EditorsLetter
Collage by Duanecia Evans Clark, The Creative Summer Company. Archival images via Creative Summer, Unsplash, and Raw Pixel.

Bad Deals Are Baked Into the Way the Music Industry Operates

We broke down the three most common types of contracts an artist might sign today, offering a window into how the “bad deal” isn’t an anomaly—it’s by design.
Drew Schwartz
Brooklyn, United States
Duanecia Evans Clark
illustrated by Duanecia Evans Clark
New York, United States
October 21, 2020, 3:49pm

Unpaid Royalties is a series about the myriad ways that the music industry exploits Black artists—and what's being done to change them. Read more here.

Over the past few months, a number of Black artists have spoken out about being trapped in what they say are exploitative, lopsided record deals with their labels. In March, Megan Thee Stallion sued 1501 Certified Entertainment for fraud, breach of contract, negligent misrepresentation, and other alleged abuses, accusing the company of preventing her from releasing new music and refusing to renegotiate her contract. In September, Kanye West lashed out at Universal Music Group on Twitter, demanding ownership of his masters and likening the way record companies treat artists to "modern day slavery." They're just two of countless Black musicians who have taken issue with their labels publicly, and called for reform at record companies they say are often guilty of swindling the artists they sign.

If we want a more racially equitable music industry, putting an end to predatory dealmaking and making sure Black artists don't get locked into unfair contracts is an important piece of the puzzle. But as much as artists have been talking about these deals of late, there's very little discussion of how they're put together. That's due in part to confidentiality clauses: Short of artists releasing hundreds of pages of legal documents online like West did, there's no way of knowing exactly what any given agreement includes.

That said, thanks to information shared by entertainment attorneys who have firsthand experience with these contracts, we do know how most record deals are typically structured. And when you wade through all the legal jargon, it's not hard to see that even contracts that represent "industry standard" are, from an artist's perspective, inherently unfair—structured around the repayment of an upfront label investment that many artists will be unable to recoup, partly owing to the terms of their agreement itself.

No two contracts are exactly alike, but we've gone ahead and broken down the three most common types of deals an artist might find themselves in today, offering a window into how the "bad deal" isn't an anomaly—it's baked into the way the music industry operates.

The Standard Royalty Deal

How does it work?
When an artist signs a standard royalty deal with a label, the company gives them a chunk of cash that goes straight into their bank account (known as an advance), which is used to keep them financially afloat while they record their album, in addition to fronting the money they need to make it. In exchange, the label gets to own the recordings on that album, known as the master recordings, along with any revenue those masters generate through sales and streams—though it will pledge to give artists a percentage of that revenue, known as the royalty rate.

Something important to consider with standard royalty deals is that all of the money the label "gives" an artist up front, in the form of their advance and recording costs, is actually a loan, one the artist is obliged to pay back through the proceeds from their album. According to the American Society of Composers, Authors, and Publishers, an artist's royalty rate usually falls somewhere between 10 and 25 percent.). If an artist secures a royalty rate of 20 percent, for every dollar their album makes, 20 cents go toward paying off what they owe the label.

Once they've paid back all of that money—known as their unrecouped balance—then, and only then, will they see royalty money hit their bank account. The problem is, for that to happen, the record has to generate a whole lot more money than the record company invested in it to begin with.

I could use an example. Can we see some numbers?
Let's say a label gives an artist a $1 million advance and it costs $200,000 to record their album. That means the artist has an unrecouped balance of $1.2 million. With a royalty rate of 20 percent, their album has to earn $6 million before they break even.

Here's how that works: $6 million (what the album earns) multiplied by 20 percent (what the artist gets from those earnings) equals $1.2 million (what the artist owes the label). From that point on, the artist begins to earn twenty cents on every dollar their album makes. Of that $6 million, $1.2 million covers their advance and recording costs, and the rest—$4.8 million—goes to the label.

$6 million is a lot of money. In a world where streaming has largely supplanted physical album sales and digital downloads, how many streams would it take to make that much?
A ton. According to an industry survey conducted by Digital Music News, record labels make an average of $0.005 per stream on a platform like Spotify or Apple Music. Using the above example, an artist's album would need to generate 1.2 billion streams across all platforms to make $6 million, and for the artist to break even.

Getting 1.2 billion streams on one album seems like a pipedream.
It is! Almost no one manages to achieve that, aside from superstars like Drake and Taylor Swift.

So what happens if, between revenue from streams, sales, and digital downloads, an artist doesn't break even?
Basically, that means they never managed to pay back the loan they owe the label. The artist still gets to keep their advance, but—in the event that they've signed a multi-album deal—the remainder of their unrecouped balance carries over to their next record. Let's say they still owe the label $500,000 from their first album. If it costs $200,000 to record their second album, they now have to earn $700,000 on that album to break even, and to start earning royalty money. If an artist gets an advance on their second record—which, according to Richard Salmon, an entertainment attorney and lecturer in media and intellectual property at London Metropolitan University, is usually the case—the amount they have to recoup will be even steeper.

Standard royalty contracts often include option periods: windows of time in which a label can choose whether its artist makes another album for them or not. According to Tonya Butler, a former entertainment attorney and label executive who now chairs Berklee's music business department, if the label decides that it does want to extend the artist's contract for another record, the artist can't say no.

"When you sign a recording agreement for, let's say, one year and five options, you have committed to six years," Butler told VICE. "The label has not. The label has committed to one year. But you committed to six, just in case they want to pick up all five options."

Got it. Is that all?
Nope—but we're almost done with this one, I swear.

On top of the advance and recording budget, in many standard royalty agreements, the label will add the cost of marketing and promoting a record to an artist's tab as a recoupable expense. Let's go back to our example from earlier: The artist received a $1 million advance and $200,000 to record their album, leaving them with an unrecouped balance of $1.2 million. If the label puts an additional $200,000 toward marketing and promoting the album, and that money is recoupable, the artist is now on the hook for $1.4 million.

Something else we should note: In an effort to keep things simple, we've been working with a set royalty rate of 20 percent. But according to Butler, that percentage can vary based on territory. For CD sales in the US,  an artist might be getting a standard 20 percent royalty rate—but for CD sales in Germany, that might be reduced to 16 percent; in Japan, it might drop to 14. As a result of these royalty deductions, the artist is earning even less money toward recouping their advance.

"That is very standard," Butler said. "You'll have a base rate, and then that base rate may be reduced depending on a variety of things, but usually having to do with international distribution. [The label's] defense is, [a] 20 percent [royalty rate] in China, by the time we get the money, is less, so you get less. Because of the exchange rate, and all that other kind of stuff."

Is there a way for an artist to make money without recouping their advance?
Not from their master royalties—but in other ways, yes. Under a standard royalty deal, the label has no claim over an artist's touring revenue, merch sales, sponsorship money, or anything else that isn't directly tied to the recordings they made for the label. Additionally, if the artist wrote their own songs, and ensured they owned the publishing rights to those songs, they're entitled to mechanical royalties: the royalties for the underlying composition of a song, as opposed to the royalties from the master recording. These royalties are paid to an artist by the label, and the artist doesn't have to recoup their advance, recording costs, or marketing costs before they start earning them. Mechanical royalties don't bring in a lot of money (about $0.0006 per stream, according to Royalty Exchange), but at least they're worth something.

That said, according to Butler, it's not uncommon for record deals to stipulate that labels only have to pay out 75 percent of an artist's mechanical royalties. That leaves the artist earning mechanical royalties of just $0.00045 per stream.

All in all, this doesn't seem very appealing.
It may not—but according to James Sammataro, who's spent more than 20 years as an entertainment lawyer representing both artists and labels, standard royalty deals can be invaluable to some artists. Sammataro told VICE that often, artists signing standard royalty deals are relatively unknown. What a major-label deal provides for a newcomer, he said, goes far beyond an advance and a recording budget.

"As described, it's like, 'Whoa, that sounds like a horrible deal'—but for non-recognizable acts or up-and-coming acts, what the label is really providing is notoriety, A&R support, and distribution," Sammataro said. "So in a physical-product world, you're doing a couple things: You're signing the artist; you're developing the artist; if you're doing it right, you're putting that artist on the road with more-developed acts; you're helping them get a presence, to find their skill set; you're getting them exposure, which would lead to radio play. And then you're distributing their physical product. This is really important in the non-digital world… The label was a starmaker. That's how you made recognizable, household names."

According to Sammataro, up until about 2015, "it was really, really hard to get something other than a royalty deal"—but over the last five years, they've become less common. Thanks to the advent of social media and streaming services like Spotify and SoundCloud, artists have been able to build massive followings without the help of a major label, making the benefits of a royalty deal that Sammataro described—exposure, radio play, and development—less attractive. Sammataro added that if an artist comes to the table with a large fanbase, they'll often be able to negotiate a better cut of their earnings than the 80/20 profit split traditionally provided for in a standard royalty deal.

Additionally, Sammataro said, it's important to note that in a standard royalty deal, "the artist has no risk": If a label gives them a $1 million advance and their album flops, the artist still keeps that advance.

The 360 Deal

How does it work?
Under a 360 deal, a label is entitled to a portion of the money earned from everything an artist does related to their career as an entertainer. This can include, but is not limited to, earnings from record sales and streams; concerts; merchandise; endorsement deals; licensing (placing an artist's music in movies, TV shows, commercials, and video games); money artists make by writing songs for other artists; and even acting in movies and TV shows. In an artist-friendly 360 deal, a label might only earn percentages of the income from about four of those revenue streams, such as concerts, streaming, merch, and acting gigs. But according to Sammataro, many 360 deals will entitle labels to a percentage of an artists' collateral or ancillary activities, which is just a fancy way of saying that they get a cut of everything an artist does for money in the entertainment industry.

An example: In 2005, Madonna signed a massive 360 deal with Live Nation spanning an entire decade and requiring her to make at least three albums. At the time, Live Nation's CEO said that in exchange for giving Madonna a series of large advances, a signing bonus, and stock shares—reportedly worth a combined $120 million—the company would receive a portion of the proceeds from "‘everything that Madonna will do music-related over the next ten years, anywhere in the world, including touring, private events, studio albums, DVDs, film [and] TV."

According to Butler, 360 deals emerged in the mid-2000s as record labels began to see revenue from physical album sales decline, and they've become increasingly common since.

"The standard royalty deal on physical product was not generating enough revenue to sustain labels," Butler said. "It doesn't matter if I'm getting 70 to 80 percent of [the profits from] CD sales if nobody's buying CDs. There was a mentality shift: Labels felt like they were creating not just musical artists but entertainers and celebrities. Once I am funding or sponsoring a celebrity, who is now getting acting jobs and endorsement deals and making money on tour, if I'm not getting money from CDs, I need to be able to participate from the other revenue that these celebrities are generating."

How big is the label's cut?
It varies. According to Sammataro and Butler, in some 360 deals, the label takes a set percentage of all of an artist's earnings, and that percent applies across the board. That rate will typically be between 10 and 40 percent, they said.

"It lingers around 20-something," Butler said. "If you're doing 10 [percent for the label], you're doing good."

In other 360 deals, each specific revenue stream comes with its own advance and profit split. For example, an artist might get a $5 million advance to make five albums, with a 20 percent royalty rate; a $10 million advance for three concert tours, with a 70/30 profit split in the artist's favor; and a $5 million advance on merch sales, with a 80/20 profit split in their favor. Anything not covered under these specific arrangements falls into an all-encompassing "ancillary" category. The money earned from ancillary activities is carved up according to a single, set rate, which typically ranges from 10 to 40 percent for the label, according to Sammataro and Butler.

Sammataro said that aside from the royalty rate for an artist's master recordings—which is almost always skewed in the label's favor—every other profit split will favor the artist. Typically, he said, artists will receive about 70 percent of the profits from each of their revenue streams, give or take ten percent in either direction.

The artist gets to keep their advances no matter what, right?
Yes—but just like in a standard royalty deal, all of those advances are basically loans an artist pays back to the label through their earnings. Additionally, according to entertainment attorney Justin M. Jacobson, the advances are often cross-collateralized, which means that if an artist recoups one of their advances, the label can channel additional earnings from that revenue stream toward advances the artist hasn't paid off.

How does that work?
If the label gave an artist a $10 million touring advance, and they earned $15 million touring, you'd think the artist would just pocket their share of the extra $5 million. But in a cross-collateralized deal, the artist wouldn't get that money unless they'd completely recouped all of their other advances. If they still owe the label $5 million from their advance on merch sales, their extra touring money will be counted toward recouping that debt instead.

So the label gets a cut of everything the artist makes, and in exchange, the artist gets… what exactly? 
For one, the total advance from a 360 deal can be huge—Jay Z reportedly signed one with Live Nation for $150 million in 2008—and that can be alluring. Plus, with a 360 deal, the label isn't just investing in an artist's music; they're investing in them, both as recording artists and as all-around entertainers.

"If you do a 360 deal with Madonna, you're now in the Madonna business," Samattaro said. "[The label is] constantly looking to monetize you because you're in their tent, so to speak. Every dollar you make, they make. So you're perfectly aligned."

If the percentages of an artist's earnings the label takes are reasonable, that could be a good thing. If the label's percentages are too high—and they're not doing their part to help your career flourish—it could be a disaster.

"If all people are doing is gobbling up your rights… that's not a good deal for you," Sammataro said. "I think Live Nation's deals were offering real value; certain labels can offer you real value. These small regional companies that are offering 360 deals, they're not offering real value."

The Net Profit Deal

How does it work?
In a net profit deal, the label pays an artist a cash advance, puts up money to record their album, and fronts the cost of marketing and promoting it, all of which is recoupable. Once the record starts making money, the label takes 100 percent of those earnings until they've recouped all the money they fronted the artist. From that point on, the artist and the label split the net profits from the artist's album. According to Sammataro, that split typically ranges from 40/60 (in the label's favor), to 50/50.

Let's say the label gives an artist a 50/50 net profit deal with a $200,000 advance, $200,000 to record their album, and $200,000 for marketing and promotion. That leaves the artist with an unrecouped balance of $600,000. The first $600,000 their album makes goes straight to the label. After that, for every dollar their album makes, they get 50 cents, and the label gets 50 cents.

Compared to the other deals discussed here, a net profit deal is significantly more artist-friendly: Artists are able to break even more quickly than in a standard royalty or 360 deal, and once they have, they're receiving a much larger share of master royalties. The rapper Russ and singer-songwriter Lucy Rose both have 50/50 net profit deals with their labels, and both have spoken about how happy they are with the setup. Notably, while Kanye West signed a standard royalty deal with Universal early in his career, he negotiated a profit-sharing arrangement with the label for his sixth album, Yeezus, under which he splits the net profits from the record with his label 50/50.

This whole thing seems too good to be true. What's the catch?
For one, Sammataro said, very few artists are able to secure these deals.

"It's not that easy to get a 50/50 deal with a label," he said. "You've got to really bring something to the table."

Additionally, net profit deals often aren't quite this simple.

According to entertainment attorney Bart Day, in a typical net profit deal, the label will charge artists an overhead fee, which they justify as a way to help them cover the cost of running a label—paying salaries, office rent, and other business expenses. The overhead fee is calculated as a percentage of the gross earnings from an artist's album—money the label takes off the top before profits are split. That overhead fee can be as high as 10 percent, but according to Sammataro, it usually ranges from 3 to 5 percent.

Let's go back to our earlier example, where a label invests $600,000 in an album upfront. Without an overhead fee, if the album makes $3 million gross, the label takes the first $600,000 in earnings, then splits the remaining $2.4 million equally with the artist, so they each get $1.2 million. But if you factor in an overhead fee of 10 percent, the label deducts that amount from the $3 million gross off the top (a fee of $300,000) before dividing up what's left ($2.1 million) with the artist.The artist takes home half ($1.05 million), and the label takes home half plus the overhead fee ($1.35 million.)

Are there any other hidden fees artists need to worry about?
In addition to an overhead fee, the label might charge its artist a fee for distributing their album on streaming services and manufacturing and selling physical copies of their record. Just like the overhead fee, the distribution fee (which can be as high as 10 percent) is calculated as a cut of an album's gross earnings, and is taken off the top.

Let's return, once again, to our earlier example—but now, let's factor in a 10 percent overhead fee and a 10 percent distribution fee. The album grosses $3 million, and the label takes the first $600,000. There's a $2.4 million pot of money left over. The label pockets an overhead fee of 10 percent of the gross ($300,000), and an additional distribution fee of 10 percent of the gross ($300,000), reducing that money pot to $1.8 million. They split that with the artist, and both parties get $900,000. But when all is said and done, the artist has netted $900,000, and the label has netted $1.5 million.

To be fair, overhead and distribution fees of 10 percent would be on the very highest end of the spectrum. That said, fees in that range aren't unheard of.

What's up with the artist's masters?
Most likely, the label owns them—just like in a royalty deal or a 360 deal. While it's technically possible for an artist to negotiate ownership of their masters, it's very rare.

I see. That's not ideal, but all in all, this sounds way better than a standard royalty or 360 deal.
Absolutely—but that's assuming the profit split is close to 50/50, the distribution and overhead fees aren't too high, and there aren't any other hidden fees worked into the contract. As is the case with any record deal, whether a net profit deal is "good" or "bad" depends on the fine print.

So what's the solution?

While some deal structures are inherently more equitable than others (a net profit deal versus a standard royalty deal, for instance), there's no getting around the fact that the odds are stacked against most artists from the get-go. Artists find themselves deep in the red before they've even arrived in the studio to record, and their only path to profitability is to hit lofty streaming and sales targets that, for most artists, are simply unhittable. That's the "industry standard," at least—but it doesn't have to be that way.

Labels could choose to write mandatory renegotiations into contracts that enable artists to bargain for better terms; they could eliminate one-sided option clauses; they could tilt percentages in their artists' favor; they could stop quietly charging them fees and deductions that only well-trained lawyers can sniff out, and that seem to be disproportionately slipped into Black artists’ contracts. In other words, they could reform themselves, bowing to the demands artists have been asking of them for years, from Prince to Kanye West. But until that day comes—if it ever does—it's incumbent on artists to avoid being kneecapped by hidden provisions that make it all but impossible for them to earn money from their music.

The only way to do that, it seems, is for an artist to avoid signing a contract as soon as it's presented to them, and first hire the best lawyer they possibly can. Without a stellar attorney representing them, there's no limit to how badly a label can rip an artist off—but with one, artists are better equipped to eliminate exploitative conditions from their contracts, negotiate better percentages for themselves, and ensure they don't get locked into something they can't walk away from. An artist could spend months researching record contracts and memorizing all the obscure, convoluted terms that govern them—but at the end of the day, there's nothing more important than making sure they have an experienced attorney on their side.

"They should obtain a good lawyer before they even think about signing anything," Butler said. "On every deal point, you can be taken advantage of without an attorney. Entertainment lawyers know what to look for."

For an even more in-depth breakdown of how music licensing and contracts work, read our comprehensive cheat-sheet here.

Follow Drew Schwartz on Twitter.