sharing with the label and ensure that the contract is aligned with the artist's expectations and early discussions it may have had with the label.

Revenue Share

Obviously, it's super important the deal clearly lays out the revenue share between the artist and label. A "net 50/50" deal is quite standard for most small to mid-size labels, with major labels typically offering the artist less given the increased investment they provide (increased advance and significant marketing/recording budget, etc.). A "net 50/50" deal means that, once the label has recouped all expenses/advances, whatever revenue is left associated with the exploitation of the masters gets split 50/50. If the label is taking a piece of other revenue streams in addition to master revenues (see the discussion on this, above), there might be a different revenue share arrangement associated with those other streams.

Tip: Under a net 50/50 deal, given that the artist only gets paid after expenses are recouped by the label, it is critical that "expenses" be clearly defined in the deal, so parties know exactly what is in and out. Artists could try to work in a right to approve expenses above a certain threshold before they are incurred by the label (e.g. $1,000 - 2,000). Receipt of detailed accounting statements (no less frequent than semi-annually) is key to ensuring the artist can monitor gross receipts and all expenses deducted by the label.           

Territory

Within a recording agreement, the territory provision identifies the territory over which the label exercises its exclusive right to manufacture, market, promote, sell, distribute, etc. the artist's master recordings. Labels typically seek a territory of 'the world' or 'the universe,' for obvious reasons. If this is the case, the artist should confirm with the label what its plan is for a worldwide release.

Tip: It may be the case that the label will primarily focus its efforts in one or two particular markets only. If so, the artist could try to carve out certain territories it wishes to explore independently. For example, the territory could be defined as the world, excluding the U.K., Europe, etc. Alternatively, if the territory is "the world", perhaps rights in certain territories revert back to the artist if the label fails to distribute in that particular territory/jurisdiction. The territory may also be relevant for the purposes of artist funding applications, which artists should be mindful of for planning purposes.           

Advances

Advances are upfront sums the label 'advances' to the artist (typically upon signing the agreement or delivery of the first album), which are recoupable against future artist revenues/royalties. This means that if an advance is payable to the artist, revenue from the exploitation of masters will first be applied to label's recoupment account until the advance is paid back in full. Once the advance(s) is/are recouped in full, net revenues will THEN be divided between the artist/label in accordance with the agreement.   

I've done deals with no/small advances, to deals with $100s of thousands of dollars in advances (upfront cash, recording budget, marketing budget, etc.). This will completely depend on bargaining power of the artist and resources of the label. For artists starting out, even modest advances can mean a lot and keep the artist going so they can focus on music. I also like to look at the advance(s) as an opportunity for the label to really show the artist that they are serious about investing in their career.

Tip: If you are getting an advance, clarify how it will be paid; for example, half upon signing and then half upon delivery of the first album? Will there be an advance associated with the optioned albums if they are exercised? Is there an escalation associated with future advances and/or minimums/maximums? If so, what is the formula for determining this?   

Creative Control

At the end of the day, it's all about the music. If you are an artist that really values your creative process and wants limited interference, ensure you get clarity in your recording agreement about creative decisions and the label's role in that process. If there are any disagreements around creative aspects of the masters, will the label's decision prevail? Will the artist and label make creative decisions jointly? Can the artist make final creative decisions and tell the label to go pound sand if it disagrees?

Tip: This is an example of a clause that, in my experience, is often overlooked/not included within recording contracts. Ensure there is clarity on this issue in the Agreement so both parties understand their role (or lack thereof) in the creative process.   

Final Thoughts   

Again, the above is only meant to scratch the surface, and includes only some provisions you might find in a recording agreement. In my experience, recording agreements can take vastly different shapes, sizes, and permutations, and will be unique to each particular set of circumstances. Keep in mind that, although it is critically important to review what is written in the contract, it is equally important to understand what provisions/issues might be missing from the contract (intentionally or not), which could add clarity and assist in avoiding disputes down the road. As such, always have entertainment counsel review your agreements from this perspective and advise accordingly.  

As always, please reach out with any questions or comments.       

 *Disclaimer: This article is not intended to constitute legal advice. Please contact a lawyer to discuss your specific circumstances and any questions you might have.