Recording Agreements - McLaughlin Law

March 2008

This edition of the Music Law Newsletter focusses on Recording Agreements covering the basic make up of traditional Recording Agreements Licensing Agreements Production And Distribution (P&D for short) Agreements and Distribution Agreements and some of the key issues to be aware of in these agreements. Different Arrangements
When you say Recording Agreement most people have a vision of a ?multi album deal? lasting for the length of an artist?s career with fame and fortune naturally following. Although historically this may have been the case for a very small and lucky number of recording artists today the term Recording Agreement can in fact refer to a number of different arrangements in the recording industry which are all aimed at getting an artist?s music out there. Traditional Recording Agreement
Before discussing some of the modern variants of the Recording Agreement lets spend some time talking about exactly what the term Recording Agreement traditionally refers to. In its most commonly understood meaning a Recording Agreement refers to the arrangement where by a record company pays for you to record your music and meets all the other costs associated with manufacturing your CD?s or vinyl as well as marketing the finished product and distributing it into stores. In return for all these services the record company will take the majority of income earned from sales of your music and will pay you a specified percentage of such income what we know as ?royalties?. Recoupable Costs
It is important to note however that you won?t start seeing these royalties off the first album sold. On the contrary there are certain costs incurred in the process of making and releasing music such as recording costs which are deemed to be the responsibility of the artist. These costs are commonly referred to as recoupable costs and the record company will keep and apply any royalties due to you until all of these recoupable costs have been paid back. Exclusivity
There are two further important points to note about the traditional Recording Agreement. Firstly the arrangement is exclusive. This means that for a certain period of time usually based around the time it takes you to record a certain number of albums as agreed between you and the record company you can not record music for anyone else. Ownership
Secondly and this is VERY important because the record company has initially paid for and arranged for the recording of your music then the record company will own forever (unless they agree otherwise in your recording agreement) the copyright in these recordings. This ownership doesn?t extend to the actual underlying songs you?ve recorded but it does mean that the version of your songs which you recorded while under contract will be owned by the record company forever. The fact that you will over time pay the record company back the initial costs of recording doesn?t change this fact. Licensing Agreements
While we are on the subject of the ownership of sound recordings it is a good time to talk about one of the variations on the traditional Recording Agreement which you commonly encounter in the New Zealand music industry. This is the Licensing Agreement. A Licensing Agreement can have all the same characteristics of a Recording Agreement with one key difference. The record company never comes to own the recordings. This is because under a Licensing Agreement you are responsible for delivering to the record company the finished recordings. As you will have been responsible for paying for and arranging for the making of the recordings you will at law be deemed to be the owner of the recordings. Licensing Exclusivity
As the name suggests under a Licensing Agreement you licence the record company the exclusive right to use your recordings for a certain amount of time. The Licensing Agreement can also provide that the record company will have similar exclusive rights in a certain number of your future recordings. Obligations
Under a Licensing Agreement the record company will still promote manufacture and distribute the finished product. Also just as with the Recording Agreement you will receive a royalty on sales and once again the payment of this will depend on whether the record company has recouped certain of the costs it has incurred in releasing your music. Retaining Ownership
Although a Licensing Agreement means that you have to cover all of the initial recording costs yourself the benefit of retaining ownership in your recordings means that this can be a very financially rewarding approach to take for the long term. Production and Distribution
The next variation of the Recording Agreement which is very popular these days is what is know as the Production And Distribution (P&D for short) Deal. A P&D Deal works in a very similar way to the Licensing Agreement in that you deliver completed recordings to the record company and the record company has the exclusive right to release these recordings for an agreed period of time. No Promotion
The big difference between the P&D Deal and Licensing Agreement however is that under a P&D Deal there is no promotion done by the record company. Rather the record company is only responsible for physically producing your music in the form of CDs or vinyl and then distributing these into store. There is a slight variation on the P&D Deal called the P&D Plus which is where in return for a slightly elevated royalty from the straight P&D Deal the record company will perform some promotion and marketing for you. Distribution Agreement
The final main variant on the Recording Agreement that we commonly see today is the simple Distribution Agreement. This operates just like a P&D Deal except you are actually responsible for providing your manufactured CDs or vinyl to the distributor who then as with the P&D Deal distributes your music into stores. Digital Only
Today there are also digital only Distribution Agreements around which will just deal with the release of your music and associated digital assets like ring tones to retailers in the digital environment. ---------------------------------------------------------------------------------------------------------------------------
Having covered the basic make up of traditional Recording Agreements Licensing Agreements Production And Distribution (P&D for short) Agreements and Distribution Agreements in the last edition of our Music Law Newsletter in this edition we’ll be moving on to look at some of the key issues to be aware of in these agreements. Term
One of the most important aspects of any of the agreements mentioned above is how long the agreement lasts for. For Recording Agreements this is usually defined around how many albums you are required to make for the record label. For a Licensing Agreement the term will be based around the number of completed albums you are required to deliver to the record label. However you should also be aware that under a Licensing Agreement the record company will require an exclusive period following the delivery of an album or after the delivery of all albums under the agreement during which only they are allowed to commercially market and sell the album or albums. This can be for a period of up to 10 years. Royalties
It is important to note however that under a Recording Agreement the record label continues to be liable to pay you royalties as provided for in the Recording Agreement in respect of any sales of your recordings. With a Licensing Agreement this obligation to continue to pay you royalties will of course expire at the end of the period that the record label has the rights to commercially sell your recordings. Options
Production and Distribution and straight Distribution Agreements are effectively set up in the same kind of way as Licensing Agreements although it is not uncommon to see Distribution Agreements apply to just one album or maybe one album with an option exercisable by the record label to distribute the next album. Payment
Payment provisions are of course another very important aspect of the types of music industry agreements we have been discussing and there are essentially two parts to these. Firstly those parts that set out how much you will actually receive and secondly how these payments are to be made to you. Percentage
Under Recording Agreements and Licensing Agreements you will generally receive a percentage of the income received by the record company for each album sold. This amount is what we commonly know as ‘royalties’. Now although a percentage of the selling price may sound like a fairly straight forward calculation be warned that there is usually a lot more detail in Recording Agreements and Licensing Agreements around defining exactly what your royalty is. PPD
For starters your royalty will not be paid on the price you see your album selling in the stores at but rather on the basis of the price that the record label sells the albums to the store at. This is known as the Published Price to Dealer or PPD. Deductions
In any Recording Agreement or Licensing Agreement you also need to be very careful to check if there are any other deductions that can be made from the amount you are going to receive as a royalty. Examples of some of the types of deductions that you commonly see included are deductions for the packaging of your album deductions in respect of any albums advertised on TV and deductions if your album is sold a reduced price. There is also likely to be an allowance for the record label to provide additional discounts to retailers to encourage them to stock the album. Detail
The amount of these deductions and the way in which they are applied to your basic royalty can make a huge difference to the amount which you finally get paid in your hand. The devil is definitely in the detail! Percentage of Income
In terms of payment Production and Distribution and straight Distribution Agreements are set up in a slightly different way. Under these types of Agreement the record label will take a set percentage of the total income received from selling the album usually somewhere around 25% before paying the balance on to you. In the case of Production and Distribution Agreements the record label’s costs of physically producing the albums will also be a cost that will have to be met by you and this will most likely be deducted directly out of any amounts due to you. With Production and Distribution and straight Distribution Agreements you still also need to be very aware of any deductions that are to be applied to the amounts payable to you. Timing of Payments
Although the amount you get paid under any agreement is probably going to be your primary concern you shouldn’t underestimate the importance of the provisions that relate to how this payment is actually made to you. When looking at any of the agreements we’ve been discussing be very aware of how often the record label is required to pay you. This can range anywhere from perhaps monthly in the case of some Distribution Agreements through to a more traditional quarterly or six monthly for Recording Agreements and Licensing Agreements. Other provisions around your ability to audit the books of the record label to ensure you are being correctly paid are also very important to have included. Territory
The third key aspect of agreements in the recording industry that we are going to look at is the issue of the territory that the agreement applies to. For Recording Agreements this is not such an issue as you will be required to provide your services as a recording artist to the record label for the world. However under Licensing Agreements Production and Distribution Agreements and Distribution Agreements defining the territory is very important. For these types of agreements the territory refers to the areas in which the record label is entitled to sell your album. Although this could well be world wide depending on the type of record label you are working with or indeed opportunities that you perhaps see emerging in specific countries you may want to carefully consider what rights you are prepared to give to any label in terms of territory. Questions?
In the mean time if you have any queries or questions in respect of the above please don?t hesitate to contact me at or on 021 630 201 or 09 363 2738. I can also be contacted through myspace at Pass it on
Know someone who you think may be interested in the information in this newsletter? Feel free to pass it on to them! And if someone has sent you on this Newsletter we invite you to register yourself to get copies of our upcoming newsletters sent direct to your inbox. 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. This article written by David McLaughlin of McLaughlin Law recently appeared in New Zealand Musician Magazine and has been reproduced with the kind permission of New Zealand Musician Magazine.