Recording Contracts – The Myth & Reality ~ by Mr. John McLellan Partner, Corporate & Media...

Recording Contracts –The Myth & Reality

~ by Mr. John McLellan

Partner, Corporate & Media

email: jpm@haldanes.com

Haldanes

website: www.haldanes.com

4 Dec 2002 Haldanes 2

“The artiste has always paid for the mortgage and somebody else owns the house”

Merck Mercuriadis

CEO, Sanctuary Group

4 Dec 2002 Haldanes 3

1. Obligations on Artiste

1.1 Exclusive Artiste Services

1.2 Term

1.3 Territory

4 Dec 2002 Haldanes 4

1.1 “Artiste’s Services”

“The sole and exclusive services of the Artiste as an audio and audio-visual recording artiste throughout the Territory during the Term ….. includ[ing] …. the preparation, rehearsal, performance, arranging, designing, choreography and recording.”

4 Dec 2002 Haldanes 5

[Artiste shall not ]

“(a) during the term of this Agreement render any musical performance including but not limited to signing and/or instrumental performance whatsoever; and

(b) for the period of 8 (eight) years immediately following the expiration of the Term or any extension thereof perform any work recorded by the [Recording Company]under this Agreement;

whereby such performance might be recorded in a form in any configuration which may be offered or transmitted to the public.

4 Dec 2002 Haldanes 6

Nothing herein contained shall prevent the Artiste from performing for the purposes of radio or television provided always that recordings of such performances shall not be offered to the public otherwise than as Normal Broadcast Transmissions.”

no live recordings

“recorded” not “released”

no pay per view, VOD

4 Dec 2002 Haldanes 7

1.2 “Term”

“4 (four) years or 4 (four) months after fulfillment of the Product Requirement whichever period is the longer.”

4 Dec 2002 Haldanes 8

“Product Requirement”

“(a) 5 (five) Albums of which 4 (four) will be in the Mandarin language and 1 (one) may at the agreement of the parties, be in the English, Japanese or Mandarin languages.

(b) up to 7 (seven) Music Videos as required by the Company for each Album referred to in (a) above.”

4 Dec 2002 Haldanes 9

“Album”

Any Record derived entirely from Master Tapes comprising no less than 12 (twelve) Tracks which shall not include a Compilation.

“Artiste [shall] ….. repeat any such performances as the Company shall require for the purpose of producing in the opinion of the Company, Master Tapes Music Videos and Records of the desired artistic, technical and commercial quality.”

4 Dec 2002 Haldanes 10

1.3 “Territory”

“the world” or “the universe” language

4 Dec 2002 Haldanes 11

2. Obligations on Record Company

? ? ? ?

4 Dec 2002 Haldanes 12

2. Obligations on Record Company2.1 Recording obligation

Normally expressed to be within a period of

time after last album

2.2 Release Commitment

“release” / “commercially release”

territories

reversion of rights territorially / ability to

terminate contract

4 Dec 2002 Haldanes 13

3. Grant of Rights3.1“ ….. All the copyright in the product of the

Artiste’s Services ….. and the sole and exclusive right to use and exploit the same in any manner the Record Company may see fit by any and all means in any media whether now known or hereafter invented or devised throughout the Universe including all renewals reversions or extensions”.

“catch all”

varying copyright terms

4 Dec 2002 Haldanes 14

3.2 “assignment of all Performers Economic Rights ….. exclusive licence to Performers Non Economic Right and rights of action in in product of Artiste’s Services”.

performers rights

4 Dec 2002 Haldanes 15

3.3 “Artiste [agrees] not to assert ….. moral

rights”

right to be identified as the author of a

work

right to object to derogatory treatment of

work

right to prevent false attribution

4 Dec 2002 Haldanes 16

3.4 Artiste’s Name

“right to use the current or future name, professional name, trade name, trade mark and/or logo of the Artiste ….. for the full period of copyright in the Master Tapes Music Videos and Live Recordings for the purpose of exploiting the Company’s rights under this Agreement.”

4 Dec 2002 Haldanes 17

“the Artiste shall [not], without Company’s prior written consent, promote, advertise, endorse or otherwise use the Artiste’s name professional name, likeness or logo in connection with the sale, distribution, advertisement of any products, entitles, or medium involved in, or capable of reproducing or transmitting sound, now or hereafter known, including, without limitation, blank tapes …..

4 Dec 2002 Haldanes 18

telephony and/or any and all transmissions via the Internet or any other computer assisted network or medium, whether or not a temporary or permanent copy is made during the transmission and all sound file formats, MS Audio, Real Audio, MPEG and wave and downloadable as well as streaming performances whether for financial remuneration, promotional consideration or otherwise.”

4 Dec 2002 Haldanes 19

“the Artiste shall not without the written permission of the Company change their professional names in whole or in part of any nature of any person and shall not be obscene, blasphemous or defamatory of any person.”

4 Dec 2002 Haldanes 20

3.5 Legal Action “[Record Company] shall have the sole and

exclusive right to initiate and maintain any and all actions or proceedings which the [Record Company] in its sole discretion deems necessary in order to establish, maintain or preserve any of the Company’s rights [and] ….. to join the Artiste as a plaintiff or defendant in any such action and

4 Dec 2002 Haldanes 21

the Artiste shall [waive] any right, title or interest in any money recovered by the Company in respect of such actions or proceedings. The Artiste agrees to fully co-operate with the Company in any such actions or proceedings, at the expense of the [Record Company].

4 Dec 2002 Haldanes 22

in name of artist

controlled by Record Company

proceeds

costs / indemnity

4 Dec 2002 Haldanes 23

3.6 “On line” right

register site with URL’s bearing Artiste’s name

control the site

linking rights

4 Dec 2002 Haldanes 24

3.7 Management Rights

“Exclusive rights to manage all aspects

of artiste’s career in the Entertainment

Industry”

fiduciary duty

co terminus with recording contract

“double dipping”

4 Dec 2002 Haldanes 25

3.8 “Controlled Compositions”

must sign “publishing rights” to sister record company

compositions co-owned? position in US / Canada

- statutory rate fixed

- can be varied by contract

- ¾ statutory rate

- only on 10 tracks

4 Dec 2002 Haldanes 26

4. Advances and Royalties4.1 Not advances in medical science but $ $ $ Advances on royalties payable to artiste in consideration for grant of rights and artiste services

4 Dec 2002 Haldanes 27

Advances can be expressed to be - “non-refundable”

- “cross-collateralisation”

- “recoupable”

- fixed or escalating

4 Dec 2002 Haldanes 28

4.2 Royalties

(i) What are they?

% of sales on exploitation of master

recordings

(ii) What are they paid on?

“Records”

4 Dec 2002 Haldanes 29

“Records” Recordings whether embodying sound alone or sound

coupled with visual images derived from the Master Tapes, Live Recordings and Music Videos and/or other performances of the Artiste recorded under the terms of this Agreement distributed in any configuration whatever whether now or hereafter known including, without limitation, a gramophone record, magnetic tape, compact disc, mini-disc, video compact disc (“VCD”), digital versatile disc (“DVD”), any computer assisted media (CD-ROM, CD-I and similar disc systems) and any other contrivance or appliance for bearing or used for emitting sounds and/or visual images and Direct Transmissions.

4 Dec 2002 Haldanes 30

“Direct Transmission” Electronic or radio transmissions including, without

limitation, telephone, satellite, cable, direct transmissions, downloading and streaming or any similar or successor form of transmission or through the Internet or any computer assisted network or medium which is similar to or is a successor to the Internet, digital jukeboxes, pay-per-play TV and radio broadcasts, radio-on-demand, television-on-demand, music-on-demand or any precedent interactive networked an/or on-line delivery of audio and audio-visual recordings or any radio or TV broadcast over subscription channels and any other such methods now or hereafter known.

4 Dec 2002 Haldanes 31

“exploit[ation] other than Records”

tv radio

film

4 Dec 2002 Haldanes 32

“New Technology Product”

exploitation

4 Dec 2002 Haldanes 33

Compilations

4 Dec 2002 Haldanes 34

How are they calculated? “Net Sales”

All Records sold by the [Record Company] less:- (a)returns credits and exchanges of any nature

including reserves for the same as shall be determined by the Company in its entire discretion;

“returns” “reserves” (b)records used for demonstration, advertising or

promotional purposes;

4 Dec 2002 Haldanes 35

(c) records given away or furnished to distributors or dealers on a no charge basis;

why “free goods” are necessary and what are they?

(d) sold at a close out price, namely at less than 30% (thirty percent) of the wholesale price.

“scrap”

4 Dec 2002 Haldanes 36

“Royalty Base Price”

90% (ninety per cent) of the actual invoice price charged by the Company from time to time in that country.

essentially wholesale price PPD

90% why?

retail price?

4 Dec 2002 Haldanes 37

Royalty Rates

4% — 30% of PPD

4 Dec 2002 Haldanes 38

Deductions

“Mid Price” “Budget Price” “TV Marketing”

4 Dec 2002 Haldanes 39

Calculation-Hypothetical Scenario

1 The artiste sells 500,000 Records

2 “Free goods” = 20% of all Records sold

3 “Net Sales”: All Records Sold – “free goods”

4 Actual Invoice Price - $90

5 Royalty Base Price = 90% of Actual Invoice Price

6 Royalty rate: 15%

7 Advance paid by the Record Company: $10 million (non refundable but recoupable against Royalties)

8 No royalties are paid to the Artiste until all Advances paid by the Record Company have been fully recouped

9 Net figure = the amount of royalty that the Artiste “receives”

4 Dec 2002 Haldanes 40

Royalties accounted to by the Record Company to the Artiste

(1) Net Sales = 500,000 copies – 20% (“free goods”)= 400,000 copies

(2) Royalty Base Price = Actual Invoice Price x 90%

= $90 x 90%

= $81

(3) Royalties = Net Sales x Royalty Base Price x Royalty

Rate

= $(400,000 x 81 x 15%)

= $4,860,000

4 Dec 2002 Haldanes 41

Royalties “receivable” by the Artiste

= Royalties paid by the Record Company – Advance paid by the Record Company

= $10,000,000 - $4,860,000

= $5,140,000

4 Dec 2002 Haldanes 42

Gross Receipts By Record Company

Gross : $45,000,000 ($500,000 x $90)

Less: Royalties : $ 4,800,000

Marketing : $ 5,000,000

Recording (videos) : $ 2,000,000

$33,200,000

4 Dec 2002 Haldanes 43

4.3 “Braxton Phenomena”Assumption Less

Advance on 3 Albums = US$1,000,000

US tax @50% on gross = US$500,000

Management @15%

on gross

= US$150,000

Lawyers @50% on gross

= US$ 50,000

Total US$700,000 US$ 300,000

4 Dec 2002 Haldanes 44

Royalties? Advance = US$1m Recoup 100% recording fund

= US$1.5m (@US$500,000 x 3 Albums)

Recoup 50% of independent promotion cost

= US$450,000 (@US$300,000x3x50%)

Recoup 50% of video costs

= US$600,000 (@US$200,000x6x50%)

US$3,550,000

4 Dec 2002 Haldanes 45

Royalties?

Assume :-Net average royalty rate of 10% of retail price

after deductions (free goods, packaging, producers, etc.)

Retail price of US$20Need to sell 17.5 million Records before

recoupment (@US$2 ÷ US$3,550,000)

4 Dec 2002 Haldanes 46

5. AccountingVerification of royalty statementsWhat is it an account of ?Who accounts?At whose cost?How many times?Limitation Period?ShortfallsInterest

4 Dec 2002 Haldanes 47

6. Suspension and Termination6.1 Suspension breach”the Artiste shall have been prevented from

performing the Artiste’s Services by injury illness mental or physical disability or otherwise or shall in the opinion of the Company be incapable of performing the Artiste’s Services for a period of 3 (three) months after the date required whether as a result of injury illness mental or physical disability or otherwise.”

4 Dec 2002 Haldanes 48

6.2 Termination

Record Company retains all rights

In event of termination for breach, artiste

only receives royalties to date of

termination.