ARTISTS STILL DON'T MAKE MONEY FROM RECORD DEALS (updated 10/02)
By, Wendy Day from Rap Coalition

Who is the incredible bonehead who said rappers make a lot of money? Wrong, wrong, wrong, wrong, wrong!! Because the fans expect their favorite artists to be very wealthy, and have an interesting, far above average, glamorous lifestyle, this puts an incredible amount of pressure on the artists to appear wealthy. And it's not just the fans; I can't tell you how many times I've been out with rappers along with people in the industry, and the industry opportunists have expected the artists to pick up the dinner check. I've even seen people have an attitude if the artist doesn't pay for everything. This is small minded and ignorant because the artist is ALWAYS the last to get paid. Everyone gets their cut first: the label, the manager (15%- 20% of all of the artist's entertainment income), the lawyer (by the hour or 5%-10% of the deal), the accountant (by the hour or 5% of all income), and, of course, the IRS (28% to 50% depending on the tax bracket).  Add to this the artists’ own payroll responsibilities: fan club, website, security, office and/or studio, etc, and family members he, or she, is expected to support or help financially.

Once an artist releases a record, the pressure is on to portray a successful image to fans, friends, families, and people around the way. People expect the artists to be well dressed, drive an expensive car, live in a very nice house, etc. Think about it. Don't you expect artists "to look like artists?" Would you admire Jay-Z as much if he drove a broken down old 1990 Grand Am instead of that beautiful, brand new, top of the line Bentley?

Sadly, when an artist gets signed to a label deal, especially a rap artist, he or she receives somewhere between 8 and 13 points. What that means is 8% to 13% of the retail sales price (less inane deductions that whittle that small percentage down another few points), after the record label recoups the money it puts out (the advance, the sample clearances, the producer advances, usually half the cost of any videos, any cash outlays for the artists, half of the radio promotion expenses, most of the street promotion expenses, etc.). The artist has to sell an incredible amount of units to make any money back. Here's an example of a relatively fair record deal for a new rap group with some clout in the industry and a terrific negotiating attorney:

ROYALTY RATE: 12%

We're going to assume that there are 3 artists in the group, and that they split everything equally. We're also going to assume that they produce their own tracks themselves, contributing equally.

Suggested retail list price (cassettes) $10.98
less 15% packaging deduction (usually 20%) =$ 9.33
gets paid on 85% of records sold ("free goods") =$7.93

So the artists' 12% is equal to about 96 cents per record sold. In most deals, the producer's 3% comes out of that 12%, but for the sake of brevity, in this example the group produced the whole album, buying no tracks from outside producers, which is rare.

Let's assume that they are a hit and their record goes Gold (although it is rare that a first record blows up like this). Let's also assume they were a priority at their record label and that their label understood exactly how to market them (which is also rare). So they went Gold, selling 500,000 units according to SoundScan (and due to the inaccuracies in SoundScan tracking at the rap retail level, 500,000 scanned probably means more like 600,000 actually sold--but they’ll only be accounted to for the 500,000 SoundScan verified units instead of what actually has sold).

GOLD RECORD = 500,000 units sold multiplied by 96 cents = $480,000. Looks like a nice chunk of loot, huh? Watch this: Now the label recoups what they've spent: the cost to make the record, independent promotion, 1/2 the video cost, some tour support, all those limo rides, all those out of town trips for the artists and their friends, etc.

 $480,000
-$100,000 recoupable stuff (recording costs)
--------
 $380,000
-$100,000 advance
--------
$280,000

Still sounds OK? Watch... Now, half of the $380,000 stays "in reserve" (accounting for returned items from retail stores) for 2 to 4 years depending on the length specified in the recording contract. So the $100,000 advance is actually subtracted from $190,000 (the other $190,000 is in reserves for 2 years). Now, there's also the artist's manager, who is entitled to 20% of all of the entertainment income, which would be 20% of $380,000, or $76,000. Remember, the artist is the last to get paid, so even the manager gets paid before the artist.  The attorney is entitled to 10% of the upfront value of the deal, which in this case was $200,000, so the lawyer made $20,000 the day the contract was signed, which the artist pays back now out of royalties.

So the artists are in debt to the label yet their album went Gold, and they are experiencing some pretty good fame and perceived success.  Unless they are making money in other areas (shows, mostly) they are completely broke.  In two years when the reserves are liquidated, IF they've recouped, they will each receive another $63,000. IF they've recouped. Guess who keeps track of all of this accounting? The label. Most contracts are "cross-collateralized," which means when the artist does not recoup on the first album, the money will be paid back out of the second album. Also, if the money is not recouped on the second album, repayment can come out of the "in reserve" funds from the first album, if the funds have not already been liquidated.

Even if all the reserves are paid in our example, each artist only actually made 38 cents per unit. The label made and/or recouped about $7 per unit. This example also doesn't include any additional production costs for an outside producer to come in and/or do a re-mix, and you know how often that happens.

So each artist in this group has received a total of about $96,000 ($63,000 on the back end and one-third of the initial $100,000 advance). After legal expenses and costs of new clothing to wear on stage while touring, etc, each artist has probably made a total of $75,000 before paying taxes (which the artist is responsible for-- remember Kool Moe Dee?). Let's look at the time line now. Let's assume the artists had no jobs when they started this. They spent 4 months putting their demo tape together and getting the tracks just right. They spent another 6 months to a year getting to know who all of the players are in the rap music industry and building a local buzz while shopping their demo. After signing to a label, it took another 8 months to make an album and to get through all of the label's bureaucracy. When the first single dropped, the group went into promotion mode and traveled all over promoting the single at radio, retail, concerts, and publications for free--unless they had a radio hit as their single, in which case they began getting some show money for about half or a third of the dates they performed. This was another six months. The record label decided to push three singles off the album so it was another year before they got back into the studio to make album number two. This scenario has been a total of 36 months. Each member of the group made $75,000 for a three year investment of time, which averages out to $25,000 per year. In corporate America, that works out to be $12 per hour (before taxes).

OK, so it's not totally hopeless. Since we're using the fantasy of a relatively fair deal, let's look at publishing from a relatively fair perspective. There are mechanical royalties and performance royalties to figure in. Mechanical royalties are the payments that Congress stipulates labels must pay based on copyright ownership and publishing ownership. These payments have nothing to do with recouping, but everything to do with who owns the publishing. Publishing is where the money is in the music business. Suge Knight claims to have started Death Row Records with the money he made from owning Vanilla Ice's publishing for one song: Ice Ice Baby. It may not be true, but it could be. Avatar Records (home of The Oz Soundtrack) is financed through the publishing that the CEO has purchased over the years.

Although publishing can be quite cumbersome to understand (just when I think I get it, I read something else that makes me realize how little I know about the subject), but the most basic principle is that when an artist puts pen to paper, or makes a beat, the artist owns the publishing. It's that simple. Whoever creates the words or music owns those words or music. Where it gets confusing is all the different ways to get paid on publishing, all the ways to split publishing with other folks, and all the ways artists get screwed out of their publishing. In the 10 years I've been doing this, I have heard so many times, artists say that they don't care about losing a song or two because they can always make a ton more. That's stupidity. It's undervaluing one's ability. That's like saying it's OK to rob me of my cash, because I can go to the ATM machine and get more money. Wrong!! It's never right to rob someone. The "I can make more" defense immediately goes out the window when the creator sees someone else make hundreds of thousands of dollars off a song. Every time!! So why not protect yourself in the door?

Bill Brown, formerly of ASCAP and currently of Sony Music Publishing, breaks it down more simply than anyone I've ever heard. He compares publishing with real estate. When you make a song, you are the owner of that property: the landlord. Sometimes you sell off a piece of the land for money (but you NEVER give away your land, right??) and if someone else wants to use your property, or rent it, they have to pay you rent to use it. I love that analogy. It's so crystal clear!

A copyright is proof of ownership of a song, both lyrics and music. If there is a sample in the music, you are automatically giving up part of the song, at the whim of the person who owns the rights to the original song (not necessarily the original artist). In order to "clear the sample," you send your version of the song to the owner of the original composition or whomever owns the publishing (and to the owner of the master, meaning original record label or whomever now owns the master). Then you negotiate two prices with those two owners. Some are set in stone and you get to either agree to their price or to remove the sample. On DJ DMD's last album (22: PA Worldwide on Elektra) he spent close to $100,000 in advances and fees due to the sampling on his album. It came out of his upfront monies (advance) and he bears the burden of paying for it all, even though Elektra released and owns the record. Proof of copyright is easy to obtain by registering your song with the copyright office in Washington DC. You call them (202.707.9100) and ask for an SR Form (sound recording). You fill out the form, listing all of the owners, and mail it back to them with a copy of the song (a cassette is good enough) along with the Copyright fee (around $30 or so). This way, if someone steals your song, or a piece of your song, you can sue them for taking it and for your legal fees. With the "poor man's copyright" (mailing your tape to yourself in a sealed envelope with your signature across the sealed flap, and then never opening it when it arrives back to you with a postmark proving the date), you can not sue for damages and it's more difficult to prove your case. The copyright fee may seem like a lot of money to some, but it's nothing compared to what a law suit would cost you.

Performance royalties are money that is paid for the performance of your song. The money is paid based on the percentage of ownership of the song. So if you own 100% of the song, you get the whole check. If you own just the music, which is half the song, then you get half the money. If you own the music with a sample in it that claims half the song, then you get a check for 25%. Ya follow? Performance Rights organizations consist of ASCAP, BMI, and SESAC (which is still quite small). They police the radio stations, clubs, concerts, etc (any place music is played or broadcast), all of whom pay a fee to play the music which the performance rights societies collect and split amongst their members based on the amount of times a record is played. Although the formulas change annually based on play, a Top 10 song played on commercial radio can earn a good chunk of change in the hundreds of thousands of dollars range.

There is another kind of royalty artists receive when their records sell: mechanical royalties. These are paid based upon a pre-set limit placed by Congress which increases automatically every two years. In 2000 and 2001 it was .0765 cents per song, but on January 1, 2002 it increased to .0815 per song. Record labels put caps on mechanical royalties (the profiteers) at either 10 songs, 11 songs, or 12 songs, no matter how many songs actually appear on the record, and you get what you negotiate for. Also, there's a slimy little clause that restricts payment of mechanicals (because God knows labels don't make enough money as it is) to anywhere between 75% and 85%. This evil deed is called “percentage of statutory rate.” Here's the difference those few pennies make as it pertains to an artist's royalty check (I refuse to even consider illustrating the worst bullshit deals such as 10x at 75%) provided they own 100% of the song:

 

I based the above chart on the old 1998-1999 rate of .0715 per song, so I could use Fiend as an example. His first album came out in April of 1998 when the stat rate set by Congress was at this rate.

The dollar figure above represents monies due an artist (regardless of recoupment) per album based on ownership of 100% of publishing. So for example, Fiend who was signed to No Limit at the time, (provided he owns 100% of his publishing--I can dream can't I?), if his deal gives him 11x rate at 85% (I hate it this low but it won't kill me) then on his first album, There's One In Every Family, which came out 4/28/98 and sold 565,977 SoundScan units, No Limit would have paid him (hopefully) $378,369.77. If No Limit owns half of Fiend's publishing, he would receive $189,184.88 provided he wrote all of his own songs (which he did, except the verses by other artists who appeared which lowers the ownership percentage and dollar amount) and provided he made all of his own beats (which he did not; he features outside producers on this album like Beats By The Pound).

So there you have it, the real deal on how much money an artist makes. You can subtract out now another 28% to 50% of all income, including show money, (depending on the artist's tax bracket which is determined by how much income was made within any given calendar year) for the IRS who get paid quarterly (hopefully) by the artist's accountant who gets paid 5% of the total artists entertainment income for this luxury (that’s 5% of the net income, meaning BEFORE taxes). If the average artist releases a record every two years, then this income must last twice as long... I think about this every time I see my favorite artists flossing in their music videos drinking champagne or every time I see them drive by in a brand new Benz...