How to Sell a Million Records and Lose Money
Congratulations! You just released one of the most popular hit records in the world! You sold over a million units, went platinum, and even got nominated for a Grammy. The bad news is that you owe your record label a half million dollars.
How in the world did this happen?
Well, it all started when you were an up and coming artist that caught the eye of a record label. They stroked your ego, said they would make you the next big thing, and offered you a contract. They gave you a 10% royalty and a quarter million dollar advance to make the killer album you’ve always dreamed of. Gone were the days of limited production budgets and cutting corners. Your creative talents were finally going to be completely unleashed.
Feeling great about yourself and ready to plow forward, you enthusiastically signed the contract. Unfortunately, you did not seek knowledgeable counsel to help you navigate the finer points of the deal, and that’s where things came off the rails.
First, let’s look at the quarter million dollar advance you were given to make your album. You spent it on the best recording studios, legendary producers, and talented mixers. The final album is killer. But that advance you just spent is designated in your contract as a loan that must be repaid to the label. You missed that point when you signed the contract, and now you are already a quarter million dollars in the hole.
No worries, your album takes off like a rocket and you sell a million units. At an average retail price of ten dollars, that’s ten million dollars in total sales of which you own a 10% royalty. That’s worth a million dollars to you – problem solved!
But your contract states that your royalty percentage applies to wholesale figures not retail, which instantly slashes that ten million dollar figure in half, along with your royalty check.
Now comes the death-by-a-thousand paper cuts. Your contract also states your royalties are calculated after a 3% reduction for Breakage Fees. This is an archaic concept related to the shipment of vinyl records and has nothing to do with your digital sales. But the clause was never negotiated out of the contract on the front end, and now you’ re going to pay for it.
Next 4% is deducted for Uncollected Assets, which accounts for retail outlets like Borders going bankrupt and returning all your albums they accepted on consignment. Which again has nothing to do with your actual sales that primarily took place on iTunes.
Per the contract, another 2% is deducted for Free Goods sent to radio stations and other industry influencers needed to promote your album. This responsibility could have been shifted to the record label, but you missed that point too.
4% is removed as part of a Container Fee that deals with CD jewel cases and printed material. Again, a total disconnect from the digital world that now dominates.
And 2% is deducted for Reserves. What are Reserves? Who even knows, but it was in the contract you signed.
So, when all the contractual deductions are totaled, combined with your quarter million dollar advance that must be repaid, and then applied to your 10% royalty on wholesale figures, you owe your label a half million dollars.
Despite this cautionary tale, records labels are largely a good thing for artist’s career. But the label is understandably looking out for its best interests first. And as an artist, you must be savvy enough to do the same and negotiate the deal that is best for you.