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RECORDING AND LICENSING AGREEMENTS • • • • • • • • • • • • • • • • • • •
What is a Recording Agreement? Does the artist own the recordings made under the Recording Agreement? What is a Licensing Agreement? How long does a Recording Agreement last for? How long does a Licensing Agreement last for? What happens if I want to record for another record label? Does the record label have the right to sell my records worldwide? What is the record label’s obligation to actually release the sound recordings? How does the record label get paid? How much will I get paid? Will I get paid from the first record sold? How long will I continue to be paid royalties for? Will there be any deductions? Are there any other royalties I will be paid? Are there any other ways royalties can be paid? When will I be paid? Will the record label pay for tours? Will the record label pay for videos? What is a 360 deal?
This Fact Sheet has been made possible by the funding received by the Creative People’s Centre from the New Zealand Law Foundation.
This Fact Sheet is not legal advice. This information is intended to provide a general outline of the relevant legal issues and further professional advice should be sought before any action is taken in relation to the information contained in this Fact Sheet. This checklist remains at all times the property of the Creative People’s Centre. You may make use of this Fact Sheet only for your own personal information. Under no circumstances may this Fact Sheet or the information in it be copied or distributed to any third party by you without the prior written agreement of the Creative People’s Centre.
What is a Recording Agreement? A Recording Agreement is a legally binding agreement entered into between an artist (either a band or a solo performer) and a record label. Under a traditional Recording Agreement a record label agrees to finance and support, to a certain specified extent, the recording and commercial release of music by the artist. This means the record label will pay a certain amount towards the cost of recording the music and will also cover the costs associated with the manufacture, marketing and distribution into stores of the finished product. It is also common for a Recording Agreement to provide a record label the option of also recording and releasing a certain number of future recordings by the artist.
Does the artist own the recordings made under the Recording Agreement? Usually the rights in the ‘sound recordings’ made by the artist under the Recording Agreement will automatically belong to the record label. This is because under New Zealand copyright law the record label has entered into an arrangement with the artist to make the specific sound recordings and also initially pays for the sound recordings to be made. For further information on copyright please refer to our Fact Sheet on ‘Copyright for Musicians’. This means that the recorded version of the songs made under the Recording Agreement will always be owned by the record label. The artist will however always retain the rights in the songs themselves that are the subject of any sound recording made under the Recording Agreement.
What is a Licensing Agreement? A traditional Licensing Agreement is set up just like a Recording Agreement with one very important difference – the ownership of all sound recordings always remains with the artist. This is because under a Licensing Agreement the artist themselves must deliver finished recordings to the record label which are ready for the record label to manufacture, market and distribute. As the record label never finances the actual recording of the sound recordings in question, the record label will not obtain any ownership rights in them. As the record label has no ownership rights in the sound recordings of the artist delivered under the Licensing Agreement, a Licensing Agreement will always have to provide the record label a licence to manufacture, market and distribute the sound recordings. It is also common for a Licensing Agreement to provide a record label the option of also licensing a certain number of future recordings by the artist. Although under a Licensing Agreement all the initial recording costs must be financed by the artist, there are long term benefits for the artist in this, in that
once the term of the Licensing Agreement has finished, the artist can themselves sell and otherwise make commercial use of the recordings and keep all the associated income. This is in comparison to a Recording Agreement where the artist will only ever receive the relatively much smaller royalty paid out by the record label.
How long does a Recording Agreement last for? The term of a Recording Agreement is usually based on how many albums the artist and the record label agree the artist will record for the record label. Although there will normally be some protection provided in a Recording Agreement for the actual length of time a Recording Agreement can last for, the ultimate determining factor will be based around the recording of a certain number of albums for the record label regardless of how long this takes. The number of albums an artist has to record for a record label will depend on the deal they are signing. However, these days in New Zealand it is unusual to see more than four albums being required. Under a Recording Agreement a record label will also usually have a right to end the term of the Recording Agreement early if they don’t wish to work with the artist on any future albums provided for under the Recording Agreement. An artist will never have these rights of early termination under a Recording Agreement.
How long does a Licensing Agreement last for? The term of a Licensing Agreement will normally work in exactly the same way as the term of a Recording Agreement, with the exception that it will be defined by the number of completed albums, ready for release, which an artist must deliver to the record label. Under a Licensing Agreement a record label will usually also have a period of exclusivity following the delivery to it of an album during which it has the sole right to sell the album. This period of exclusivity can be anywhere from a couple of years to ten years depending on the deal.
What happens if I want to record for another record label? It is normal for a Recording Agreement to provide that during the term of the Recording Agreement, unless the record label gives its permission otherwise, that an artist can only record music for the record label. After the term of the Recording Agreement has finished the artist will be free to record for whoever they want and can enter into a new Recording Agreement with a different record label. The original record label will of course however always retain ownership in the sound recordings the artist recorded for the record label under the original Recording Agreement. Similarly under a Licensing Agreement, the record label will usually also require the exclusive rights during the term of the Licensing Agreement to
sound recordings of the artist. Following the end of the term of the Licensing Agreement the artist will be free to record for whomever they wish, but as noted above, the record label will retain the exclusive rights to sell the sound recordings licensed to the record label under the Licensing Agreement for a further certain period of time. After the end of this further period of time the artist will be free to sell the previously licensed sound recordings themselves or even enter into a new Licensing Agreement with a different record label.
Does the record label have the right to sell my records worldwide? It is common for Recording Agreements to provide the record label with the right to sell the records anywhere in the world. However Licensing Agreements usually define specific countries (often referred to as ‘territories’) in which the record label can sell the sound recordings licensed under the Licensing Agreement. Careful consideration should be given to what territories a record label will have the right to sell any licensed sound recordings in, in terms of whether the record label actually has the practical ability to do this in an effective way. Both Recording Agreements and Licensing Agreements should also have some right for the artist to arrange for someone other than the record label to sell the sound recordings in a certain territory if the record label becomes unable or unwilling themselves to arrange for the selling of the recordings .
What is the record label’s obligation to actually release the sound recordings? In the case of either Recording Agreements or Licensing Agreements, the record label should agree to release the sound recordings within the applicable territories within a certain period of time of receiving the finished sound recordings from the artist. This is often provided as being three months but will be conditional on the artist providing the record label with all information and materials that the record label reasonably needs from the artist. If this release obligation is not met then the artist should have the option to arrange for the release of the sound recordings themselves in the applicable territories in which they haven’t been released and in which case the record label should also lose the right to distribute sound recordings in those territories in the future. The record label should also be obligated to keep the sound recordings on continuous release within the territory during the period of time they have rights in the applicable sound recordings or else the artist should be given the option of arranging for such ongoing release themselves.
How does the record label get paid? In return for taking the risk of providing the financial backing and other services the record label supplies under a Recording Agreement or Licensing Agreement, the record label will keep most of the income earned from sales of an artist’s music.
How much will I get paid? Under Recording Agreements and Licensing Agreements an artist will receive a set percentage of the total income received by the record label for each sound recording (be it an album, EP or single) sold. This is known as a ‘royalty’. The exact royalty payable on each sound recording will differ depending on the format (e.g. album, EP or single) that the sound recording is sold in. The royalty is also not based on the price the sound recording is sold in the stores for, but rather on the wholesale price that the record label sells the sound recordings to the store at. This is often referred to as the Published Price to Dealer or ‘PPD’. In respect of the sale of sound recordings in digital format, as there is no physical goods as such being purchased by a digital retailer for on sale, the concept of the ‘PPD’ is often replaced with the straight measure of the amount received by the record label from the digital retailer for each sound recording sold.
Will I get paid from the first record sold? Under Recording and Licensing Agreements there are certain costs which will be described as ‘recoupable costs’. The most common type of recoupable costs are any cash advances that may be given to an artist on signing a Licensing or Recording Agreement. Another common type of recoupable costs is the recording costs incurred in making sound recordings under a Recording Agreement. Recoupable costs are costs that the artist is deemed to owe the record label and are payable to the record label from any royalties due to the artist under the Recording Agreement or Licensing Agreement. An artist should never be personally liable to the record label for the repayment of any recoupable costs outside of the income due to them under the Recording Agreement or Licensing Agreement. What this means in practice is that any royalty that would otherwise be payable to the artist will first be applied to any unpaid recoupable costs that the artist has incurred. Consequently an artist may not actually start to
receive royalty payments directly until quite a number of sound recordings have been sold. In the case of Recording Agreements it should also be noted that even though over time the record label will be paid back the recoupable recording costs, this does not change the default copyright ownership the record label has in the sound recordings, as outlined above.
How long will I continue to be paid royalties for? An artist will continue to be paid royalties for as long as the record label has the rights to sell the artist’s sound recordings. Under a Licensing Agreement this will of course be when the record label’s right to sell the sound recordings following both the end of the term of the Licensing Agreement and the following period of exclusivity as discussed above expires. As under a Recording Agreement the record label owns the sound recordings and can continue to sell them forever, an artist will always be entitled to royalties from the record label for any sales the record label makes even if the term of the Recording Agreement itself has finished and the artist is now recording for another record label.
Will there be any deductions? The royalties actually payable to an artist under a Recording Agreement or Licensing Agreement will often be reduced further by making the final royalties payable subject to certain deductions. For example, deductions are often made for costs incurred by a record label in packaging the sound recordings, paying for television advertising and also when the album is sold at a reduced price. There will also be deductions related to discounts that retailers have been given as encouragement to order in additional copies of the sound recordings. From an artist’s perspective the effect of these deductions on the final royalty payable can be massive, so wherever possible in a Recording Agreement or a Licensing Agreement such deductions need to be carefully considered and limited.
Are there any other royalties I will be paid? Apart from the sale of sound recordings there are a number of other ways that a record label can make money out of the sound recordings it controls. Examples of these other uses include arranging for the sound recordings to be used in films, TV programs, video games or in commercials or even to be sampled in other artist’s songs. A Recording or Licensing Agreement should specify the royalty an artist is to receive when the sound recordings are also used in these ways and an artist will usually also have the right to approve any such uses before they happen.
Are there any other ways royalties can be paid? Apart from a percentage royalty of the income generated from each sale or use of sound recordings, another way that royalties are sometimes paid under Recording and Licensing Agreements is on the basis of a net profit split. This net profit split may be 50/50 or may be any other variation depending on the commercial deal the artist and the record label are prepared to agree to. The difference between a net profit split royalty and a traditional royalty is that under a net profit split royalty all the costs of manufacturing, marketing and distributing (and recording in the case of a Recording Agreement) are accounted for first before any royalty is paid out. In these cases an artist trades off a guaranteed royalty on every sound recording sold for a potentially much more favorable royalty split once all the costs of the project have been recovered.
When will I be paid? Under Recording Agreements and Licensing Agreements payment of royalties is traditionally made either every three months or every six months. It is also common to have a provision in Recording Agreements or Licensing Agreements which allow an artist to audit the accounts of a record label to ensure that all royalties due to the artist are being properly accounted for and paid through.
Will the record label pay for tours? Since touring normally increases sales of sound recordings, there may be occasions where a record label is prepared to give financial support to an artist to help offset the cost of a specific tour. These contributions are usually referred to as ‘tour support’. From an artist’s point of view, it is preferable not to have tour support treated as a recoupable cost for the reasons explained above.
Will the record label pay for videos? As music videos can be powerful promotional tools to help boost the sales of sound recordings, under a Recording Agreement a record label will usually agree to provide a certain amount of funding for each of a certain number of music videos. From an artist’s point of view, it is preferable not to have this funding treated as a recoupable cost for the reasons explained above. Under a Licensing Agreement music videos, if it is agreed they are required, will be something the artist will be responsible for funding and creating themselves and then delivering to the record label along with the finished sound recordings.
What is a 360 deal? A 360 deal is a type of Recording Agreement or Licensing Agreement that concerns more than just the sound recordings of an artist. A 360 deal may for instance involve the record label making up front cash payments to the artist or the artist receiving a much more favorable royalty on sales of sound recordings, in return for granting to the record label a certain percentage of the income that the artist earns from other sources such as from touring or merchandising. A 360 deal takes its name from the concept that in extreme cases such deals can see a record label sharing in every aspect of the income an artist earns in the music industry. This idea of a record label taking income from all angles or the deal being all encompassing led to the term ‘360 degree deal’ (as in 360 degrees in a circle) which has since been shortened in common usage to just ‘360 deal’.
