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by David McLaughlin

The Lawful Truth: Different Types of Royalty Structures

by David McLaughlin

The Lawful Truth: Different Types of Royalty Structures

There are an increasing number of small independent record labels emerging that represent perhaps only one or two artists. One by-product of this change is that the royalty models offered by these smaller independent record labels are often quite different to those previously offered by the majors. Understanding the difference of royalty structures is important for both artists and any new emerging record labels alike.

Traditionally most record labels (and particularly the majors) have paid royalties based on a percentage of the wholesale price that the labels receive from selling music to retailers. This is often referred to as the PPD or ‘Published Price to Dealer’. When you hear someone talking about the fact they have a 15% royalty rate what they are usually referring to is that their share of the PPD is 15%. In these digital music days a similar percentage is commonly also provided, now based on the amount a record label is paid by a ‘digital’ retailer (iTunes etc.) for each sale.

Under traditional structures, royalties from income related to having music included in adverts, films and TV will normally be paid based on a percentage of that actually received by the label – the artist’s share of this type of income tending to be a lot higher than that received for just straight sales of their music.

Under such deals a record label would pay the artist a royalty on every sale or dollar of income received. (This would, of course, be subject to the label first deducting any amounts the artist owed the label, such as advances paid to the artist for making recordings or videos.) In return, it would then be the record label’s responsibility to pay out of their share of income received, all costs relating to marketing, manufacture and distribution of the music.

An alternative approach to royalty payments, which has been around for a long time, is really starting to come back to the fore again, particularly amongst the emerging independent labels. This sees payment of royalties being based on a share of net profits, rather than a share of PPD or similar amounts. The big difference is that the record label and the artist actually share in any profit made from the release of the artist’s music. The exact ‘share’ of course, very much depends on the final split of net profits that the parties agree between themselves.

There are big ramifications for both the artist and label from agreeing to this different approach to royalties. Under a net profit split model payments are only made once all applicable costs have been covered. From both parties’ perspective it importantly means that costs of the project that used to be paid solely by the record label (e.g. the marketing, manufacture and distribution costs as noted above), are now effectively shared. This is obviously better for the record label – but inevitably not so good for the artist. 

Offsetting that it also means that the artist’s share of any income generated by the project is no longer set to a specific amount per CD sold, or dollar of income received. In theory, once all costs of a project have been covered, the artist potentially stands to get a much more significant share of the overall income received by the label than has been the case in the past. This is obviously good for an artist – but not so good for the label.

Given the good and the bad aspects to these deals for both parties, why are people so keen to move to these net profit split deals. Importantly a net profit split type royalty structure can create a feeling that the parties are much more ‘partners’, as they truly share in the success and real costs of the project, and this can bring its own benefits. From a record label’s perspective these types of deals make signing artists less risky, the label gets to recover a greater share of any costs they incur. From an artist’s perspective there is much greater possibility to receive more income from a successful project than under the traditional royalty structure.

As a final point it should just be noted that the above approaches to royalties are really only applicable in the case of a Recording Agreement or a Licensing Agreement. There are certain other deals offered these days such as ‘Distribution Agreements’ or ‘Production and Distribution Agreements’ that calculate an artist’s share of income received from sale of their music in different ways from that described above.
 
David McLaughlin is a specialist music lawyer with Auckland law firm McLaughlin Law (www.mclaughlinlaw.co.nz).
 
Disclaimer: This article is intended to provide a general outline of the law on the subject matter. Further professional advice should be sought before any action is taken in relation to the matters described in the article.

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