Understanding Music-Production Deals
By Paul W. Gardner, II
The word “producer”
generally refers to a person who raises money and puts a transaction together;
this holds particularly true for the film and television industries. In the
music industry, however, the producer usually stands in the role of director
instead of fundraiser.
The history of the music-production deal has evolved through
attempts to reward celebrity producers who could get new artists signed to
record labels simply through their affiliation with those artists. For example,
if a producer with the stature of Quincy Jones, Simon Cowell or Dr. Dre agrees
to produce a previously-unknown and unsigned artist, then it is highly likely
that a coveted major-label deal will soon follow. Celebrity producers normally
receive a 6 percent producer’s royalty to produce an album by an established
artist like Mariah Carey. Therefore, they should be entitled to extra consideration
if it is their status as celebrity producers that cause the new artist to be
signed to a major label deal. Thus, the concept of the production agreement
Consider the following example: in a hypothetical case, an
artist is signed directly to a label and offered a signing advance of $100,000,
a recording fund of $400,000 ($360,000 of which goes pay third-party recording
costs, leaving $40,000 in “back-end” money left over to distribute
to the artist) and a retail record royalty of 12 percent. That means that,
in this direct artist-to-label signing, the artist winds up with $140,000 and
a 9 percent royalty (after deducting 3 percent for an outside producer). If
that same artist signed the same deal with identical terms but did it through
a production agreement in which the production company is entitled to 50 percent
of whatever the artist receives, the artist would be lucky to net $70,000 and
a 6 percent royalty.
Many production agreements provide that all costs (including
recording costs) are recoupable solely against the artist’s share
of royalties. It is also common for production deals to require that the royalty
payable to the producer of the album (usually 3 percent) comes solely out of
the artist’s share of royalties (thus reducing the artist in the
hypothetical case to a total royalty of 3 percent).
The effect of these provisions is that the entire $500,000
paid out by the record company so far will be recouped only against the artist’s meager
royalty share rather than on an equal basis with the production company.
A sharp music-industry attorney can improve such a production
deal in the artist’s favor. For example, the production company might
agree to split the financial responsibility for the royalties paid to the producer,
even though this is still more disingenuous than generous, since the artist’s
principal motivation for signing with a production company in the first place
was to allow it to handle all production responsibilities and to be compensated
for doing so out of its share of the proceeds.
Unfortunately, many artists come from disadvantaged backgrounds
and cannot afford to pay what often amounts to sizable legal fees. As a result,
these artists often sign retainer agreements whereby they agree to pay their
attorney between 5 percent to 10 percent of all gross royalties and gross advances
(in perpetuity). Although this represents a gamble for the attorney, the compensation
sometimes works out in the end.
Applying this arrangement to the hypothetical production
deal, an artist who used this retainer plan would pay his or her lawyer $50,000
(i.e., 10 percent of the gross sign advance of $100,000 and 10 percent
of gross recording fund of $400,000) and a royalty of 1.2 percent (10 percent
of the gross royalty of 12 percent).
So, assuming that the artist’s attorney was able to
get the production company to reduce its share of record royalties by one-half
of the producer’s royalty (i.e., by 1.5 percent), the 6 percent
royalty due to the artist for his half of the original 12 percent royalty would
then amount to 4.5 percent. Reduced by the 1.2 percent due to the lawyer, the
artist’s royalty would equal an embarrassingly low 3.3 percent. And upon
deducting the attorney’s share of the advances (i.e., $50,000)
from the $70,000 that the artist was due to receive, the artist will actually
net a paltry $20,000.
But there is more bad news for the artist. Most production
agreements allow the production company to recoup any costs that it incurred
prior to entering into the recording/distribution agreement. Conceptually;
this makes sense, because anyone who makes a capital investment in an artist’s
career should have the opportunity to recover that investment. At this point,
it would likely surprise no one that the entire amount of the production company’s
investment (say, $20,000) can be recovered 100 percent out of the artist’s share
of income, despite the fact that the production company stands to gain 50 percent
of all the monies earned under this deal.
So if the production company exercises its right to deduct
this $20,000, the artist in the hypothetical case is now left with a royalty
of 3.3 percent and an advance of zero dollars. What is more, it is not uncommon
for artists under these circumstances to also sign a management agreement with
a “division” of the production company at the same time they enter
into the production agreement, making matters worse for the artist.
One hopes the production company would avoid the outright
conflict of interest and not commission the artist’s income from the
production deal. But if the company does commission it, or if a third-party
manager is involved, the artist’s royal points (which are currently 3.3
percent) could be diminished by an additional 20 percent, leaving the artist
with a low royalty of only percent. In other words, the artist – the
engine that drives this entire process – may actually wind up receiving
only 17 percent of the total royalty points in the deal and 0 percent of all
the money that the record company handed over to the production company in
order to acquire the artist’s services.
But the situation for the artist declines still further.
Most production agreements contain a clause that allows the production company
to award itself a substantial portion of the artist’s publishing rights
for free (this, even though in many cases the production company already owns
half of the publishing because it provided the
“tracks.”). And most artists simply still do not understand that
in handing over these rights for little or no consideration that they are:
(1) Giving up administrative control to a production
company that is free to do whatever it wishes with the artists’ song,
title, lyrics, etc.;
(2) Allowing the production company the right to change an
administration fee for doing the above;
(3) Allowing a production company to collect the artist’s
publishing money and trusting that production company to engage in accurate
(4) Granting the production companies the right to “cross-collateralize” the
artist’s share of publishing royalties against any un-recouped balances.
As you can see, understanding and negotiating
a music-production deal can be a tricky process.
Paul W. Gardner, II, is Managing Partner of
the Gardner Law Group in Baltimore. He focuses his practice on entertainment
and business law matters.