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Net Profit Deals:
A Recent Alternative to the Traditional Record Deal
by Bart Day - Entertainment Attorney, October 2009

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Part Two (of Three Parts. Read Part One)

Some Sample Calculations:
(Comparing Traditional Recording Contract Royalty Calculations to "Net Profit Deal" Calculations)

For purposes of these sample calculations I am just plugging in some sample (and admittedly somewhat random) numbers here. Certainly all of these numbers will vary substantially from one artist-label situation to the next.

Also, to try to keep things as simple as possible in the sample calculations below, I am not factoring in any numbers for such things as income from the digital distribution of single songs or income from licensing masters for films and TV shows. I am also drastically oversimplifying how royalties are calculated in the case of the traditional record deal.

Finally, this major point: I'm not taking into consideration here the fact that major labels generally spend substantially more on recording costs, marketing etc. than indie labels do. And so, I'm not trying to base these calculations on realistic numbers of what either an indie label or major label would spend. Instead, the purpose of these sample calculations is just to show the methodology of the calculations of the net profit deal versus the traditional deal, using essentially the same set of numbers for both deals.

So, now the fun begins:

Sample Calculation of Artist Royalties
(Traditional-type Recording Contract)

ARTIST ROYALTIES (Traditional-type Recording Contract):
$15 - RETAIL price per record
(x) 10% net artist royalty rate  
=$1.50 artist royalty rate (for each record sold)
(x) 30,000 records sold
=$45,000 in artist royalties
(minus) $20,000 in recording costs (recouped/deducted by the record company from the artist's royalties
(minus) $10,000 (50% of independent marketing and promotion costs, and tour support given the band). (Normally the major label is entitled to recoup from artist royalties 100% of the amount given to the artist as tour support, and 50% of the money spent on independent (outside) marketing and promotion costs (as opposed to the cost of the label's own staff doing marketing and promotion).  
= $15,000 in ARTIST royalties

MECHANICAL ROYALTIES (Traditional-type Recording Contract):
(where there are 10 songs on the album and the artist wrote all ten songs)

Six and 83/100 CENTS (6.83 CENTS) per song for each record sold. (Explanation: In most recording contracts, the artist/songwriter is not paid the full "statutory rate" provided for by the U.S. copyright law, but instead 75% of that amount. As of January 1, 2009, the statutory rate is nine and one/tenth (9.1) cents per song for each record sold. This 6.83 CENTS equals 75% of this so-called "statutory rate" of Nine and one/tenth cents per song for each record sold.
X 10 songs
= $68.3 in mechanical royalties per album
(x) 30,000 albums
= $20,490 total SONGWRITING/PUBLISHING royalties  

(under Traditional-type Recording Contract):

$15,000 - Artist Royalties
$20,490 - Mechanical Royalties
$35,490 TOTAL Received by Artist

Now, compare the above numbers to the following Net Profit Deal calculations.

Sample Calculation of Artist Royalties
(Net Profit Deal)

(assuming that the contract does not require the separate payment of mechanical royalties to the artist)

If RETAIL price per record =$15
And if WHOLESALE price per record (the price actually received by record company from distributor) = $9  
30,000 records sold @ $9 per record = $270,000 gross income from distributor
(minus) $20,000 recording costs
(minus) $40,500 "Overhead Fee" deducted by label (based on 15% of the $270,000)
(minus) $30,000 in duplication and printing costs (calculated at $1/per record) for 30,000 records
(minus) $20,000 costs incurred by label to advertise, market, promote the record
= $159,500 net received by record company from record distributor(s)
of this amount is payable to Artist = $79,750
to the Label = = $79,750 (IN ADDITION TO the $40,500 "Overhead Fee" deducted and retained by the Label)

Remember - these are only sample calculations. Any significant changes in the numbers plugged into these calculations will obviously have a large impact on the final totals.  

Also - and I cannot overemphasize this enough - the above calculations should in no way be interpreted to mean that an artist will come out better financially with a Net Profit Deal than with a traditional-type recording contract. Every situation has its own unique numbers, and which type of contract is better will depend on the exact numbers that are used. This is one reason why it is so important for artists to do the best possible income/expense projections for their particular situation. 

Finally, if a record is a big flop it won't really matter much which kind of deal was used, since in either scenario there will usually be no artist royalties owed to the artist, and no net profits for the artist to share in. The one exception to this general comment is the fact that under the traditional record deal (and some Net Profit Deals), the artist will have been receiving mechanical royalties along the way. That being said, if the record is a flop, mechanical royalties will be minimal anyway.  

Continues in Part Three: Miscellaneous Deal Points in Net Profit Deals, and the Overlap with Traditional Record Deals


Editor's Note: Bart Day is a veteran entertainment attorney and represents numerous national recording artists, publishers, labels, managers, producers, and others active in the music industry. He has a Portland, Oregon-based entertainment law practice and presently divides his time between Portland and Los Angeles.  

From 2002-2008, Bart was the Vice-President of Legal and Business Affairs for Media Creature Music, a prominent Los Angeles music publisher and catalog administration company specializing in the licensing of music for film and television productions. He has also been outside music counsel for a number of major entertainment companies, including Vivendi Universal Games, the computer games unit of Universal Studios, and counsel for a major concert promotion company.

From 2000 to 2004, Bart served two terms as an elected member of the Governing Board of the Recording Academy, Pacific NW Chapter, presenter of the Grammy Awards.

Bart co-authored a chapter ("Contracts and Relationships between Major Labels and Independent Labels") in "The Musician's Business and Legal Guide," a book compiled by the Beverly Hills Bar Association and published internationally by Prentice-Hall Publishing (New York). He also recently co-authored with Chris Knab (founder of 415/Columbia Records) the book "Music Is Your Business: The Musician's FourFront Strategy for Success," published in late 2007. It is available for purchase at musicbizacademy.com    

Bart can be reached at 503-224-4900 and by email at bart@dayandkoch.com.

More information about Bart can be obtained at: http://www.avvo.com/attorneys/97204-or-bartley-day-1490758.html.

DISCLAIMER: The reader is cautioned to seek the advice of the reader's own attorney concerning the applicability of the general principles discussed in this article to the reader's own activities. This article does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to adequately evaluate a contract or legal problem without comprehensive consultation and a thorough review of all the facts and documents at issue.  


NOTICE TO MUSIC ACADEMY WEBSITE VISITORS: The above information is offered for general informational purposes only, and not for the purpose of providing legal advice. You are cautioned to seek the advice of your own attorney concerning the applicability of the general principles discussed above to your own particular activities.

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