Breaking Down the Contract

by Chip Cox

A few months ago, this column discussed two announced changes in longtime contract practices by two of the five major label groups (BMG and Universal). In March, a third of the five, Warner Music Group announced a series of changes that go beyond the earlier announcements and if they become accepted by the other labels, give some hope of genuine reform in label accounting practices.

For some time, musicians, most notably Don Henley, have lobbied and testified in the California legislature regarding their belief that the major labels were cheating musicians out of royalties by improper accounting practices. The changes announced by Warner appear to be prompted by legislative pressure as the changes were first revealed to California lawmakers. Here’s a list of the Warner changes:

1. Warner will change royalty amounts from a percentage of suggested manufacturer’s list price to a percentage of the wholesale price received from retailers and distributors. Warner will also drop such provisions as the infamous 25% container deduction and/or the equally infamous new media deduction. These worked on the principle of giveth with one hand whilst taketh away with the other. If a band had a 12% royalty on SMLP, that’d be instantly reduced by the packaging deduction of 25% to just 9% of SMLP. And potentially, so on. And perhaps, so on some more.

What this will do is simplify accounting statements. What it won’t do is actually raise royalties-meaning the effective royalty rates (unless the band had two or more of those 25% reduction clauses). The actual money received per CD sold will be about the same under either contract; it’s just the statements will be easier to read and it’ll be harder for the label to hide royalties from artists.

2. Warner will allow artists to see the manufacturing statements, which is something the labels have always refused to provide. The labels’ theory was that since royalties were only payable on CDs actually sold, it didn’t matter how many they made. Careful readers will quickly realize that a thorough accounting job would require both knowing how many CDs were made, how many were sold, how many became promo copies and how many are left in the label’s warehouse. In an ideal world, the total manufactured would equal sold + promos + inventory. But until you know manufactured, the world wouldn’t begin to be ideal.

3. If an audit uncovers unpaid royalties, Warner will pay interest at the prime rate. Up to now, the typical contract had no provision for interest. So if there’s a cashflow issue at a label, they can stick the money in the bank, pocket the interest, and write that check out months or years later with no monetary penalty to them. The IRS figured out this game years ago, which is why the interest rate for unpaid taxes is so very high.

4. If the same audit discovers an error of more than ten percent, Warner will pay the reasonable fees of the artist’s accountants. I’ve seen this provision in some indie contracts recently, but I’ve also had some indie labels refuse to include it “because the majors don’t do it.” Hopefully, that’ll be the end of that line.

If your band is getting ready to negotiate a contract, these are all provisions you should be asking to have included in your deal. There’s no reason your contract can’t be the first reform deal at your new label.

Chip Cox is a former professor at the University of Missouri Law School and currently practices entertainment law in his hometown of Kansas City, Missouri. He can be reached via email at chip@inspiratron2100.com