The Different Kinds of Deals Involving Record Labels: A Thumbnail Sketch

This month, rather than discussing any particular kind of music business contract, I thought that it might be useful to give a thumbnail sketch of the various kinds of business deals between separate record labels, and also the various kinds of deals between record labels and distributors.

What distinguishes these various kinds of deals can be very confusing at times, but hopefully the thumbnail sketches below will make it easier.

Before getting into these various kinds of deals, one thing should be mentioned first, though: With any particular kind of deal, there will usually be some variation in the exact terms of the deal from one situation or company to the next.

DEALS BETWEEN LABELS AND DISTRIBUTORS

Pressing and Distribution (“P&D”) Deals: The name of this deal describes its basic premise. A record label finances the recording process and delivers the final master recording to a record distribution company, which will then have records pressed (i.e., duplicated) and distribute those records to sub-distributors, retailers, etc. In the case of these P&D deals, as in the case of the next two distribution-oriented deals discussed below, the label retains all ownership rights in the master recordings.

The distributor’s cut is typically 18 to 25 percent (and sometimes higher) of the wholesale price of the records, plus the distributor is entitled to be reimbursed out of sales income for any out-of-pocket costs incurred by the distributor – for example, duplication costs incurred by the distributor. The deal may be limited to a particular region or country, or may be worldwide.

Distribution deals with large distributors are often structured to be in effect for a two to five year time frame. With some smaller distributors, the contract may provide that either party may cancel the distribution deal upon thirty to ninety days notice.

“Distribution Only” Deals: Basically the same as the “P&D” deal described above, but here the record label, not the distributor, has the records duplicated. The distributor’s role is “distribution only.” The distributor’s cut here is typically in the same percentage range as the “P&D” type of deal mentioned above.

“Piggyback” Deals: Used when an indie label doesn’t have the clout to get its own distribution deal. Instead, in order to find distribution, the indie label must instead “piggyback” onto another indie label’s already-existing distribution deal with a record distributor. This kind of deal is also often used when an indie label could get a distribution deal on its own, but the deal it can piggyback onto is a much better deal, or with a better distributor, than the indie label could get on its own.

Typically the label with the distribution deal will get a few percentage points from the other label’s sales. So, for example, if that label’s distribution deal provides that the distributor is getting a distribution fee of 20 percent of the wholesale price, it might cost the piggybacking label 24 percent – i.e., the distributor is getting 20% and the label with the distribution deal is getting an additional 4%. The exact percentages, though, vary from deal to deal.

TYPES OF DEALS
WHEN LABELS DO DEALS WITH EACH OTHER

Licensing Between Labels: Here one label owns the masters, but “licenses” (i.e., leases) the masters to another label for a limited amount of time (usually in the range of two to five years), during which time the label receiving the license will have the rights to sell records made from those masters. The label that owns the recordings will continue to own the masters at all times.

The party receiving the license pays a royalty for each record sold to the label that owns the recordings. Usually the royalty will be in the range of fifteen to twenty percent of the retail price of records sold, but often with various royalty deductions applied, in which case the actual royalty paid is somewhat less.

All manufacturing, marketing and promotion costs are paid by the label selling the records.

This kind of deal is often found between two labels in different countries. For example, a U.S. label might enter into a licensing agreement with a German label, whereby the German label is entitled to sell the U.S. label’s recordings in Germany. However, this kind of deal can also happen in the case of two labels in the same country. For example, sometimes a U.S. major label will license (to a U.S. indie label) certain recordings from its catalog that may have a very small current audience, because it may not be worth it to the major label to promote and market those particular recordings.

“Rights Buyouts”: Here one label will have previously signed a recording contract with an artist. Then at some later time, that label and a second label will sign an agreement, whereby the second label buys all of the rights which the first label has in the artist. In short, the second label steps into the shoes of the first label. In return, the second label normally agrees to pay to the first label a cash advance and a royalty on the label’s future sales of records featuring that artist. This was the kind of deal done, for example, when Geffen Records acquired the rights to Nirvana from SubPop Records.

DEALS SPECIFIC TO THE MAJOR LABEL WORLD

With the various kinds of deals mentioned above, a major distribution company or major label may or may not be involved in the deal.

On the other hand, there are certain kinds of deals, as mentioned below, that usually only happen when there is a major label or major distributor involved. These are as follows:

Production Deals: The “indie label” here is usually just a production company financed by a major label, and is created solely for the purpose of producing records. The production company uses the label’s financing to sign artists and produce records, and then delivers the masters to the major label. The label will manufacture and distribute the records and handle the marketing and promotion activities.

The term of the deal is often for an initial two or three years, with the major label having the option to continue the deal for an additional two or three years after that.

Usually the major label will own (in perpetuity) all masters produced during the term of the production deal, though there are sometimes some fairly complicated reversion or “buy out” rights” in the contract.

Joint Venture Deals: The term “joint venture” indicates a joining of forces by a major label and an indie label, whereby they agree to share responsibility for the making of records and the marketing and promotion of those records. These responsibilities are divided in whatever way the two labels agree upon in their formal joint venture agreement. The major label finances the joint venture. Then, from records sales income, the major label will reimburse itself for the expenses that it has incurred, and the net profits are then divided between the two labels, usually 50-50.

The deal is usually for an initial three to five years, with the major label having an option to continue the deal for a certain number of years after that. However, the major label will often have the right to terminate the deal if its losses reach a certain specified dollar amount. (This is referred to as a “stop loss termination.”)

In the case of the production deals and equity deals mentioned above, the major labels have lost a lot of money on some of these deals in recent years and as a result, are now much more cautious about entering into these kinds of deals, especially in situations when these types of deals are in effect given as “vanity deals” to top-selling artists.

Equity Deals: Think of ‘equity’ as having an investment in something. With this type of deal, the major label invests money in the indie label. In exchange, the major label acquires a part ownership of the indie label and the indie label’s assets and its contracts with artists and may have the right to purchase the remaining ownership of the indie label at a certain future point in time for a certain price, or with the price to be determined on the basis of an agreed-upon formula.

 

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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