Record Producer Agreements: The Basics

This month, I want to talk about the basics of record producer agreements, i.e., the kind of agreement used when a record company or a signed artist is hiring a record producer.

AN OVERVIEW

Under the terms of the typical record producer agreement, the producer is paid a cash advance.
The producer will also be entitled to be paid royalties on future record sales, subject to certain conditions (described below). However, the record company, before being obligated to actually pay producer royalties, will be entitled to first recoup (deduct) from those royalties the amount of the advance originally paid to the producer. Any remaining amount will then be paid to the producer.

So, for example, if the advance is $25,000 and the producer’s royalties eventually add up to $60,000, then the producer will receive an additional $35,000 (i.e., $60,000, minus the original $25,000 advance).

RECORD PRODUCER AGREEMENTS:
WHO SIGNS THE DEAL?

Depending on the terms of the artist’s recording contract with a record company, it may be the record company who contracts with the record producer, or alternatively, it may be the artist who does so.

If the Record Company Is Signing The Deal. If the producer agreement is between the producer and the record company, the record company will generally require a “Letter of Direction” from the artist, authorizing the record company to pay a certain designated advance and royalty directly to the producer.

Depending on what approval rights are contained in the pre-existing recording agreement between the artist and the record company, the record company may be contractually required to obtain the artist’s written approval as to the selection of the producer, as well as the terms of the producer agreement. From an artist’s perspective, it is very important to have this right of approval, since a “sweetheart deal” between a record company and a producer can sometimes have very negative financial repercussions for the artist.
If the Artist Is Signing The Deal. If the producer agreement is between the producer and the artist, the record company will often (but not always) have the right to approve or reject the producer.

Also, the record company will typically require the producer to sign a side agreement directly with the record company (sometimes called a “Producer Declaration”). This document will say that if there is any conflict between the terms of the agreement between the artist and producer, and the recording agreement between the artist and the label, the terms of the recording agreement will supersede and preempt the producer agreement. This permits the record company to, in effect, override any provisions in the producer agreement which are contrary to the label’s normal policies, and to avoid any contractual obligations not already contained in the artist’s recording contract with the label.

Record Business 101: If you’re a producer, you want to do everything possible, before you start producing a record, to try to get the record company to agree in writing to pay you your producer royalties DIRECTLY, rather than you having to collect your producer royalties from the artist.

First of all, the artist may very possibly not have the money to pay you when your producer royalties become due. Secondly, even if the artist “directs” the record company to pay you directly, such directions are not binding on the record company, and so the record company may refuse to do so.

Getting a record company to pay you directly will require not only a “Letter of Direction” signed by the artist, but also a document signed by the record company, agreeing to pay you directly.

The basic provisions of record producer agreements are as follows:

1. Payment of Recording Costs and Ownership of Masters. The record company pays the approved recording costs. Often there is an itemized recording budget attached to the producer agreement. The record company will own all masters and will normally have approval rights over the masters. This gives the label the right to reject any masters which are not technically or commercially satisfactory.

If the producer owns the studio where the project is going to be produced, generally the producer will submit a recording budget for the estimated studio fees and the miscellaneous recording costs (e.g., session musicians). These expenses will usually be referred to in the producer agreement but generally will not be considered as part of the advance to the producer.

2. Payment of An Advance to the Producer. The agreement will provide for the producer to be paid a certain cash advance. This advance will be recoupable from the producer’s future royalties, as shown in the example given at the beginning of this article.
Sometimes, the advance is paid on a “per track” basis, and the amount per track can range from $1,000 to $25,000, and even more for top producers.

3. Producer Royalties. Usually the producer royalty is in the range of 3% to 4% of the retail price of records sold. For hot producers, the royalty is often higher.
In most instances, the band’s recording agreement with the record company will provide for an “all-in” artist plus producer royalty. For example, if there is an “all-in” artist/producer combined royalty of 14% of the retail price of records sold, then if the producer royalty is 3%, the artist will receive the remaining 11%. This remaining percentage payable to the artist is usually called the “Net Artist Rate.” (Incidentally sometimes, particularly in the case of country music recording agreements, the royalty rate provided for in the recording contract is an “artist only” royalty, and not an “all in” (artist plus producer) royalty rate. In that situation, the artist’s royalty rate is not affected by what the producer’s royalty rate is.)

Producer agreements and recording agreements usually provide that no royalties will be paid to the producer until all recording costs have been recouped at the so-called “Net Artist Rate.” Using the example from above, if the producer royalty is 3% and the “all in” artist plus producer royalty is 14%, then the “Net Artist Rate” is 11%. Once the amount of artist royalties (calculated at the “Net Artist Rate”) equal the total recording costs, the producer will be entitled to be paid royalties. As discussed in more detail below, the “artist royalties calculated at the net artist rate” will not actually be paid to the artist; this calculation of artist royalties is merely an accounting process, and is only done in order to determine the point at which producer royalties must be paid.

Example: Let’s say, to make it simple, that the total recording costs are $125,000, and that the 11% “Net Artist Rate” here equals $1 for each record sold. Once 125,000 records are sold, the recording costs will have been recouped by the record company (at the Net Artist Rate of $1 per each record sold), and producer royalties will then be owed to the producer at that point. Under the terms of most record producer agreements, those producer royalties will be calculated on a “record one” basis (discussed below)

Again, no artist royalties will be paid to the artist for those 125,000 records.

4. “Record One.” The term “record one” is a term often used with producer agreements. It means that once the recording costs are recouped at the Net Artist Rate, the producer will be paid for all records sold, beginning with the very first record sold. Again, this is referred to as being paid “from record one.”
This concept has very important ramifications for both the artist and producer. In short, producers are typically paid from “record one,” but artists are not. So, using the above example, once 125,000 records are sold, the producer is paid for all records back to the very first record, but under the terms of the typical record deal, the artist would typically be paid artist royalties on only those records sold after those first 125,000 records. In other words, the artist, using the sample numbers listed above, would not be paid artist royalties on those first 125,000 records. Therefore, as a practical matter, the producer typically gets a bigger piece of the total artist/producer royalty pie than their respective royalty rates would suggest.

Here’s a (somewhat oversimplified) example how all of this works: Let’s say a producer is paid a $20,000 advance, and that the producer’s royalty rate equates to 25 cents for each record sold. If, using the sample numbers above, 125,000 records are sold (such that the $125,000 in recording costs have been recouped at the $1/record “Net Artist Rate”), the producer is owed $31,250 (125,000 multiplied by 25 cents for each record) for those 125,000 records. But since the record company is entitled to recoup the original $20,000 producer advance from the producer’s royalties, the record company must pay the producer only another $11,250 for those 125,000 records (the $31,250 in total producer royalties up to that date, minus the producer’s original $20,000 advance).

For all records sold after those first 125,000 records, the producer will continue to receive additional producer royalties at the rate of 25 cents for each such record sold.

5. “Pass Through” Clause. Most producer agreements contain a clause, often referred to as the “pass through clause,” which provides that the producer’s royalties will be calculated on the same terms as the artist’s royalties. For example, if the artist’s recording agreement with the label says that the artist will not be paid on “free goods” and will be paid a lower royalty rate on foreign sales, then the producer’s royalty will be adjusted in the same way. This kind of clause can have very negative consequences for a producer who is producing an artist who has signed a sub-standard record deal.

6. Tricky Issues Concerning Recoupment. There can be some fairly tricky issues in terms of how the recoupment provisions are written. For example, the producer will want to make sure that the definition of “recording costs” in the producer agreement excludes any cash advances paid to the artist.
In general, the producer will want to have the term “recording costs” defined as narrowly as possible. All things being equal, the narrower the definition of “recording costs,” the lower the total dollar amount of recoupable recording costs there will be. And the lower the recording costs, the sooner those costs will be recouped by the record company, and therefore, the sooner the producer royalties must be paid.

7. “A-Side Protection.” This term relates to the producer royalties payable on “singles.” Established producers are often able to get “A-side protection,” which means that their royalty is based on the entire retail price of singles, and not prorated if a different producer produced the “B side.”

Though “singles” have been a dying part of the music business for a number of years, the term “A-Side protection” still appears in many boilerplate-type producer agreements.

Incidentally, when I refer to “singles” here, I’m referring of course to “singles” in the traditional sense – i.e. physical records containing two songs. With the onset of the digital distribution age, the sale of single songs is once again becoming popular, but the new downloadable digital single” is not typically sold as a two song set (as was traditionally the case). Therefore, even though “singles” are now becoming popular in the digital world, the traditional two-song single – as well as the related concept of “A-Side protection” – continue to become more and more obsolete as time goes by.

8. The Producer’s Audit Rights. If the producer agreement is between the producer and recording company, the producer will normally have the right to audit the record company’s books.

However, if the producer agreement is between the producer and artist, the producer will not have the right to audit the label’s books. Therefore the producer will often request a clause in the producer-artist agreement allowing the producer to force the artist to audit the label’s books on behalf of the artist and producer jointly.

9. Producer Credits. Usually the producer agreement will state, sometimes very specifically, how the producer credit will read on record artwork and in any print ads.

10. “Re-Recording Restriction.” Generally the producer agreement will prohibit the producer from using any song from the project in another project within a specific period of time, usually two or three years.

THE FINANCIAL REALITIES
OF RECORD COMPANY RECOUPMENT

As mentioned above, producer royalties become payable once the record company has recouped the recording costs at the “Net Artist Rate.” As a practical matter, these calculations are “Hollywood accounting” and have little or nothing to do with the financial realities of the situation. In many (if not most) instances, the record company will have “broken even” from sales of the record long before it has, for accounting purposes, “recouped recording costs at the Net Artist Rate.”

 

Editors Note: The reader is cautioned to seek the advice of the reader’s own attorney concerning the applicability of the general principles discussed above to the reader’s own activities.

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