By John F. Sase
Gerard J. Senick, general editor
Julie G. Sase, copyeditor
William Gross, research
"Aside from the creative and technical aspects of recording an album, there are legal and contractual issues that must be considered before even entering the studio. The artist or label paying the expenses of recording must be sure that everyone is on the same page regarding whether fees and/or royalties are to be paid and, if so, how much is to be paid to each party."
– Howard Hertz, entertainment attorney, Hertz Schram PC, Bloomfield Hills (www.hertzschram.com)
As with many of us, I, Dr. Sase, began my growth in music as young child taking music lessons on the piano in our living room. However, I waited until high school to delve deeper into my study of music. My parents bought me an acoustic guitar and I used funds saved from my paper route to pay for lessons. During senior year, my friend Duane, who played bass guitar in his father's polka band, lent me one of his Gibson Thunderbird bass guitar. Duane gave me a few lessons, lent me a copy of the Best of the Animals album, and told me that by learning all of the bass riffs, I would develop a strong foundation for playing bass in a rock band. He was right!
I started playing bass guitar in earnest during senior year and my skills helped me to give me some needed income by playing on long weekends at frat parties and campus dances. Also, I developed as a folk and classical guitarist throughout my college years that included two master degrees and a doctorate. During this time, I co-founded and presided over a hole-in-the-wall performance space in the Cass Corridor, commonly known as the Freezer Theatre. During these years, I began to experiment the art of recording and produced/released a number of independent a number of 45s, twelve-inch disks, and CDs that we marketed directly to customers and through local record stores on consignment. Building upon these years of experience and a MBA, I taught a Basics of Business for Musicians course at two local colleges and did some writing on the subject. As my years of doctorate education weighed heavily on my available time that included marriage and my first two children, I limited my active participation in music to benefits and religious services. These experiences and the music professionals who I have known over the years led me to write this series of articles.
Music and Law
Depending on the individual foci of a law practice, attorneys may work on cases regarding Intellectual Property and Contracts in the Music Industry. Quite often, music composers, song writers and performing artists remain as neophytes in respect to matters of the economic and legal issues that affect their industry. This month, we continue to address the basics of Economics and Law that intermingle in the production, recording, manufacturing, and marketing of recorded music. For the benefit and sanity of our readers, we will minimize the Economic and Legal techno-speak while presenting our basic treatise on issues involving the production and marketing of music. Therefore, we hope that our efforts will aid individual attorneys in their own further education and that of clients pursuing their career in the field music and related arts.
The Basic Business of Music
Both legal and economic perspectives complement the artistic and technical side of live performance and studio recording. For legal issues, Entertainment Attorney Howard Hertz explained to me that any person contributing work to a song (referred to as the composition) and/or work on a recording (commonly known as the master) usually results in claims on copyright ownership or to performance rights. Therefore, the artists and their record label must emerge from the studio with a legally owned product that they and other entities such as recording distributors may sell to the public. To assure their claims, contractual agreements need to contain the proper "work-for-hire" legal language. In essence, work-for-hire implies that any contributor may relinquish ownership claims on the composition or master by stating that all of the performed work receives equitable compensation.
Furthermore, Hertz emphasized that all producers, engineers, and side-person musicians who have worked on the project must sign copies of these agreements. Typically, the artist or label contractually owns the copyright to the master recordings. Alternately, multiple writers and other contributors may hold or acquire this copyright ownership in the underlying composition. All of the parties involved may agree in writing that the artist or label may "buy out" these rights. Due to the potential complexity of such agreements, contributors often fill out a "split sheet" for each work following the recording sessions. This sheet lists percentages of the song or instrumental that each contributing party provided along with the determination of the individual percentage of rights owned by the publisher and other parties involved. Then, all of these contributing parties sign the split sheet-thus making the determined split a legally binding agreement.
The Rock Band as a General Partnership
Many musical groups lack an understanding of Music Business Law and overlook the fact that the law will treat them as a General Partnership rather than as a Limited Liability Company (LLC) or as a Subchapter-S Corporation (which differs from a Subchapter-C entity in our U.S. Corporation Laws). Operating as a General Partnership implies that the law considers that all partners hold equal-ownership shares if no detailed written agreement exists to delineate the shares. In respect to the Business of Music, Mr. Hertz explains that, according to the Court, each author who has contributed words or music to a composition owns an equal share. It remains important to note that this decision holds true when no written and signed agreement exists to the contrary, despite the percentage of contribution held by the author and composer. Hertz has provided the following illustration: "[I]f three writers contribute to a work and have no signing to the contrary, they each own one-third of the copyright, even if one of the writers only contributed one line of lyrics and might have likely agreed to a five or ten percent share of the song if it was put in a split sheet." A word of wisdom to all musicians, audio producers, and engineers: have a qualified Entertainment Attorney on your side to guide you through these choppy waters.
Replicating and Marketing the Final Product
The 500 hours of time, energy, and artistic angst invested in the production of an album buries itself as a Sunk-Cost. We define Sunk-Cost as the Non-Retrievable Fixed Cost associated with the production of recorded music for sale. In the production of recorded music, time constitutes the major portion of the upfront, fixed, and sunk-costs. These costs cover all of the work and expenses incurred up to the point at which the glass, metal, or ceramic master along with the product cover and disc artwork used in the replication of commercially manufactured CDs, vinyl products, and other formats. In respect to these costs, we note that a downloadable MP3 and similar products may not require this final step.
The amount of funds that an artist needs to invest in order to reach this final step in the process described often depends upon the location (New York, Los Angeles, and Nashville versus everywhere else in the country), the amenities, and the reputation of the studio employed. Reportedly, the current high-end studio cost exceeds $3,000 per hour. Ignoring minor incidentals and not including upfront fees to contracted producers, engineers, side-vocalists and additional instrumentalists, studio costs may exceed $1.5 million (500 hours x $3,000 per hour). Based on the sales needed to recover these costs, not many artists go "gaga" over this price tag. As noted previously in this series, the average studio cost-per-hour in urban areas outside of major markets appears to fall as low as $75.00 to $200.00 per hour. This recording route reduces the average studio cost to $168,750 ($75 times 500 plus $200 times 500, with the total being divided by two) per album project, assuming that the artist(s) does double duty as producer(s)/engineer(s).
If an artist acts as a producer/engineer, s/he may be able to release the music to the public for $20,000 to $37,500. An independent artist can achieve this goal either by using a budget-conscious studio priced at $75.00 per hour or by investing $30,000 or more in his/her own digital-audio workstation such as Pro-Tools HD (www.avid.com/pro-tools) and a small assortment of high-quality microphones (such as ones by Neumann), pre-amps (such as Avalon Design), and acoustic sound-absorption and -reflective material. For many musicians who want to record their music, the latter serves as a viable option. Given the relative complexity of the compositions and the musical arrangements used for their recordings, some artists manage to get their albums out the door for about $12,000 or less. For the sake of comparative discussion, let us work with these last three figures and assume that the artist becomes an entrepreneur and manages the entire release.
CD replication has become highly competitive. The price per lot of 1,000 copies has decreased to about $1,000, depending on the type of artwork and packaging. This home-spun method results in Unit-Fabrication Costs, the pressing of a physical CD, of about $1.00. However, one needs to consider packaging and the promotional costs involved in a release. The major and effective cost of this type requires the strategic gifting of copies to radio stations, clubs, and individuals in order to prime the proverbial pump. Also, using social media such as Facebook, YouTube, and a number of others can provide "free" advertisement. For the sake of simplicity, let us assume that the promotional cost for a CD that contains ten songs averages $1.00 per CD. The more CDs that are manufactured, promoted, and sold, the more money that an artist needs to invest in the project. In short, manufacturing and promotion costs vary with quantity. Therefore, we refer to these costs as Variable Costs that total $1.50 per CD, on average.
If the the artist averages Direct Net-Revenue of $10.00 per CD, one may suggest that the CD might be priced at $14.00 and sold at live performances, distributed as digital downloads, and made available at online and brick-and-mortar stores. With this estimate in mind, we may phrase our economic question as a break-even analysis (see Economics for Attorneys 1, https://youtu.be/VgpU8Rm11dA). (Note: In the world of business, an entrepreneur considers a break-even point of three to five years as reasonable.)
If we consider the artist as a start-up business, let us anticipate a break-even point at five years (sixty months starting with composition, arrangement, and production in the first year). At this juncture, we have two questions to consider: If s(he) releases the album at the end of the first year, how many copies will this artist need to sell over the following forty-eight months in order to break even? How many copies will s/he need to sell per month in order to achieve this goal?
Using $1.50 as the variable cost per copy, the upfront sunk-cost of producing the master recording constitutes the key determinant in our calculation. If we divide this fixed amount by the difference between the net price at which the album is sold and the combined cost of manufacturing and promoting each copy, we arrive at the break-even quantity that must be sold. The Break-Even Quantity equals Fixed Costs divided by the difference between the Average Revenue and the Average Variable Cost, and then rounding up to the whole unit. If the total production and mastering costs amount to $38,000, then the artist needs to sell 4,471 CDs at a rate of 94 discs per month for four years. However, if the artist economizes or sets up his/her own project studio for an investment of $20,000 (for some new/used equipment), then s/he needs to sell only 2,353 CDs at a rate of 50 discs per month (about two per day). An artist who possesses sufficient musical talent, recording skills, and market savvy may achieve this goal at a barebones studio that charges $25.00 per hour may be able to break even by selling 1,471 CDs at a rate of 31 discs per month (one-per day).
The Great Beyond
As Mr. Hertz stated in our opening quote, "The artist or label paying the expenses of recording must be sure that everyone is on the same page regarding whether fees and/or royalties are to be paid and, if so, how much is to be paid to each party."
We have focused on what may be called an Entrepreneurial Indie Label, one in which an artist or group does everything from production to direct sales (e.g. merchandise tables at gigs) except for two chores. Fabricating the CDs or vinyl may be done through companies such as Discmakers (www.discmakers.com). Hopefully, the artist can sell copies with the help of a music-marketing service such as CDBaby (www.cdbaby.com) or promoted through a music-streaming service such as Spotify (www.spotify.com). Then, these recordings can sell online, as digital downloads, or at brick-and-mortar stores as hard copies. The next rung up the ladder requires that the small, entrepreneurial music company signs with a major or minor label. At this point, a good Entertainment Attorney to represent the artist(s) becomes even more indispensable.
The Digital Age
The Record Industry continues to reinvent itself in this Digital Age that has brought an affordable means to artists for accomplishing what only multi-million-dollar recording studios could do previously. Online distribution has become feasible and preferable to many artists through Amazon, Bison Disc, CD Baby, iTunes, and similar sites. These turns in events leave major labels to do what they continue to do best-finance, promote, and distribute product to large markets in diverse geometric locations. In Love's Manifesto, a blog on which recording artist Courtney Love stated, "If a record company has a reason to exist, it has to bring an artist's music to more fans and it has to deliver more and better music to the audience. Previously undiscovered artists benefited from the huge promotional break that only a major label can offer. It takes a ton of funds to break a new artist--funds that most artists do not have on their own" (12 July 2001, http://www.indie-music.com/modules.php?name=News&file=article&sid=820). However, the world of music continues to evolve.
Rerecording/mastering, fabrication, distribution, tour support, and other promotional investments all require adequate capitalization.
In determining which artists to sign, labels consider artist potential and bases its decision on what the artist has accomplished beforehand. A rough rule-of-thumb remains, such that major labels sign artists who have made verifiable sales of at least ten-thousand albums on their own. In other words, I. The artist assumes the risk and costs of test-marketing their music. II. Labels consider plans for touring in order to support direct product-marketing to a wider audience. III. Labels assess the feedback received about the music through social media. Then, they use this information to more finely tune their marketing and distribution efforts.
We might compare the Business and Law of Music to the spin of a roulette wheel. A wheel has thirty-six black-and-white numbers plus a green "0" and a "00." The gambling house wins on these last two numbers. Their odds of winning are 5.26%-the two green numbers divided by the total of thirty-eight numbers on the wheel. Generally, the Record Industry hits the break-even point on 10% of their releases. However, only 5% of releases actually turn a profit. The break-even releases and those that generate a profit subsidize the other 90% that lose money.
Therefore, cash advances bestowed upon artists must be determined on the basis of their abilities (both musical talent and the ability to sell albums), the costs that may be recoverable from an artist, and the probability of success in a marketplace that ultimately relies on the 5% of releases that eventually become profitable.
"She's So Fine, There's No Tellin' Where the Money Went!"
"Simply Irresistible," by Robert Palmer, 1988
An advance is an ADVANCE. Essentially, an advance represents a loan repaid through royalties (a percentage of the sales) that hopefully the artist earns through future record sales. Under their contracts with artists, the record label wants its payback as the entity paid back first.
Therefore, labels withhold all artist earnings from sales until it recoups the advances for production, marketing, and distribution costs. Furthermore, sequential or multi-album contracts allow for repayment of advances on any one album from the income earned on multiple albums recorded by the same artist of group. We refer to this method of securitizing the investment made by the record company in a given artist as Cross-Collateralization. Apart from a few exceptions, a label might recoup every cent invested in an album from artist-royalty points. As a result, most artists receive $0.00 from their royalty points until recoupment by the label is complete.
So, how do artists go about making money from their recordings? Very simply, they can achieve their goal by remembering that they are involved in a business as well as an art. Furthermore, this business takes place in what economists refer to as a Perfectly Competitive Market-the market interaction between buyers and sellers sets the price for similarly situated products. This price remains relatively constant at any point in time. Due to this market quality, revenue increases at a constant rate as greater quantities of a recording are sold. As a result, only two ways exist to increase profits: One is to sell greater quantities of the product and the other is to decrease the costs of production, manufacturing, promotion, and distribution.
Takeaway
Though the Music Business has evolved dramatically and continues the process of evolving even further, it remains possible to release music and to earn a profit through business knowledge acquired and applied. We hope that we have edified our readers about the physical, economic, and legal aspects of the Recorded-Music Industry over the past four months. Furthermore, we again thank our guest Howard Hertz for his enlightening contributions.
– Post Script: For those readers interested in learning more about this business, the following is a list of some favorite books on the subject:
• “Business Basics for Musicians” (7 January 2020), by Bobby Borg
• “The Musician’s Guide to Licensing Music” (16 February 2010), by Darren Wilsey & Daylle Deanna Schwartz
• “All You Need to Know About the Music Business” (10th Edition) (29 October 2019), by Donald S. Passman
• “This Business of Concert Promotion and Touring” (2 October 2007), by Ray D. Waddwell, Richard Barnett, et al
• “Rockonomics: A Backstage Tour of What the Music Industry Can Teach Us about Economics and Life Hardcover” (June 4, 2019), by Alan B. Krueger
• “Music Business Handbook and Career Guide (12th Edition)” (30 January, 2019), by David Baskerville & Tim Baskerville
• “The Musician’s Business and Legal Guide 5th Edition,” by Mark Halloran
• “Tim Sweeney’s Guide to Releasing Independent Records” (Mar 1, 1996), by Tim Sweeney and Mark Geller
• “The Music Industry Book: Protect Yourself Before You lose Your Rights & Royalties!” (Paperback,1980), by Walter E. Hurst
• “Music Money and Success 8th Edition: The Insider’s Guide to Making Money in the Music Business” (2018), by Jeff Brabec, Todd Brabec
• “Promoting Rock Concerts - A realistic look at what it takes to be a successful concert promoter” (Nov 1, 1979), by Howard Stein and Ronald
Zalkind
• “Making It With Music: Kenny Rogers’ Guide to the Music Business Paperback” (October 1, 1978), by Kenny Rogers, Len Epand
• “Inside the Music Industry: Creativity, Process, and Business” (May 22, 1996), by Michael Fink
• “Making Money Making Music: No Matter Where You Live” (Jul 1, 1991), by James W. Dearing
• “Project Management for Musicians: Recordings, Concerts, Tours, Studios, and More (Music Business: Project Management)” (Paperback,
January 1, 2013), by Jonathan Feist (Author)
• “The Studio Business Book, Paperback” (January 24, 2006, by Mitch Gallagher, Jim Mandell
• “This Business of Music, 10th Edition (This Business of Music: Definitive Guide to the Music Industry)” (Hardcover, June 26, 2007), by M. William Krasilovsky), Sidney Shemel, John M Gross, Jonathan Feinstein
• “Music Law in the Digital Age: Copyright Essentials for Today’s Music Business” (Paperback, May 1, 2017), by Allen Bargfrede
• “The Mixing Engineer’s Handbook, 4th Edition” (Kindle Edition), by Bobby Owsinski
• “The Recording Engineer’s Handbook, 4th Edition” (Paperback, January 13, 2017), by Bobby Owsinski
• “The Mastering Engineer’s Handbook, 4th Edition” (Kindle Edition), by Bobby Owsinski
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Howard Hertz has represented numerous artists and entities in the entertainment field for more than three decades. In 1979, he established the law firm of Hertz Schram with Bradley Schram. Hertz specializes in entertainment law and is the lead attorney of Hertz Schram’s Entertainment Practice Group. He earned his B.A. and J.D. at Wayne State University. Hertz can be reached at Hertz Schram PC, 248-335-5000 and by e-mail at hhertz@hertzschram.com.
Dr. John F. Sase has taught Economics for four decades and has practiced Forensic and Investigative Economics since the early 1990s. He earned an M.A. in Economics and an MBA at the University of Detroit and a Ph.D. in Economics at Wayne State University. He is a graduate of the University of Detroit Jesuit High School. Dr. Sase can be reached at 248-569-5228 and by e-mail at drjohn@saseassociates.com. You can find his Economics videos of interest to attorneys at www.youtube.com/saseassociates and saseassociates.com He continues to play electric and acoustic guitar, bass, drums, keyboards, and other instruments while singing.
Gerard J. Senick is a freelance writer, editor, and musician. He earned his degree in English at the University of Detroit and was a supervisory editor at Gale Research Company (now Cengage) for over twenty years. Currently, he edits books for publication and gives seminars on writing and music. Senick can be reached at 313-342-4048 and at www.senick-editing.com. You can find some of his writing tips at www.YouTube.com/SenickEditing. He continues to play acoustic guitar while singing.
