MBW Views is a series of exclusive columns written by notable music industry figures…who have something to say. The following comments come from UK-based Hunter Giles (pictured), co-founder and leader of Infinite Catalog, a royalty accounting software + services company.
Whenever I talk to artists who want to sign a profit-share recording deal (50/50), I always think of them in a specific context. Think of a pond, about twenty feet wide, ten feet deep, and maybe sixty yards long. I pictured the artists on one end of the pond and the indie label folk on the other, waving hello with shy smiles and holding a profit-sharing agreement waiting to be signed.
People at independent labels are gesturing and saying come on in, it’s okay! Perhaps not the most pristine pond ever and there is always some risk in swimming, but it is very safe and you are welcome to swim for as long as you want. All the artists jumped in, and although most weren’t strong swimmers yet, they all paddled around, trying out some strokes and splashing each other with playful camaraderie.
The two artists arrived first on the label side. To one, the label said: “You’re obviously great, but we don’t think signing you is the right move for either of us. The Pond is a great place to continue growing and we’ll be rooting for you from here.”
They say to the other side, “We’d love to work with you, even though the chances of success are slim and the road is hard. We don’t care. We trust you. And they do.”
There is a rotting manure ditch next to this pond. If you want to sign a royalty-based recording deal, this is where you swim.
I.Steve Albini and Music Matters
We lost Steve Albini last week and I thought I’d pay our respects by revisiting his Music Matters, a seminal work on the DIY and independent music scene. It is still relevant today.
From its colorful opening to its chilling final line, it pulls back the curtain on the darker side of the music industry circa 1993. The middle section is a rant about recording. The entire scam of a major label “royalty-based” record deal is revealed as a parable for a band whose seemingly positive journey ($250,000 advance, $3 million in record sales, a bus tour) left them with Out – $14,000 Royalty Hole.
Albini would probably laugh at my introduction above, which is an inversion of his introduction to A Matter of Music, in which a sadistic major-label A&R requires the artist to backstroke through a line of putrid feces. I wouldn’t argue with him if he did. The challenges and pitfalls of combining art and commerce don’t go away just because people call themselves DIY or independent, use one trade instead of another, or say they care more about artists than money.
In fact, let’s get the record straight: many indie developers have been exposed for dodgy deals, faulty royalty accounting, and not paying artists. I started my company, Infinite Catalog, to help people avoid and deal with this not-uncommon fate.
High-profile pond vs. trench presentation aside, just because a brand is independent or in a profit-sharing deal doesn’t mean they or the deal are inherently “good,” nor does it mean major or all franchises The underlying transaction is inherently “bad”.
but they yes These transactions are different.
Music Matters makes it clear why the music industry has a bad reputation. That’s what makes it such a powerful piece of work, and Albini, not afraid to speak truth to power and being an eloquent bastard, is the perfect messenger. His influence on music as an engineer and artist was profound and rightfully gets most of the attention, but it was Music Matters that changed my life.
Because when I read about it, I also recently learned about another type of record deal—the profit-share (50/50) agreement that independent musicians have used for decades, which better aligns labels with artists . He described the “problem” perfectly, and a profit-sharing deal seemed like the obvious solution to me, especially considering that I don’t and don’t think people who hand out royalty-based deals are greedy psychopaths.
If more people knew how different the trade types were, maybe artists would stop signing up for the shit ditch, or the people involved would stop forcing artists to backstroke through it because there’s a perfectly good pond everyone can use.
That’s what I thought then, and that’s what I think now. IMHO, Steve Albini didn’t mention the profit share deal in Music Matters, nor did he consider comparing the two in the same scenario.
Neither did I until he passed away last week. That’s it.
2. Two types of record deals
Here’s how a net-profit record deal works: The label pays most of the fees and any advances, collects all proceeds, and if it breaks even, shares the profits with the artist (usually 50/50). If the label cannot recoup fees and advances, the artist does not have to repay them.
In a royalty-based deal, the “royalty rate” received by the artist is usually around 15-20%, and physical sales are calculated based on the “PPD” rate (“Distributor Published Price”) set in the contract, which may be either ( More) may) be different than what the brand actually earns from the sale (as in the real world there are many different prices, discounts, etc.).
These deals often include a more generous “license rate”, often 50% for things like sync and other non-sales revenue, which you might think would be the rate they apply to streaming and social revenue (because apparently there isn’t way) to set a standard rate for this), but last I checked they mostly still use entity sales rates (unless you sue them).
In these deals, the manufacturing and distribution costs do fall entirely on the label (in a profit share, all costs are ultimately “shared” between the label and the artist if the costs are recovered), but are typically taken out of the royalties A deduction of 10% for “packaging expenses” covers the former, and if they are professionals, they also own a distribution company, so the “costs” will be included as revenue as a separate part of their business.
This means that, mired in the morass of royalty bases, it’s difficult and often impossible for artists – and even labels themselves – to truly know how much a record actually makes, or how much profit the label makes compared to the artist. On the label, actual revenue is treated in terms of accounting, while “calculated” revenue is treated in terms of royalties, and the two rarely meet.
The dislocation between labels and artists created by these royalty-based deals is, in my opinion, the longest-running problem in pop music history, hurting not only the artists but everyone who missed out on countless records that were never made Music fans, because once the ink dries on their royalty base agreement, the careers of great bands they never get a chance to hear are doomed.
This is also a problem we can solve. To paraphrase an artist who broke away from the profession at the first opportunity and started his own brand, this war could end tomorrow (if you let it).
3. There are these bands
There are these two bands. They’re both excellent, both have attracted a following, and have received strong attention from some serious industry players. They all self-publish through an aggregator for just $20 a month and no royalties, so they’ve started making real cash on their own.
But they were both ambitious and knew that a real breakthrough would mean making a deal with the devil of the music industry. Originally they wanted to go completely DIY like Chance the Rapper, but look what happened to him, right? no thanks.
So they hire experienced managers and lawyers, and they pay people to look after them. Furthermore, since they have successfully released themselves, they hold all the cards! They won’t sign a bar napkin or choose the better of two bad choices. If they don’t like the offers, they’ll walk away.
But wow, not only did they get an offer, but there was an all-out bidding war going on!
They narrowed it down to two transactions each. It’s an “old school” royalty-based deal – the upfront payment is larger, but the royalty rate is lower. The other is a profit-sharing deal, with a smaller upfront payment but higher royalties. Both bands received the exact same offer, one for each genre.
One strip relates to a profit-sharing agreement. Maybe they’re thinking “long term,” or maybe they just prefer that label.
Another band is in line with a royalty-based deal. Maybe it’s a bigger step up, maybe they just prefer another label, maybe they think you know, nothing is for sure. This way, if they fail, at least they made greater progress, and if they succeed, they succeed! Can’t lose?
Their records dropped, their film and PR teams got to work, and in fact both were a hit! Each record earns $1.5 million from streaming, an additional $500,000 from physical sales, and $100,000 from licensing and other random revenue.
The math below shows just how wrong the royalty basis deal is:
The groups generated about $3 million in revenue for the music industry from these recordings alone, but the royalties to the groups were -$14,000.
They eventually recoup their costs, but they earn only about 20% of every $1 of revenue. At this point, their residual income from the advance payment is less than when they worked at a 7-Eleven convenience store.
The dissonance between their success and royalty balance led to a rift between them and the label, and the relationship soured. Regardless, the label picked up their next option, but the band didn’t want to work with them anymore. The impasse killed their momentum and their careers were in proverbial trouble.
Meanwhile, profit-sharing bands make more money for themselves and their teams, and their labels do well. Not only are they currently $250,000 above the royalty base, but they and their producers collectively earn 50% of every $1 earned. Continue to work together.
Profit sharing deals are almost magical because they are so fair, flexible and transparent. Even when things don’t work out, people rarely complain about these deals.
No one likes royalty-based deals except the record labels who do them.
Not the artists who never recover and see their careers end prematurely, not the few who do recover and limping along, not even the tiny minority who make it big on these trades through statistical miracles, Because labels – the administrative and marketing devices they temporarily use – make about 80% of the money forever.
“Some of your friends are probably already this fucked up.” — Steve Albiniglobal music business
