This Article Originally Published March 1999


by Donald S. Passman

After a record has had its initial run in current release, it is known as a catalog item, meaning it's listed in the company's catalog of available titles, but isn't being currently promoted. Most record companies' catalog items are now issued at mid-price, meaning a reduced price that's designated to encourage consumers to buy older titles. Today, a typical mid-price for a cassette album originally released at $10.98 would be $7.98, and a CD originally released at $15.98 would be $11.98.

Royalty

The royalty rate for mid-price is usually 75% of the U.S. basic rate (7.5% if you have a 10% royalty). Note this is a double whammy--not only is the royalty rate lower, but the retail price on which it's based is also lower. The record companies justify this because their wholesale price is lower, and accordingly, so is their profit margin. Their thinking is that the lower price will generate extra sales to more than make up for the lost revenue.

Here's an example of a mid-priced cassette royalty computation:

Retail Price:
$7.98
Less 20% Packaging
-$1.60
Royalty Base
$ 6.38
Royalty Rate
-x 7.5%
Royalty (rounded to penny)
$.48

Compare this to your royalty of 87.9 cents when this same record is sold at full price and pray the companies are right about the extra sales.

As you gain clout, you can negotiate a period of time after initial release before a record can be released at mid-price in the United States (usually 12-18 months), or perhaps even a flat prohibition without your consent. This provision used to be easier to get than it is today, because it's a relatively recent practice to issue catalog items at mid-price.

In some territories of the world, mid-price is customary for the first release, and there is little, if anything, you can do about it. Presumably, your interests and the record company's are the same, since they want to maximize their profits in that territory. Thus, they won't put something out at mid-price unless they feel the reduced price will promote the sale of enough additional copies to justify the lower profit margin.

Budget Records

The next step down from mid-price is Budget, which means a record the company doesn't think it can sell unless it knocks the price way down. These are the ones stuck in bins (with a handwritten sign saying "Big Savings!") selling for $4.98 or less for cassettes, and $9.98 or less for CDs. The contractual definition for budget records is one with a price of less than 65% of the top-line price, but sometimes there is no mid-line defined and the contract says everything under 80% of the top-line is a budget record.

Budget Royalties

The royalty on budget records is usually 50% of the top-line royalty rate, or 5% in our 10% example. With some clout, you can hold back budget records for a period after initial release. Because being on a budget line is a statement about what the company thinks of your career, you can usually get a longer holdback than you can for mid-price. For example, in the United States, the company might agree to wait 18 months to two years after initial release. Again, foreign markets have their own peculiarities, and there will be little you can do unless you're a major artist in a particular territory. As your muscle increases, you may be able to get a flat prohibition against budget, at least during the term of your agreement. And, if you can't get the right to consent to budgets after the term, a compromise is to say they can't do it as long as your account is recouped. The idea is that, if they've lost money on your project, they can do whatever they want to get even, but otherwise, they must keep you off the budget line.

Record Clubs

Record Clubs are mail order clubs which you join by agreeing to buy a certain number of records. Royalties for record clubs sales are usually half of the top-line royalty rate, but not more than 50% of the company's net licensing receipts from the record club (remember that these sales are licensed to record clubs, who manufacture and distribute the records). With a little clout, you can get a straight 50% of the company's net licensing receipts.

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."

From "All You Need To Know About The Music Business" by Donald S. Passman. ©1991, 1994, 1997 by Donald S. Passman. Reprinted by permission of Simon & Schuster, Inc.




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