So you think you want to be a recording star?

In general, most artists that sign contracts with major labels intend on receiving the "fame and fortune" from their music. However, the amount of musicians that have succeeded with fame and fortune can literally be counted out (i.e. Michael Jackson, Madonna, Bruce Springsteen, Billy Joel, etc.) Statistically comparing the number of thousands upon thousands of artists signing record deals, to the ones that actually succeeded with fame and fortune, you could say, the chances of success from music is like the odds of winning from a lottery ticket!

How do artists go about getting signed to the record industry?

It is either one of two ways, labels come to artists or artists go to labels, but it could be a web of different strings between. A strong 80 percent of artists look to get signed. They begin by networking with the people involved, collecting contacts. Most artists shop their demos (sample recordings) out to hopefully get a record label to draw attention to their particular music. When a record label has an interest in a certain artist's music, suddenly the artist is "bought" into signing a record contract. Instantly riding in fancy automobiles, staying in luxury hotels, and paid airline flights for meetings in eminent corporate offices. The artists gets so wound up like it is like the greatest chance of the lifetime.

Since recording contracts vary, the basic terms in recording contracts is the number of albums to be recorded, budget, royalties and advances to be paid to the artist, what rights the company has with recordings and in the event of breach of contract. According to the particular contract, generally the label owns title of the recording, control of distribution, as well as promotion. The artist is allowed to borrow any money needed in the recording/production costs, as well as any money needed for tour support. But any money advanced is to be recouped by the record company.

Growing problems arise for many artists who say the blame for the musical failure of their careers lies with management taking advantage of their unfamiliarity with the music industry. In return, the management blame the artists for getting themselves so deep in debt. By the time artists sign their record deal, they are so excited over the whole thing, they become stupid to the point of where sense of fulfillment becomes greater than their business sense.

How royalties work

Record royalties are the percentage of sales the artist and/or producer receives from the record company. They are based upon the number of records that are sold, the retail price, and standard deductions every record company takes from the gross income from the sales of those records. These deductions include the recording costs, packaging, returns and reserves, discounted military sales, video costs, tour support, and free goods.

It is very easy for artists to fall in debt. Most artists receive between 6 to 13 percent of the retail sale price after the record company recoups all money loaned to the artist. Royalties are only calculated after packaging costs and taxes are deducted from the sales price and are payable only on the amount of records sold (about 85 percent of the total number of records sold as CDs and 70 percent of records sold as singles.) Music sold to the military and the rest of the world can expect a low royalty rate -sometimes as low as 50 percent of the sales of domestic. (Keep in mind, international wholesalers purchase American music paying top dollar to these record companies.) Even though all the percentages are expressed in the contract, artists don't really think about the royalty rate which translates anywhere from 70 to 98 cents per album. Artists automatically assume that a 30,000 debt is not hard to pay back with the royalty rate. (While artists continue paying off their debts, record sales are soaring giving the record company the monopoly of all initial sales.) It is also very easy for artists to spend $30, $150, $400, etc. thousands of dollars -lawyers, accountants, managers, producers, engineers, recording costs, booking agents, tour vehicles, food, clothing, music equipment...the list goes on! All these necessities cost the artists.

Reserves are the percentage of income that a record company holds and will not pay royalties on (just in case a portion of records that have been purchased are returned to the store or wholesalers.) If these records are not sold, the record company will never pay royalties on them. Reserves are the record companies' protection from having to pay artist and producer royalties on records that are returned (have not generated income.)

Record companies have agreements with large wholesalers and retail stores that allow them to return goods that have not sold to consumers within a certain period of time. Sometimes record companies will manufacture large quantities of CDs and cassettes expecting a high demand in sales. But many times the record bombs and the result is a large number of returns. The greatest risk for a large number of returns is taken when a record company releases an album recorded by a superstar artist. The record company believes that project will sell a huge number of units and they then manufacture and send off a large number of records to wholesalers and stores. If the project is not a success, the record company can look forward to seeing truckloads of returns real soon.

When a record company feels the only way to sell off existing inventory of a record is to sell it at rock bottom prices, they refer to these records as budget items. Here the trick of the record company is to negotiate how long after an initial release a record company must wait until they have the right to offer that record as a budget item. Royalties on budget items can be as low as 50 percent or even 0 percent of the base royalty rate. There is nothing more embarrassing and humiliating for artists than to walk into a record store and find their albums in the budget bin of that store for the low, low price of 99 cents.

Free goods are referred by record companies as CDs, cassettes, and records the company gives away to record stores. Of course, the artist gets no royalties on these records. The reality about free goods is that they are meant as a way for record companies to make money on sales of records and at the same time not have to pay artists, producers, and publishers. The average deductions for free goods are 15 percent for CDs and 23 percent for singles. This means that for every 85 CDs or cassettes sold to record stores, an additional 15 are received as free goods.

More about royalties

Artist royalties are based on the retail selling price. Record companies make more money based on the wholesale price. No matter what the record company charges a wholesaler, artist royalties are still based on suggested retail price of the product.

Record companies exaggerate the wholesale price of records by 15 percent and pass along to wholesalers 15 free records for every 85 records the wholesaler buys. The wholesaler is still paying the exact same price for the same amount of records, but since record companies pay no royalties on free goods the artists does not receive royalties on 15 free records the wholesaler is supposedly "getting for free."

Also, most artists misunderstand the 15 percent free goods issue with the free goods that record companies give to record stores, radio stations and TV stations. There is a difference with the free goods that labels give to record stores for promotion, product attraction, and in-store air-play (a further deduction of 5 - 10 percent from artist, producer and publishing royalties!)

Options?

When artists are signed, in general, the record label will sign them up and then leave them alone for a while until they sign a profitable deal or have a hit recording. Then, the record company will crawl out of the woodwork, waiving their old contracts and claiming that they own the rights that the artists just sold. Chances are, the record company wins. Unless the artists has money to pay for lawyers to hopefully get them out of the jam, or get another record label to buy them out, they are pretty much at the label's mercy. A record company usually guarantees or contains them to a minimum number of albums to be recorded under contract. This is typically one CD or sometimes maybe a single. Thereafter, the company can, at its discretion, require the artist to record additional recordings. This is referred to as an option. Normally, the company agrees to do one CD with options to do seven to nine additional CDs. The fewer the options, the better it is for artists to become a "free agent" sooner and can arrange for a new contract on the open
market. Sometimes artists are allowed to be terminated if a certain minimum number of records were not sold on the prior release or if the albums were not released in the US and/or other major world markets.

Artists wanting to purchase their own music recordings for selling at live performances, as well as for giving to friends and family members, are only permitted to buy back the recordings from their own label at a special wholesale rate. The labels charge the regular wholesale rate $6-$8 per CD to the artists for their own music. (Keeping in mind, CD manufacturing at most costs $1.22 to make.) Artists pretty much rely on touring for their main source of income and not the royalties from their record label. The record label pushes artists to tour (in order to sell more music.) Artists need a lot of merchandise in order to sell at live performances. A lot of times artists have no choice but to barrow money from their record company in order to buy back their CDs at the special wholesale rate. So while artists are stuck in debt, the record label makes money off the band (for making the band purchase the CDs at the wholesale rate) as well
as keeping the artists in debt and touring in order for the record label to make most initial sales in record shops. That is commonly known as LOAN SHARKING!

The good news is, if the records reach sales of over 750,000 units, artists will start to receive royalties, unless they have taken advances that will keep them in the un-recouped position. The bad news is that most artist's records do not reach anywhere near 750,000 units and therefore 95 percent of all artists who have records released never receive a royalty check.

Artists deserve to make the lion's share of profit from their artwork. Artists should have complete control over the recording and manufacturing of their own release, a control over the distribution, and control over what the retail price of their release should be sold at. Although it appears as though record labels are taking a risk in the beginning for signing artists, if the artist's time, energy, and emotions mattered to labels, they wouldn't feel they were the only ones taking risks. Without artists, record labels would not exist. The
only thing record labels have as their most valuable contribution is money. Artists bring talent and creativity as their most valuable contribution. Which is more valuable? In all reality, record labels would not exist if it were not for artists bringing them their talent.