Paul B. Ungar, Esq.

Attorney At Law




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How to Make Money and Retain Control of Your Music


The best way to sell records is to land a big record deal with a big company, become a superstar, and make gobs of money from maniacally loyal fans, who'll buy whatever you write. Isn't that right? Let's talk realistically.


I recently helped one of my rock band clients from the Northern Va. and Washington, D.C. area shop a record deal. Through ingenious self-marketing, the band attracted the attention of an important A&R person from a major U.S. label. The band asked me to help organize a showcase in New York City because the label wanted another look at the band. I invited A&R representatives from other companies to come to the show to spur competitive bidding. While talking to my contacts at the labels, I asked each one how many new acts they were they planning to sign this year. The answer from all of them was fewer than five. One friend and client told me that he plans to sign one new act this year. Instead of signing new acts, he's concentrating on his existing talent and signing new blood cautiously.


If you count all the major labels in the world, this means that only a few hundred substantial new artist deals are available each year. I define substantial deals as those in the range of $200,000 for production and recording costs, $100,000 for a video, and the typical costs for independent promotion, which usually runs the same amount as production costs. And how many really talented artists are out there? A whole lot. I guess that most of them won't be receiving big deals with big labels.


The big deals, however, still are available. One of my clients recently landed recording and co-publishing deals, each which feature initial advances in the mid-six figure range. After video and the promotion costs, the label will spend a million dollars on this project that most people haven't yet heard about.


Big deals happen infrequently because record company executives have become incredibly picky. Their well-paid jobs depend on the success or failure of the acts they choose. Many of my clients are record company executives, and I know they worry about their job security. A hot issue when negotiating recording company employment agreements is the golden parachute clause. The parachute is the amount of money the company owes the executive if it fires him before his contract ends. Record executives assume at the beginning of their deal that they won't last. If an executive signs a few big deals each year, he risks millions of his company's dollars. And the company will hold him responsible if the investments don't provide a return.


Your End of the Big Deal


It's harder than ever to land a rock star-type deal these days. But, let's examine the big deal if you are lucky to receive one.


The following deal is typical for a new artist on a major label. A new artist's typical royalty for a CD sold through normal retail outlets in the United States is $1.00. Let me explain how you determine the royalty. A new band receives about a 12 percent retail-based royalty rate, which then is multiplied by the royalty base price. The royalty base price is the suggested retail price – in this case $16.00 – minus a packaging charge of 25 percent, which is $4.00. The royalty base price now is $12.00, and the royalty equals $1.44. The record company further multiplies the royalty by 85 percent, which includes a 15 percent free goods deduction. The royalty now is $1.22. But the company again multiplies it by 85 percent because the base royalty rate applies to traditional vinyl or analog cassette – not CDs. The band is left with $1.04, which the company may multiply by 90 percent of net sales. The final royalty is $0.94. But let's round it off to $1 for this example.


A record company fronts the money for all of its deals. The band owes the company, however, for every dollar it spends. So, the company spends $200,000 for recording costs, $50,000 for advances to the band members, their manager and lawyer, $75,000 for a cheap video, and $300,000 for independent promotion and marketing. (Of course, I could negotiate the contract so that only half of the video production and marketing expenses are recoupable.)


The band is $437,500 in the red, and it needs to sell 437,501 CDs to make $1 in record royalties. The band almost must have a gold record to break even. (Profit from publishing revenue, however, is for another article.)


More Problems with the Big Deal


Another major provision in new artist contracts is that the record company may approve material the band records. The company also may approve individual producers and other creative elements, which must be commercially satisfactory. In other words, the company must like what you're doing. If it doesn't, you must keep trying until the company is happy. The only way to change the phrase from commercially satisfactory to technically satisfactory is after the band has sold millions of records.


The good news is that the band in our example has a big deal with a big company. The bad news is that the band has no creative control over its music, and it may never see another record royalty.


The band members also must tolerate their label's corporate politics. The A&R executive who hired the band could loses his job. His replacement could try to impress her boss by cleaning house and dropping the band. Also, the record company only accounts to its artists twice a year – even when it owes people money. And for new acts, the record company often keeps 25 percent of royalties for two or more years as a reserve. Nice system, huh?


Do it Yourself


What if you can't score a big deal? What if you don't want to score a big deal?


Well, you can market a CD yourself and make much money. Let's say you spend $2,000 for recording expenses, and each CD costs you $2.00 for duplication and printing inserts. Also, assume that you wrote, produced, and performed the music yourself. You can sell each CD $15.00 directly to your fans. After selling 135 units, you've recouped your recording costs. Subtracting other costs you may incur, you now can make at least a $10 profit per unit sold. .If you sell 10,000 CDs, you have a $100,000 profit. Remember our newly-signed band? If the band sold only 10,000 units, its A&R executive would lose his job – and the band its contract. A sale of 100,000 units also would be a disaster. But, if you sold 100,000 CDs, you would be a millionaire.


Sounds simple, right? I know that it isn't easy to sell 10,000 or 100,000 units. A band must always work on advertising and promotion to reach these numbers. If you go this route, you must think of clever ways to attract your potential fans'attention. You may need to spend some money to do it. The Internet isn't the cure for all of the world's problems. But look at the economics of scale. If you keep costs low, then you only must reach a small number of the millions of people online to make a lot of money. You also keep creative control over your music by remaining independent. For most people, control is more important than the money.


-        Paul B. Ungar, Esq.


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