The Changing Deal

The music industry is changing before our very eyes. One important facet undergoing a shift is the record deal. Long gone are the days when an unknown

The music industry is changing before our very eyes. One important facet undergoing a shift is the record deal. Long gone are the days when an unknown artist would be discovered by a cigar-smoking record executive and then catapulted to stardom with a long-term, exclusive record deal. Today's artist deals retain a few traditional contract points but have eliminated many of the elements that once were standard.

Topping the list of factors that have fueled such change in the industry is the artists' increased access to inexpensive yet high-quality recording equipment. This has been both good and bad news for fledgling artists. Although these tools give musicians a considerable amount of creative control over their material, major labels no longer feel the need to spend as much time and money on artist development as in the past. Consequently, large labels now concentrate their marketing and distribution efforts on artists who have "prepaid" their development dues.

Issues that would never be considered just five years ago have today become deal points in record-contract negotiations. The deals are now much more sophisticated, so artists need to focus on more than the length of the contract, the percentage of royalties, and the size of the advance. Thanks to new technology, the rise of independent labels, and a strong economy, the music business is undergoing a revolution, and the artist deal has become a major battleground.

A PLATINUM DOWNLOAD?The advent of Internet music distribution has sent the traditional record business scrambling to adjust to the digital age. While major players in the music and computer industries hammer out new formats for the secure digital distribution of music, artists and record labels are heavily negotiating a number of issues concerning the digital rights to artists' masters. Because of the trend toward digital distribution in the form of downloads and streaming audio, most deals now include the exclusive rights of the labels to distribute an artist's music online.

Due to the nature of the Internet and related technology, several standard clauses in artist deals are being challenged by lawyers who need to draft contracts in response to the new technology. For instance, labels traditionally base artist royalties on the wholesale price or suggested retail price of a CD; however, because the price for downloading music from the Web has not yet been standardized, the royalties of artists who use this distribution method can fluctuate wildly.

Another label tradition-dating back to the days when music came on 78 rpm records made out of shellac-is the standard 10 percent deduction from artist royalties to pay for the many records that shattered during shipping. (Believe it or not, many of today's contracts still include breakage clauses.) It's difficult to justify this deduction, given digital distribution, because downloads can't break.

Labels also take a packaging deduction of 10 to 25 percent from artist royalties to pay for the sleeves, jackets, artwork, and jewel cases used to package records and CDs. With digital distribution, the label no longer has to pay for physical packaging, so this deduction should not apply to downloaded music.

The Internet also complicates the old practice of negotiating separate distribution deals by geographical territory. For example, an American artist who gives a French label the exclusive rights to sell an album in retail stores throughout France may find that controlling the flow of product is relatively easy. However, preventing that same label from allowing consumers outside France to download online material can be more difficult.

A related issue that is also subject to heated negotiations is ownership of Web-site domain names. Tens of thousands of dollars are being paid for a single domain name these days, making it an extremely valuable asset if an artist becomes a superstar. Labels argue that because they invest heavily in creating, developing, and marketing artists' superstar status, they should own the related domain names and Web sites. If a band establishes and maintains its own site, a record company may require that it contain links to the label's own site, which will feature not only that band but other acts signed to the label as well.

IS THAT A TURNTABLE I SEE?On the opposite end of the high-tech discussion are vinyl rights. Artists who perform certain styles of music (such as techno and hip-hop) depend on underground and club play to develop their audiences. This leads to a big dilemma: vinyl is the club DJ's format of choice, but many major labels no longer press vinyl records, concentrating instead on the sale of CDs and newer formats. Therefore, artists working in these genres need to negotiate commitments from their labels to press and sell their works on vinyl.

The labels claim, however, that vinyl records are "specialty products" for target markets-promotional items that shouldn't count when calculating artist royalties. Some artists negotiate very progressive deals that let them independently release vinyl versions of their records to reach their core audience while allowing the labels to handle distribution of "standard" CD configurations.

INSURANCE ASSURANCEOver time, labels have discovered that recording artists are their most valuable asset. To protect that asset, most major deals include the right of the record company to take out medical and life insurance policies on its artists. Health insurance policies go into effect if, for instance, an artist should suffer from exhaustion and be unable to complete a tour or finish recording an album. Through health insurance coverage, the label can be sure that the artist will get the medical attention necessary to complete the obligations at hand. And if an artist should die before fulfilling the terms of the recording contract, a life insurance policy protects the label's share of potential royalties that the artist would have earned.

A SAMPLE PLANDigital sampling technology has developed to the point where sampling is not only easy but affordable. The practice of sampling previously recorded material has crossed over into so many genres that artist deals almost always include sampling liability language. When an artist wants to sample a previously recorded song, two rights must be cleared before a record including the sample can be released: the right to use the recording, and the right to use the musical composition itself.

Depending on a number of factors, the cost of sample clearance can be substantial. In the evolution of the artist deal, the responsibility for clearing the samples has shifted away from the labels and onto the artist. The labels often set aside a portion of the recording budget as a sample clearance fund. This fund is used to pay any fees associated with clearing samples and, just like any other recording cost, is eventually paid back from artist royalties. The artist is assuring the label that these samples will be cleared; if problems arise in the future because of uncleared samples, any costs that the label might incur (such as paying the original label or publishing company for the sample) will be taken out of the artist's royalties.

UNBECOMING CONDUCT"Sex, drugs, and rock 'n' roll" has been a way of life for both established and aspiring rock stars since the genre's inception. The outlandish behavior of some musicians may have been accepted in the past, but today artist deals follow the cues of society, the media, and zealous lawyers by making artists ultimately responsible for their actions. This is accomplished with a conduct clause. By agreeing to this clause, an artist promises to act within the accepted behaviorial norms of society when fulfilling the duties of the contract. Artists who violate the conduct clause must reimburse the label for any costs that it might incur as a result of the misconduct. When they trash a hotel room on tour, break public-decency laws on stage, or are convicted of a violent crime, artists literally pay for their rock 'n' roll conduct through royalties.

PICK A DEAL, ANY DEALThe points discussed here so far have become integral parts of the standard label contract, but artists today have more types of deals to choose from than in the past. Using the technology industry as a model, artists now deal in "content" rather than in songs, masters, and promotional materials-treating record labels as "strategic partners" instead of gatekeepers to the record-buying public.

Major record companies are increasingly entering into nontraditional deals with independent labels. In a joint-venture deal, for example, the major and the indie co-own the venture: the major provides marketing clout and experience, and the indie provides "street credibility" and alternative marketing strategies. With a distribution deal, artists retain ownership rights to their masters and exclusive rights as recording artists, relinquishing only the distribution rights to a major label; the label therefore gets a much smaller piece of the pie than it would through a standard exclusive record deal. Other artists search outside of traditional labels and partner with online music distributors or radio stations in exchange for nontraditional compensation packages (such as 50/50 royalty splits and stock options).

Artists who are willing to stick it out through the development process-especially if they can develop sales on their own-end up with more than a few 21st-century bargaining chips to bring to the negotiating table.

When he's not surfing the Web and keeping up with new technology, Michael A. Aczon can be found writing in his journal with a ballpoint pen while enjoying Little League baseball games at a park in El Cerrito, California.