RIAA Accounting: How To Sell 1 Million Albums And Still Owe $500,000

from the who's-ripping-off-whom-again? dept

Last year, we had a post on RIAA accounting, detailing how labels screw over many musicians, even some of the best selling ones, such that they never actually make a dime in royalties. Bas points us to an excellent 14 minute video from lawyer Martin Frascogna, entitled How To Sell 1 Million Albums and Owe $500,000:

It definitely covers a lot of the same ground (in fact, his advance numbers and sales numbers match up exactly with the numbers we quoted last time from Courtney Love), but it also delves into some of the sneakier aspects of record label contracts with musicians — things that many musicians simply won’t know about or understand when they sign their contract. Using those points, he breaks down how a band might think it’s getting royalties on $20 million worth of sales but then find out that, thanks to some of these fun tricks, the basis for calculating the royalty takes that number all the way down to $4.9 million (and then with a 10% royalty, the official take is $490,000 — but if the advance is $1 million… the band still technically “owes” $500,000).

And, as we noted in the post last year, don’t think that because a band goes “unrecouped” that the label loses money on them. The “recouping” only comes from the 10% royalty rates, which are really much, much lower (in this example, the “real” royalty rate is more like 2.5% due to the clauses in the contract). That leaves 97.5% of the money in play. Obviously, some of that is covering costs and expenses. But there’s plenty of cash that makes its way into the label’s bank account, when an album sells $20 million.

As for what kinds of tricks the labels use, well, Frascogna notes “breakage fees” of 20%, which are based on breakage rates for vinyl from half a century ago. That CDs don’t break so much and that digital files don’t break at all, doesn’t matter. The labels still try to get a super high breakage rate that they get to deduct. For them, it’s pure profit. Then there are “uncollected account” withholdings, on the basis that some retailers go bankrupt and don’t pay for the stock they had. The way it’s described here, that’s often just a set number, rather than based on any actual, documented cases of uncollected fees. Next up? “Free goods.” Now, we talk about the importance of free goods all the time. But here it’s used in a different manner. Basically the labels deduct the “cost” of providing reviewers/radio stations/etc. with “free” copies of your album. That money comes straight out of the gross that the royalty is calculated on. The fact that you could just email the mp3 to those folks yourself? Well, pay no attention to that newfangled technology.

Next up, there are “container charges.” That’s for things like the jewel cases and inserts for CDs. Again, the fact that digital music doesn’t have such expenses is pretty much ignored. Also, the fact that all of these expenses get deducted from the artists’ share? That also seems wrong. Even more insane? Apparently the standard “container charge” is an additional 30% off the revenue. Again, in many cases that’s just pure profit for the labels.

Finally, there’s the ever lovely and totally amorphous “reserves.” As Frascogna notes: “no one really knows what reserves entail.” It’s basically a blank check for the record labels to claim they have to keep some of the money themselves for “other stuff,” which is mostly undefined. In this case, some labels simply set a straight percentage, up to 20% more of the gross that artists never get to see as part of their own royalties.

Bring all that together, and the 10% royalty looks more like a 2.5% royalty, and that’s not enough to even get halfway to recouping even if you sell 1 million albums at the high high price of $20/album. And that doesn’t even touch on splitting up any money you get between band members and paying the manager/agent, etc. When you dig in to things like this, you can understand how artists like Lyle Lovett can say they’ve sold 4.6 million albums and never made a dime in royalties from album sales.

Now, many of these points can be negotiable if you’re knowledgeable about them. But many artists sign such contracts without realizing what that fine print really means — and that’s just what a lot of the labels are counting on.

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Comments on “RIAA Accounting: How To Sell 1 Million Albums And Still Owe $500,000”

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Ma says:

Re: Mike, You Just Dont Understand

What? Artists create music, not labels. Labels are responsible largely for marketing and distribution and industry connections. That’s their value proposition. This article points out, quite rightly, that the labels also charge BS fees to soak musicians for money. Why do you think the RIAA is so afraid of the internet? It changes the distribution paradigm so that their value proposition is limited.

LegitTroll (profile) says:

Re: Re: Re:

Brittany Spears did not build the financial empire of hers on music performances alone. She has clothing, endorsements, perfume, and many other ventures not directly related to her music that has allowed her to amass a very large amount of money. The numbers I have here are a little old, but regardless they paint a picture that music is not where it is all coming from.

Jose_X (profile) says:

Re: Re: Re: Re:

And this is exactly why it can make lots of sense for all sorts of artists (from popular to obscure) to bypass these middlemen and embrace “piracy” and open licenses. They replace the super costly middlemen super cheaply while allowing their fans to keep more money which can be used later on to buy tangible goods and services direct from the artist. Even the middlemen are further enriched this way because they can save their souls from damnation.

Anonymous Coward says:

Re: Re: Re:

More bullshit.

Artists never toured before like they have to now. They got their mansions and fancy cars from record sales royalties.

Now, since people want to rip them off, they have to leave their families for 9 months a year to go out on the road to earn a living. Or they just quit. Nice work, asshole pirates.

kirillian (profile) says:

Re: Re: Re:3 Re:

I’m at work. Taking lunch. I’ll tell you that you really need to cite some sources. Ad-hominem attacks only serve to convince the rest of us that you really have nothing of value to speak of.

To be honest, I’ve never been shown convincing evidence that there was ANY time when artists made more money (profit here that goes to the artist – as we’ve already discussed in the above article, quite a bit does NOT make it to the artist) from recordings than from performances.

Anonymous Coward says:

Re: Re: Re: Re:

More bullshit.

Artists never toured before like they have to now. They got their mansions and fancy cars from record sales royalties.

Now, since people want to rip them off, they have to leave their families for 9 months a year to go

I’m interested … I’ve seen multiple people from within the industry publish case studies showing how the record label system screws over the artist.

Has anyone published a credible version that shows how great things were in the good old days before digital piracy?

Some Asshat says:

Re: Re: Re: Re:

You’re so full of it. What do you mean, they didn’t have to tour? Ever see a documentary on Ray Charles? Kingsmen? Sam and Dave? Please don’t comment further until you actually know something about the industry.

They had to tour almost year round, and rode the ride. They toured in order to give out records and do interviews on local radio stations to build their audience. They went from small town radio station to small town radio station doing self promotion.

The sad part is that you’re either in the industry and don’t understand it, or not in it and still completely clueless.

Howard says:

Re: Re: Clarification

Do the labels reimburse retailers for shoplifting?

No. Think of the “Breakage” fee as insurance for the record label. If a case of CDs was to fall out of a truck on the way to the store, and then get run over by another truck (never mind the fact that the shipping company would be responsible for the damage), the record label takes a bit of money our of the pool reserved to cover the loss of profit and expense incurred by such an incident.

If the case of CDs doesn’t get damaged, then the record label can keep the money.

Either way, the record label keeps the money… It’s a win win for everyone that is the record label!

Hothmonster says:

Re: Re: Clarification

no its still 0%, breakage means if they shipped a store a record and it broke on the way they would have to ship them a new one and the cost came out of their pocket.

Seeing as it costs them nothing when someone pirates an album and a digital file can’t break on the way to itunes servers the digital sales breakage would be 0%.

Ken Hansen says:

Re: Clarification

Breakage does relate to shoplifting and other losses at the retail level, but why should that expense pass through the retailer that let the product walk out the door be able to pass the loss on to the record label, who in turn off-loads that loss onto the artist?

It makes no sense – aside from producing an album that someone thought was worth stealing, it isn’t the artist’s fault/responsibility.

Anonymous Coward says:

You can run the numbers the other way too, and sort of see what happens.

Do you think perhaps that the artist made a good living off the advance, got to go on tour, got to sell concert tickets as a result of all the marketing and promotion, and all the came with it?

The royalty rate is still 10%. If they signed a contract and agreed to stupid, unsupportable fees, they have nobody to blame but themselves. The royalty rate is still 10%, they just stupidly allowed for 75% of the income to be expenses that don’t have to be documented.

You wouldn’t do that in any other business, so why sign a contract like that in the music business?

Anonymous Coward says:

Re: Re: Re:

They are in profit business, not the hand out business.

Would you consider the average VC to be horrible too? Some of them buy up 90% of companies for a few dollars (making the investment) and when the company goes public, they make a ton of money. Do you think they should give money back to the founders or original workers just because they made too much?

The issue is bands and artists who sign contracts without understanding the implications, and then whine about it later.

John Doe says:

Re: Re: Re: Re:

The issue is bands and artists who sign contracts without understanding the implications, and then whine about it later.

Um, no its not. The issue is our freedoms are being trampled in the name of “doing it for the artists”. If people can’t negotiate “fair” contracts, that is their problem. But if the mafIAA is buying influence in government to take away our freedoms than that is everyone’s problem.

Anonymous Coward says:

Re: Re: Re:2 Re:

No, there you are buying into the techdirt party line, and it’s just amusing.

It is done for the artists, because if the artists work isn’t protected, there is no way to fund them to start with. The labels must protect their profits in order to be able to keep doing this sort of thing, otherwise there is no money for the artists.

Cause and effect. You cannot split them up and ignore the one you don’t like.

Cowardly Anon says:

Re: Re: Re:3 Re:

Yes, the major labels are a business. Yes, they need to grow and secure their profits.

Growing and securing their profits does not mean pretending that we still live in the 90s and trying to find ways to pretend that technology hasn’t advanced since then.

If they spent that 10% breaking fee on something like ‘Technological Growth and Development’ they would still be making money and they wouldn’t have to run to the government every time something new comes out. Why should the governments of the world be responsible for a handful of business.

Record labels aren’t too big to fail. Remember that. If the big labels were gone tomorrow, would we be any worse off? I doubt it. Because it’s a lucrative business, I’m pretty sure someone step up to fill the void very quickly.

RadialSkid (profile) says:

Re: Re: Re: Re:

Paying an “artist” for their work is a “handout?” Did you actually just say that?

And you douches keep trotting out some variation of, “if it’s a bad contract, they shouldn’t have signed it.” Newsflash: If virtually every contract out there follows this same model (and they do, indubitably), AND you’re naive enough to believe in the “golden ticket” the recording contract is supposed to represent, then you sign whatever contract is offered to you, or you go without one.

Conner says:

Re: Re: Re: Re:in the profit business

The issue is the labels take advantage of artists and coerce them to sign ridiculous contracts with no way out…
You’re saying that people who spend their lives playing instruments, with the percentage of high school dropouts pretty high for an industry should know about these things?

Jared (user link) says:

Re: Re: Re: Venture Capitalists vs. Private Equity firms

I think you picked the wrong entity.

Check out the link to Fresh Air’s story about Private Equity firms (particularly the last sentence below): “Private equity firms buy undervalued or underappreciated companies, impose short-term improvements and sell them for a fast profit. Some of the companies they’ve bought include Hertz, La Quinta, Dunkin Donuts, and Toys R Us. Josh Kosman, a private equity expert, says that the way the firms have been able to buy these businesses ? through leveraged buyouts ? means the majority of the money for the buyout has come from loans that the firms dump on the company they’re supposedly fixing.”

Anonymous Coward says:

Re: Re:

Agreed. Masnick just posts this bs to try and get people to feel less guilty about ripping off music.

And the only “tricks” going on here are the disingenuous ways a record contract is portrayed. For example, most indie deals are straight up 50/50. Indie record labels have been devastated by piracy. Masnick and the freetards don’t care.

Also, the deal described is ludicrous. A record label is a venture capitalist in a far more ballsy way than most: they put ALL the money up, right at the front. The musician has a nice fat advance to go shopping with, but if they’re stupid enough to sign a deal with a low royalty, that’s thier fault and nobody else’s.

Demonizing record labels is such a sleazy way to try and justify ripping off musicians, but that’s never stopped Masnick before, has it?

Rikuo (profile) says:

Re: Re: Re:

You’ve just seen a post that has evidence that the RIAA labels pretty much take most of the income and say that it’s wrong to demonize them?
Yes, they’re for-profit companies. But there’s a difference between making an honest buck and literally stealing from the hand that feeds you.
Yes, the artists that sign such contracts are stupid to agree to such terms but what about the people who WROTE the contracts in the first place? They are far more at fault here.

Also, please note, this article said nothing about justifying copyright infringement. What it said was that the very same companies who literally buy laws to “protect the artists” are instead more akin to parasites.
So tell me, what are we the consumer to do? We’re being told to pay to support the artists, but the money isn’t going to them. Just last week, a Spanish collection agency had its top brass arrested for fraud. I know, that’s just one agency, but it was a very influential agency that had been trying to make it legit to extort license payments from all sorts of things.

Capitalist Lion Tamer (profile) says:

Re: Re: Re: Re:

It is in many ways an attempt to justify something else, and the only “else” seems to be piracy.

That’s a ridiculous claim and you have nothing to support it. Search this site all you want and you’ll never find Mike supporting piracy or attempting to justify it.

You mistake criticism of a system that ripped off its artists for years for piracy justification. As if sticking it to the major labels would somehow make more money roll downhill to the artists.

There’s no justification going on here. He’s presenting the average major label contract in all its perversely ugly glory and you think it’s being used to justify something?

There’s more time and letters wasted here by commenters like you on two unsupportable claims:

1. Major label contracts are good for artists.
2. Mike Masnick supports piracy.

Finding evidence to support either of those two claims is going to be a long, fruitless search.

Anonymous Coward says:

Re: Re: Re:2 Re:

Except it isn’t an average major label contract.

Nerds, dorks and geeks that know nothing about the music business want to believe it is, because they think it might then excuse them from ripping off musicians.

Besides, do pirates only rip off major labels? No? They rip off indies too? Then shut your lame-ass hypocritical piehole.

Capitalist Lion Tamer (profile) says:

Re: Re: Re:3 Re:

Besides, do pirates only rip off major labels? No? They rip off indies too? Then shut your lame-ass hypocritical piehole.

Well, thanks for making my point for me: exposing the ugliness of a major label contract has nothing to do with justifying piracy.

And of course it isn’t an “average major label contract.” When it comes to arguments like this, you start sending everybody on a hunt for the mythical “true Scotman.”


cc (profile) says:

Re: Re: Re:3 Re:

Come on, since you carry yourself like someone who seems to know everything there is to know about the recording industry, surely you can respond to CLT’s request for something (anything) that proves the label system is good for artists.

I mean, the evil pirate-supporter Masnick has already linked to a video from an industry lawyer showing how artists are being conned by the labels. Now it’s your turn to put the nerds, dorks and geeks in their place and show them how wrong we are. A bell curve showing how much the artists make from their recordings would be ideal, thanks.

Max (profile) says:

Re: Re: Re:

“A record label is a venture capitalist in a far more ballsy way than most: they put ALL the money up, right at the front.”

Without the music that the artist performs, the record label has nothing to sell. After they use the artist up and spit him or her out, they then hold the rights to the artist’s recordings for decades.

I can tell you who I respect in this transaction, and it’s not the vampire record labels.

Anonymous Coward says:

Re: Re:

But these are musicians who sign contracts, not lawayers. They need the advance because they can’t afford the equipment and studios they need with out it. And with that comes living expenses. Where would they find money to hire contract attorneys? This is a purely abusive relationship where one side has nearly unlimited power over the other.

Hothmonster says:

Re: Re:

“You wouldn’t do that in any other business, so why sign a contract like that in the music business?”

Because before the internet you couldn’t self-distribute and advertise (on a large scale unless you were uber rich to begin with) and all the major labels had these clauses in their contract.

So it was sign a bad contract or don’t get in the business. Its not like there were/are a lot of major labels offering good deals and idiots just signed with the wrong ones.

So when your band have previously made a couple grand a year and someone wants to throw a million dollars at you, but only if you sign this shitty contract, what would you do? Make a couple grand a year and slowly expand your market until hopefully someday you make money or take the fucking million knowing you will never make another dime on any albums covered in that contract

alex (profile) says:

Re: Re:

I agree.

It’s obviously important for artists to be aware of the contract they’re signing and this video certainly highlights some of the things to look out for. At the same time, it’s fairly one-sided.

The band was given $300k upfront – when nobody really knew if the album (that didn’t exist yet) was going to sell well. The label spent $500k in studio fees and another $200k on a top producer and engineer. In other words, the label has invested $1m on recording the album. They then have to pay for manufacturing, distribution, promotion etc.

Also slightly misleading is that the $500k debt that the band has ended up with isn’t a real debt; they don’t have to pay it back. It’s just a number on a balance sheet.

Glenn Gillen (user link) says:

Re: Re:

People sign contracts with similar horrible terms every single day, with “interest free” purchases, buy now pay laters, money-back guarantee, and any number of dubious things. Sure a savvy business person doesn’t sign a contract with such terms, but to assume that is at all representative if the average person is disingenuous at best.

Play that with the usual musician stereotype of someone who has been busting their ass playing in dive bars and clubs for years trying to get a break, barely able to make rent, and now suddenly has a $1m contract thrust on them with a $500k advance. The RIAA is knowingly exploiting the situation these people are in and dazzling them with big numbers.

Schmoo says:

Re: Re:

> You wouldn’t do that in any other business, so why sign a contract like that in the music business?

Mostly ’cause there’s 100s of other suckers desperate to fight you to get there first. It’s easy to rationalise value in something that so many people are so desperate for. Ask Steve Albini about ‘the trough’… but finish lunch/brekkie first.

Anonymous Coward says:


Perhaps because they’re young a excited about getting an almost impossible to get recording contract and they just sign.

I do like the fact that just because it’s legal it can’t be unjust. It’s quite an American attitude (not sure whether you are or not).

I any case I usually find that people like you with hyper-capitalist attitudes are the first to whine when things like this happen to them.

I guess what I’m trying to say, ever so politely, is just shut up.

AmateurBassMan (profile) says:

Re: Re:

In any other business there are better defined regulations against this type of highway robbery. On top of that, many bands/artists/singers feel pressured to sign those types of contracts because of the idea that they may not get another shot at a record deal. Some just aren’t as concerned with the business side of things as they are with the music. Many musicians play music for the love of playing music and any opportunity for them to do that is a good one in their eyes. And there are also always plenty of sell-outs ready to take your place if you turn down the deal.

So while many of those people maybe have been ignorant in signing those contracts, that doesn’t excuse the actions of these labels nor should it absolve them of responsibility to play more fairly with their artists.

out_of_the_blue says:

Wait a sec, Mike: did the band get $1M? If so, that's plenty.

It’s limited work — er, make that time, and VERY limited time at that to play a few tunes — so if they actually got an advance of $1M, then they’re WAY WAY ahead of working people such as farm laborers who likely won’t see (say, divided by 5) $200K in piece ever. With $200K in hand and a bit of wisdom to invest it right, you’re all but guaranteed $10K a year for the rest of your life without doing ANY more work ever.

Now, if your point is that record labels ALSO make too much money, you’d be right. But you’re wrong if ignoring the absolutes of a $1M advance for merely playing music.

Aitala (profile) says:

Re: Wait a sec, Mike: did the band get $1M? If so, that's plenty.

You did not read this > http://www.techdirt.com/articles/20100712/23482610186.shtml
article then.

Yes, the band got $1 million, but they had to pay to recored the album, pay managers, lawyers, etc…

After taxes, they end up with $180,000. For the whole band.


RadialSkid (profile) says:

Re: Re: Re:3 Wait a sec, Mike: did the band get $1M? If so, that's plenty.

I know enough about it to stay away from it, or the so-called “art” it produces.

How is your career going? Not seeing your big mythical piles of cash, and assuming those darned PIRATES must be responsible? Your kind is so pathetic. You stand for nothing, and accomplish even less than that.

The eejit (profile) says:

Re: Re: Re:3 Wait a sec, Mike: did the band get $1M? If so, that's plenty.

And yet, here you are, attacking people without cites. You say only experts can talk about the subject, but that’s not really true, either, is it?

To use an old example, you don’t have to be a terrorist to be an expert on terrorist mechanisms, nor do you have to be a Goth to be an expert on Gothic architecture.

Overcast (profile) says:

Re: Re: Wait a sec, Mike: did the band get $1M? If so, that's plenty.

You did not read this > http://www.techdirt.com/articles/20100712/23482610186.shtml
article then.

Yes, the band got $1 million, but they had to pay to recored the album, pay managers, lawyers, etc…

After taxes, they end up with $180,000. For the whole band.

So in otherwords – if they would have posted their music for free on the web, and sold t-shirts; they may well have doubled their profits…

Grae (profile) says:

Re: Wait a sec, Mike: did the band get $1M? If so, that's plenty.

In the example given the band got $300,000 directly. The rest of the $1,000,000 advance went to pay for other things such as recording costs, staff, etc.

So no, the record label did not hand the band a $1,000,000 check and say “now go make us a winner!” Hope that clears it up for you.

Anonymous Coward says:

A question on the math for the ignorant… Why are the percentages taken off the previous line item in the illustration? As an example, the container fee percentage was taken from the remaining total post free goods and not from the original $10M. Why isn’t the container fee 30% of the $10M (in this particular example)? Likewise by my math, the reserves aren’t 10% of the 10M but 10% of the remaining after the container fees. Maybe my math is wrong, but I just want to understand a bit better.

JustJ (profile) says:

The number of albums released annually now is an order of magnitude greater than it was 10+ years ago. The number of publishers/recording studios is also significantly higher. Ignoring all other factors (movies, video games, strip clubs, etc..), this inherently creates competition. In a free market, competition lowers price. Yet here’s an entire industry that has violently defended, nay colluded, to keep their pricing firm.

If they are losing money by signing too many bands that flop, then they need to decrease their costs so that unproven bands are less of a risk instead of spreading out the costs amongst all their artists.

It’s like Wal Mart charging $100 for every item in the store, because the rotten fruits/veggies won’t sell. The difference is that Wal Mart spends their capital on efficiencies to lower consumers’ costs, whereas the RIAA spends their capital on litigation and regulation in order to decrease consumer satisfaction.

Glacial Concepts (user link) says:

Innacurate and It doesn't need to be

The basic idea of this is correct – label accounting is fairly obtuse and overall it is not the best deal for the artists – but I think his details are a little off, and they don’t need to be.

First 20 dollars as the base retail price for a CD. Even in the 90’s I don’t recall many single cds that were 20 dollars. 15 dollars would be a more accurate SLRP for today, while most albums are sold for less than that.

Second, Most contracts base a royalty on the SLRP not on the wholesale, so I believe he is incorrect there.

Third – Reserves are based on returns not potential spends. Labels are paid on ships, not sales, and so reserves are for the returns that inevitably come from a operating in a consignment industry as Martin states. I find it odd that he says that no one understands the point of reserves. I would say more accurately that some people are poor at incorporating the math of reserves into their projections, but I would hope that everyone who negotiated a contract with a reserve clause understands the concept.

There are several more inaccuracies and exaggerations in this video that I’ll omit to save time, and the sad thing is that he didn’t need to do that. The actual accounting is draconian to say the least, I’d like to see an actual record contract broken down not mythical norms in potential scenarios to see what would be potentially owed on either side. This is actually what artists ( or their lawyers ) should do. They should break down a model of possible scenarios under the proposed contract and see how much you would have to sell and the label would spend to end up at an agreeable numbers on both sides.

The contract is a blueprint for a financial model – why not just run the numbers of several scenarios beforehand.

Jesse Townley (profile) says:

Couple of details...

Hi, as an actual record label head (albeit a small indie one), I want to offer the following details/corrections/explanations.

1. SRLP (Suggest Retail List Price) is often much higher than the realistic list price. In the 90s & 00s major label CD SRLPs were as high as 19.98 for a major artist. A consumer would have to hunt for a record store that was silly enough to sell the CD for that much, but on paper that meant that each sale was worth $20. It makes all of the numbers more impressive. (2 examples: “We sold $10 million worth!” or “Pirates cost us $10 million!”)

2. I’ve seen contracts with royalties based on both wholesale price AND SRLP. I don’t know which is more common, but both certainly exist for at least small to mid-sized acts & their labels.

3. Reserves are basically a % of the prospective sales that have occurred within a pay period that are held over until the following pay period (or for 2 pay periods, or more, depending on the contract).

In this case, a “sale” is a release sent to a store or distributor on consignment. They can still return it and it ceases to be a sale. On a balance sheet, the “sale” is a positive addition and a “return” is a negative addition.

The understandable and to me, acceptable justification for this is: Every new release has a huge burst of sales when it is first offered. In the 2nd 6 months of a record’s life cycle (sometimes earlier if it’s a smaller release, sometimes later if it’s a larger release) there is a sudden influx of returns from stores and distributors. This happens because the stores and distributors have a limited return window for releases and if a record’s just sitting there, they’ll return it for credit & order something else.

A lot of times, a release will have a large initial sales period that shows “sales” of $$$. Then, the subsequent returns will wipe out the vast majority of those “sales” and if the label didn’t hedge its bets by taking out a reserve for that first pay period, it would’ve paid $ to the band for sales that didn’t actually happen. (It’s one of the few places where a band has an advantage over a label)

Thing is, if a release DOES have such a backlash of returns and the label has paid the band for phantom sales, that release is usually pretty dead in the water and the label may show that overpayment for years or even forever. The fabled “long tail” can be pretty fucking long!

Here’s an example of what I’m talking about
Key: month, sales in that month, returns in that month (total sales):
1st month 500
2nd month 250 (750)
3rd month 200 (950)
4th month 200, -100 (1050)
5th month 10, -400 (660)
6th month 30, -250 (440)
7th month 25, -50 (415)
8th month 25, -5 (435)
9th month 20 (455)
10th month 20 (475)

and so on… if the band & the label are lucky, it turns into a catalog title that clicks over steadily, maybe with bumps as the band tours or gets more well known. Usually, the long tail becomes really really long.

Please note: I am not in any way excusing or explaining the bookkeeping tricks of the major labels, or even the larger indie labels who use those tricks.

Jesse Townley (profile) says:

Re: Couple of details...

P.S.- An example of label chicanery is the transfer of the breakage risk, uncollectable accounts, and promotional items to the artist from the label.

The manufacturing costs shouldn’t be borne by the band (container charge) unless it’s allowed by contract.

For example, we recoup art fees above and beyond a standard art cost. We also recoup certain costs related to certain formats, for the same reason. Everything else is borne by the label.

Also, keep in mind that things that are recouped by the label are actually paid for up front by the label and recouped from future sales, so it’s not as if the band is physically paying for recoupable costs.

P.P.S.- Listening to this video while typing and I think there’s a few problems with it. Glacial Concepts pointed the issue of the definition of reserves. I’ll have to go back and listen to the video again because he wasn’t making any sense.

About the SRLP & the $20 million starting place in the video: No sane label or band will see 1,000,000 sales and assume that all of the SRLP is being paid to the label.

Everyone knows that the label ONLY gets the wholesale price for each sale, just like in any other business that works on a distributor model (food, automobiles, clothing, other consumer goods, etc).

It sucks because I appreciate any easy-to-understand primer on the ways that record labels can fleece the unprepared. I wish he’d started at the wholesale price ($10,000,000 in his example) instead.

Chris says:

Idiots blaming the victim

Wow! Lots of Anonymous Cowards playing the game of blame the victim. If you folks were ripped off by some company for your hard work, you’d be the first ones whining, crying and wanting to sue.

The folks getting ripped off are musicians, they are not lawyers or accountants. The evil record labels deliberately add arcane language in a concerted effort to obfuscate and masquerade the kind of deal the artist is signing up for. Then, they go after the general public for more money, even going as far as suing 12 year old kids and elderly people on social security for millions of dollars for “copyright violations” when the labels themselves are violating the creators of such material. Not to mention that the record labels force feed us crappy music. They do all this, then wonder why the public becomes so disenchanted with the state of the music industry.

All of these bait-and-switch and strong arming tactics simply do nothing more than add to the riches of the record labels. Blaming the artist for record company evil is like blaming the victim of a crime. It’s unconscionable.

dukevader says:

They still make money...

Artists get the shaft with a contract. We’ve known that for ages. However, where they DO make money is when they put on concerts. The artist gets either the full amount for ticket sales, or charges X to perform. None of that goes to the label…its theirs. Well, maybe a percentage due to the fact the music actually belongs to the label.

Long story short, don’t go label. do it yourself!

rooben (profile) says:

Advance -getting it wrong

Keep hearing people talk about the advance as if this is the paycheck. The advance is usually used to record the album, hire lawyers, representation, touring, up front merchandise costs, and the rest is split between the band members. The advance is a LOAN, and all royalties are held until that is paid back- so while the record comapny is fronting the cost, they keep all revenue until the investment is 100% paid back. Those musicians dont get a salary, or any funds outside of that advance, unless they go find another source of income (touring, etc).

Yeah, easy to say. Its your own fault for signing, but usually its between signing the contract or getting a job at McDonalds. One party holds all of the power, the record company is usually not that desparate to sign, while this represents the artists future.

Gene Cavanaugh (profile) says:

HOw the labels cut artists out

So, let me see if I understand:
For “artists” (IMO better defined as “Idle Americans”), they can develop the “idea”, and developing the idea – which we assume is less important – is left to people who rip off the deserving idle Americans.
For IP, we reverse that. The idea is totally unimportant, and anyone who develops it should be entitled to all the credit (and profit?).
Why am I not understanding this?

Curt Cogent says:

Pirating is already in the accounting

Obviously not everyone pirates an album or knows how to. Hell, remember the days of cassette tapes, I bet MORE people copied music back then, because it was easier. People have been copying music since we had cartridges and reel-to-reel!

It’s not like it’s new, or the industry isn’t used to it. They’ve dealt with it all along, but it’s only now – since it’s digital, that they’re making a big fuss. Why? Because, being online, it’s somewhat detectable and traceable. Controllable – e.g. it can be legislated for at the ISP level.

The labels never before, in the past, had this ability to discover pirates (mainly now thru use of peer-to-peer) so they simply built it into their accounting. They doubtless still do. If pirating was magically eradicated, they *still would* (like the over-large “breakage fee”).

I’m pretty tech-savvy. All my friends are young and professional and they have *no idea* how to download stuff. They buy Apple for gods sake, that practically guarantees they don’t have the skills to do anything outside iTunes and Tiny Wings.

So I’m sure that although it’s easier to pirate *lots* of music now than it was in the past, *fewer* people are doing it. And that makes all the difference.

Just say 10 million albums are downloaded for free every year. Sounds like a lot. If every download was a different person, then sure you could say 10 million lost sales. But if most of the downloads are done by a tiny percentage of people, what’s the lost sales? They could never actually buy all the the music they download.

So the majority of downloads don’t equate to lost sales. Actual lost sales would not be any higher, per capita, that it has been in the past. Probably less, considering you need to be savvy (and I don’t mean “I have an iPhone4” savvy) to do it. And in the past the labels have sucked it up. It’s already part of their accounting.

They’re just making a fuss about it these days because they see the chance to control it – and therefore make more money than they do already, because they’re sure as hell not going to give the bands any more money, even if nobody pirates at all anymore.

Viktor Edholm (profile) says:

Am I the only one reacting to the fact that the recordlabel, in the video, is basically just a big ass $1 million loan? The costs for recording etc. seems to be covered by the “advance” which the artist has to pay back anyway? Doesn’t that mean that the artist payed for producing the album himself? Just with a loan from the labels?

Shouldn’t they be able to get a loan with better rates somewhere else? What actual function does the labels serve?

Viktor Edholm (profile) says:

Am I the only one reacting to the fact that the recordlabel, in the video, is basically just a big ass $1 million loan? The costs for recording etc. seems to be covered by the “advance” which the artist has to pay back anyway? Doesn’t that mean that the artist payed for producing the album himself? Just with a loan from the labels?

Shouldn’t they be able to get a loan with better rates somewhere else? What actual function does the labels serve?

Anonymous Coward says:


So, it’s ok to rip someone off if they’re not savvy enough to understand the quagmire (giggity) of legalese in the contract? Have you ever read a contract before? They are purposely written to confuse and hopefully bore the signer out of reading the whole thing, let alone understanding it. Most contracts require a lawyer or attorney’s expertise to make any sense of it, and how many garage bands can afford a lawyer for that? Record labels, and any other company that makes its living off of offering bad deals, bank heavily on this technique. Just because it is legal, doesn’t mean it is right, or even defensible. On the other hand, there is literally NO reason for any band to need a record label these days, so I have little sympathy for those that seek out the labels’ assistance.

AmateurBassMan (profile) says:


I agree with almost everything you said… until you got to the end when you said there’s “literally no reason” for any band to need a record label these days.

While they may not need a label in the traditional sense, they DO need some form of support to get their own asses out there to venues to play. Even IF they know where all the available places are to play, they still need the resources to get there, such as gas costs, food costs, and if they value hygiene at all a place to sleep & shower. And even though MP3’s are overtaking CD’s, people STILL buy CD’s just as they still buy vinyl records.

This is why it is so difficult for bands starting out to say no to labels. It’s not JUST the music. It’s all the practical applications of putting the band out there. Besides, it’s a little uninformed to say that a band doesn’t need a record label at all. FYI, not every record label is a major record label. The vast majority aren’t. And even though there are indie labels out there who operate with a major label mentality, there also record labels out there who offer artists more artistic control over their music. They just offer a more structured way for an artist to promote themselves.

deciever (profile) says:

Just a flipside view of this discussion. Maybe this can shed some light on how the music biz has worked for the past fifty years…There dont seem to be many professional music people reading or commenting here so here we go….Since 1984 I have signed four major record deals, a production deal, and a publishing deal. My total advance for the four albums was around 2.5 million, the production deal advance was $300,000 plus $100,000 for new gear. The publishing deal was an advance of $350,000. None the four albums barely saw the light of day before the label lost interest and declared the project dead. The executives who signed me to the production deal left the company as I was gearing up to make records for them and the new guys didnt care who I was and told me to take my money and go home. The publishing money was based on the records money, so those guys said never mind too! So I took in around three million dollars before taxes over a ten year period and the guys who gave me the money never recouped one cent! They never even asked. So, now understand I have ten friends who have been in similar situations over the years, some for much more money by the way, and you can see how the business of advances keep food in our mouths for a long time. I would estimate that for every album the label spent 1 million dollars on in the 80’s and 90’s, nine out of ten were TOTAL LOSSES. So thats my piece for day.

NickNoize says:

Music business

Having read Deceivers account of his experience with the business – I would have to surmise it is better to fail than succeed in this business. Never mind Courtney “kill my husband to steal his fame” Love – Prince was very outspoken about his displeasure with Sony even when at the time he had cut one of the best royalty deals in the history of popular music- He changed his name to the Glyh if you recall and became the artist formerly known as Prince because Sony argued that under the terms of their contract they owned the “brand name” Prince. They also owned the masters of 4 or 5 albums he had produced for them by that time that they were refusing to bring to market, in order to “make room” for a roster of new talent with less lucrative contracts…Prince could keep his advance but he couldn’t get his music released and couldn’t play it on tour..He appeared on TV Talk shows with “Slave” written in marker on his face and was more than happy to explain why as he sued to be released from his contract with Sony.. …he made so much noise they finally released him but they still have all that music he produced at the height of his career sitting in a vault somewhere….The model is an old one….just like the studio days in Hollywood and the company towns in mining country…and the system of share croppers in the bread basket states..the musicians are treated like share croppers… the advance whether 500,000 or 5 million is a loan ….seed money for the band or talent to produce the album..that has to cover all their living expenses, studio time, any side musicians, producers, percentages to managers, legal fees so almost always they are broke by the time the project is completed. and now they have to pay the record company back – so if the album is released – the company adds on the packaging and promotional fees to the original advance and starts to divert the artists royalties to pay off all of this money before the artists see another dime for their work. In most cases their best hope to cash in is to have a hit on their hands they can tour behind…yet even here they have to pay the promoters their piece of the action …road crews, sound techs…management again but a genuinely popular artists managing themselves wisely could pocket 25% to 50% of gate from these concerts. Only now the record companies have contracts that include the tour package stipulating x amount of performances over an x amount of time, at rates that aren’t much better than the royalties they receive for recordings. This is why the runner ups on American Idol go farther and get richer faster than the winners do. The winner of the Million Dollar contract as they call it must produce something like 5 albums in 2 years with 2 years of touring at slave wages ..the company owns the music, the tour, the merchandising rights… everything. Way better off coming in second or third and skipping the contract. For something so beautiful as music it sure is an ugly business.

Paul David (user link) says:

To the 'piracy' comments

Why is everyone calling Masnick a piracy-supporter? That’s very confusing. What I’m hearing is this: A farmer grows carrots. He is offered 1 cent per carrot (Way less than what he feels his carrots are worth, but he’s broke). The distribution companies are turning around and selling them for 15 cents each and giving the farmer another cent for every one sold. The Farmer doesn’t feel good about it. I don’t see how Masnick is supporting the ‘stealing of carrots’.

I understand the concept of a Label making as much money as they can, from whomever, including the artists. Donald Trump would even say, “Want your business to make money? Pay yourself first.” Spotify has the same concept as record labels do in the music industry: Spotify business is huge right now, and huge money is being tranferred to many commercial marketing business owners. Money is being thrown around to everyone and, like the person who farmed the carrots, artists only get around .004 cents per song stream.

Business in this type of industry is largely manipulated for one purpose: The heavier the money-weighing scale leans on your side of business at the end of the day, the better you are at music business–the more money you will rake in. This is achieved by selling “star status” tactics and easily convincing an artist to sign for a huge loan–a massive loan.

At the end of the day, an artist (or farmer) feels like his work and talent is worth more than 0.4% of revenue return for the product, while the Commercial Advertising/Internet business takes the rest.

When someone tries to communicate this, it is not supporting piracy. It shows dislike with how much the money scale leans toward the certain departments of the industry.

Yes, everyone needs a piece of the pie, but how big is the slice being given to the artist?

I support anyone who is against how the music industry pays the valuable talent in the artists–the most valuable asset to the Music Industry Business.

Fitzwilly (profile) says:

The Results

..and that cause is commercial radio, by dint of now always needing to make a ton of profit all of the time, and always signing up pop ‘musicians’ and ‘singers’ that will make back their profits for them by singing about nothing but the moon and June (just like Marvin Gaye used to do before personal problems and the way the world at the time made him write and compose What’s Going On-too bad a similar catharsis can happen to any of the pop artists we have now.)

Best thing to do? Just avoid radio (if you’re doing that already, keep on doing it) and download/use Spotifiy, etc. as much as possible.

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