Mumbo Jumbo

Donald Passman

Donald Passman is a Los Angeles-based music attorney with the firm of Gang, Tyre, Ramer & Brown. Specializing in music business law for over 20 years, his clients include major publishers, record companies, film companies, managers, producers, songwriters, and artists such as REM, Janet Jackson, Quincy Jones, Tina Turner and Green Day. On a regular basis, we will be excerpting from Mr. Passman's best-selling book, "All You Need To Know About The Music Business."

"Record One" Royalties

It is customary for producers, at some point, to be paid for all records sold, meaning that recording costs are not charged against their royalties (while those costs are always charged against artists' royalties). These are called record one royalties because they are paid from the first record that the company sells. (All producers have to recoup any advances they have received, but if you think of these advances as a prepayment of royalties, this is the same as getting royalties on all records). The key question is when the record one royalties are paid, and there are three methods:

Superstar Producers

Superstar producers are paid for every record sold without recoupment of anything (except their advances). Let's look at an example: Suppose an artist's "all-in" royalty (artist & producer combined) is 60-cents a record, and the producer's royalty is 10-cents a record. Assume the producer gets a $10,000 advance and that the recording costs (including the producer's advances) are $120,000. If the producer is paid from record one, and the album sells 150,000 units, the producer will get $15,000 in royalties (10-cents x 150,000 units). Since he already got a $10,000 advance, this is deducted, and he gets the balance of $5,000.

Units Sold	150,000
Producer Royalty	x $.10
	$15,000
Less Advance	- $10,000
Net Payable	$5,000

So as not to mislead you, you should know that it's extremely difficult for even superstar producers to be paid from record one.

Hot Producers

Hot producers can get a royalty that is retroactive to record one after recoupment of recording costs at the combined rate. What this means in English is that (a) before recording costs are recouped, the producer gets no royalties at all; (b) once the recording costs are recouped, the producer gets paid from record one "retroactively" (meaning the company goes back and pays on sales previously made that didn't bear royalties at the time of sale.); and (c) the recording costs are recouped at the artist's "all-in" rate (the combined artist & producer rate). This is easier to see with numbers:
Assume the same facts as in the first example. By changing the deal so that the producer is paid retroactively, however, the producer makes less. This is because, at 150,000 units, the artist will have only recouped a total of $90,000 ($0.60 x 150,000=$90,000), which is short of the $120,000 recording costs. Thus, the recording costs have not been recouped, and the producer is not entitled to any royalties. So, instead of the additional $5,000 paid in the first example, the producer gets nothing (except, of course, the $10,000 advance).
If that album later sells another 50,000 copies (a total of 200,000 units), the recording costs are now recouped (200,000 x $0.60 = $120,000 in costs), which means the producer gets paid for all 200,000 units ($20,000, which is $0.10 x 200,000 units), less, of course, the $10,000 advance. At this stage, note that the producer is in the exactly same position as if he or she had been paid from the first record sold.

Most Producers

Most producers are paid retroactively after recoupment of recording costs at the net rate. This means that, instead of recouping at the combined producer & artist (all-in) rate, the recoupment is only at the artist's rate after deducting the producer (i.e. the all-in rate "net" of the producer's royalty). In our same example, this would mean $0.60 less the $0.10 producer's royalty, or $0.50. Thus, under this example at 200,000 units, the producer still doesn't get any royalties, because $0.50 x 200,000 equals only $100,000 which is short of the $120,000 needed to recoup the recording costs.
In this case, the producer wouldn't get his record one royalties until the artist sells a total of 240,000 units ($0.50 x 240,000 =$120,000). Once this sales level is reached, the producer is paid retroactively ($24,000, which is $0.10 x 240,000), less the $10,000 advance. At this point, re is no difference between this deal and the deals under the first two examples.

Other Royalty Computations

Except for the record one aspect, producers' royalties are customarily calculated in exactly the same way as the artists' (except for home video). This means they get the same packaging deductions, the same "free goods" reduction, and, the same proportionate reduction for foreign, budget, mid-priced, CDs, etc. For example, if an artist gets 75% of his or her U.S. rate in England, the producer will get 75% of his or her U.S. producer rate in England.

Home Video Royalties

For home video devices, producers generally get half of their otherwise applicable rate. The theory is that the Master is only half of the product (the video portion is the other half).

In our December Mumbo Jumbo column, we will further explore producer deals and discuss both hiring and paying the producer.