What is a record deal?

Caveat Emptor Rules

Ever since Robert Johnson “sold his soul to the devil” in order to become a famous musician as chronicled in his song “Crossroads,” record deals have been looked at as a necessary evil.
A record deal locks in an arrangement between the artist and a record label to potentially make money for both sides. When it works well, it can be amazing. Take the case of Lady Gaga. Before she signed with Interscope Records, she was barely known. Because of her deal with Interscope, the label paid for her to be the opening act for a New Kids on the Block concert tour.

Interscope’s support included marketing, wardrobe, makeup and all other expenses she required for the year-long tour. They also arranged for her to do radio station interviews in almost every city where she was appearing. Fast forward a few years, and Lady Gaga’s own Monster Ball Tour grossed over $227 million. No matter how you split it, Lady Gaga and Interscope Records both made out extremely well from that record deal.

When it comes to the music business, the labels still have lots of clout. They can definitely help an artist achieve success if they are motivated (and contractually obligated to do so.) However, like everything else in life, record deals are and nobody has ever described record labels as being charitable organizations. You need to know what record labels are responsible for and make sure that you do your due diligence to and read the fine print on your record deal.

This means the artist needs to operate under caveat emptor rules (let the buyer beware) and do as much due diligence as possible, or better yet, hire a competent entertainment lawyer to represent them. Not only is a lot of potential income at risk, depending on the contract terms the artist could conceivably be placed in the position of basically being an indentured servant for many years.

Know About Carve-Outs

Some of the things the artist should be aware of, and reach a decision on prior to negotiations with a record label, include carve-outs. These pertain to revenue streams that might be otherwise subject to 360 deal terms. For instance, 50 Cent made a deal with Vitamin Water—he got stock in the company for promoting and endorsing their product. Ultimately, his shares became worth $100 million dollars. Without a carve out, he would have owed the record label a significant portion of this revenue.

A good attorney can not only help negotiate the amounts the label will receive from these various revenue streams (merchandise, touring, digital products, publishing, endorsements, appearances, etc.), they can put in contract form what the label is required to do for their percentage of each revenue stream. For instance, let’s say the label wants 25% of all merchandise profits. The artist can ask for the label to manufacture, supply and sell the merchandise in return for this 25%.

Advances and Revenue Streams

Another thing to look for when trying to get a record deal is how advances are treated. The artist should seek an advance against every revenue stream included in the deal. These advances are paid back from the revenue streams. Your attorney should ensure that there is no cross-collateralization between the revenue streams. In other words, if the record label pays the artist an advance for recording and album sales don’t generate enough revenue for the label to recoup their advance, they will not be allowed to make up the difference by pulling from touring revenues.

Net vs. Gross

Then there’s the old “net profit” vs. “gross profit.” All artist commission payments to the label should be based on net, not gross profits, otherwise the artist may never get out from under the contract.

Finally, and perhaps most importantly in the long-term picture, is how publishing rights are handled. The artist wants to control and own their songs. The record label wants these rights for themselves. Negotiations are usually required to find a balance—if the artist gives up some of their publishing rights (ownership and/or royalties), do they get enough music promotion from the record company for it to make sense?

Record deals—salvation or curse—only the artist can really define their deal, and usually only after the deal is over. That’s why it’s important to at least talk with an entertainment lawyer before signing any agreement in the music business, even if it’s with your best friend.

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