Terms of 2.0

More ramblings on Label 2.0

2.  Clean up your act.

One thing that I've noticed prevalent in the machinations of Label 1.0 is an inability to upgrade one's approach once a new format arrives.  They seem to keep archaic articles of contracts around like someone who refuses to clean out the fridge and hopes no one notices the stench. 
A notorious example is the "Breakage" deduction which hung around like a bad smell well into the CD era.  The basis of this deduction (sometimes reducing a royalty base by as much as 15%) was that when Vinyl records were made with Shellac a certain percentage of those would crack and break while being transported.  The label passed that damage on to the artist.  Without any basis, labels kept the clause in there way past the sell-by date, hoping no one would notice.  A few other examples of clauses that could do with an overhaul would be:

Shorter album terms:  There’s no need, and may be counterproductive, to lock an artist into a long term deal.  The standard used to be 7 years...

Full royalty for all geographic territories:  In the past, artists would be paid 50% of their royalty for sales outside their “home” country.  Within a digital economy, this is an anachronism that needs to be removed

New Media deductions:  Some contracts call for paying only 75% of a royalty on “New Media”, including digital.  There is no reason, other than artist royalty reduction, to keep this around.

Digital “Free Goods” and “Packaging”.  Unbelievably, some Label 1.0 companies still use packaging deductions and free goods deductions on Digital delivery. 

Packaging Deductions / Free Goods Deductions:  The worst of a bad bunch, labels would use a 20-25% packaging deduction (the cost to make the records packaging) and a 10-15% free goods deduction ( to account for copies given away as “promotional items”) to reduce an artist’s royalty.  For example, if an artist received a 15% royalty on a CD priced $18.98, he’d get $2.85/CD.  But these deductions would reduce the “royalty base” by the given amount so she’d end up with a smaller cut:

For example, with a 25% packaging deduction and a 15% free goods deduction an artist royalty looks like this:  

25% (pack. ded.)of $18.98= $4.75.  
15% (free goods) of $18.98= $2.84.  

$18.98-
$4.75 (pack ded.)
$2.84 (free good ded.) = $11.39.  

Artist royalty would now be 15% of $11.39, NOT 15% of $18.98.  thus reducing the artist Royalty to $1.71/ CD. 

As a perfect example of how Label 1.0 had a propensity for shooting itself in the foot, a simpler, more transparent method of accounting is currently in use that forgoes all of the number-juggling, but leaves both labels & artists with almost the identical split of revenues.  Instead of basing the royalty on SRLP, why not base it on Wholesale price?  A frontline CD wholesales for about $11.45 today, and would lead to an almost identical split of revenues without the smoke & mirrors - and provide a certain level of trust between labels and artists.

There are of course many methods of equalizing the basis on which the artist/label relationship is based.  That equalization is already well under way, so it only follows that Label 2.0 move with it.

That being said, it's a widely accepted fact that in order for viable business models to emerge from the rubble of Label 1.0, Label 2.0 will have to share in revenues from sources not traditionally demanded by record contracts.  T-Shirt & Merch. sales, tour revenue and performance monies are some examples.  The (now widely derided, but perhaps prophetic) deal that Robbie Williams & EMI struck back in 2002 may be a good blueprint for agreements in the future.

From an artists point of view, I can understand why there'd be some resistance to these kinds of changes. But as Digital Music has served as a leveler, so the relationship of artist/label must come closer & closer to resembling a partnership. (which is why, incidentally, I don't agree with the Controlled Composition clause, but more on that later). 

This is an enormous opportunity for artists and labels across the music industry economic spectrum to abandon years of acrimony and work more closely together for common goals.  It should be an interesting ride...