Interviewed by Doug Minnick

Veteran attorney Jim Zumwalt represents recording artists in contractual negotiations with record companies. Among his clients are Jackyl, Kenny Wayne Shepherd, Big Head Todd & the Monsters, Jackopierce, Jars of Clay, Jack Ingram and songwriter/producer Tommy Sims ("Change the World"), as well as the recently signed bands Stir, Mighty Joe Plum and the Honeyrods.

Having negotiated the record deals of all of the above artists, the Nashville-based lawyer has an intimate knowledge of artist contracts. Having also represented indie label Spongebath and his own Paladin Records (an affiliate of Revolution Records whose best-known artist is veteran writer/singer Steve Forbert), Zumwalt has viewed dealmaking from both sides of the bargaining table, so he's in a particularly good position to explain the keys and nuances of present-day record deals.

In order for the layperson to more fully understand Zumwalt's points, some background is necessary:

The law of supply and demand applies not just to selling records but to getting a record deal in the first place. Since the breakthroughs of Nirvana and Pearl Jam in the fall of 1991, major labels have been increasingly willing to shell out big bucks in order to lure alternative bands that their A&R people identify as having the potential to connect with record buyers in a big way—particularly when other record companies want the act as well. These sorts of scenarios have resulted in the creation of what the industry refers to as "buzz bands"—acts that are being hotly pursued by several labels. Because the demand for these bands is so great, the attorneys representing them have been able to extract significant concessions from record company lawyers when negotiating artist contracts. These guarantees have become the rule rather than the exception in bidding-war deals. Recent recipients of megadeals include Ben Folds Five (signed to Epic/550), Jennifer Trynin (Warner Bros.), Hayden (Outpost), the Eels (Dreamworks), Girls Against Boys (Geffen/DGC), Whiskeytown (Outpost) and Sister Soleil (Universal).

According to A&R rep Liz Brooks of the Work Group, "The wave of signings of alternative bands has really done artists a favor. There's a definite trend of artist-friendliness because of the competition. There are things that artists will get in contracts now that they never would've gotten before. Issues like reversion of masters are now being discussed, bands get things guaranteed in contracts that didn't used to be a given, like tour support. It's a healthy trend for artists in that sense. Financially, deals have ballooned, which I'm not sure is such a good thing."

Reprise staff producer/A&R exec. Rob Cavallo shares Brooks' misgivings about mega-deals. " "I have yet to see a giant bidding-war band actually succeed," he says. "I don't think there ever will be one, because I know what the burden is; I've seen what happens when a band's financial situation changes. Money changes you, especially when you haven't earned it yet."

It's important to understand that a big advance is just that, an advance against future earnings from record sales—in other words, an interest-free loan. Ironically, these advances tend to reward commercial failures, because artists who fail to generate income have no way to repay their labels, which are forced to eat the front money they put out.

What are the some of the other concessions frequently granted to in-demand artists in bidding-war deals?

  • Record royalty rate: The percentage of record-sale revenue that goes to the artist. Hence, the higher the rate, the more money the artist receives. In the past, a royalty rate of 14-16% was considered to be generous; with buzz bands, it can go several points higher. Keep in mind that the artist doesn't start earning money from record sales until the label has recouped the advance and the monies it put out to market the artist's recordings. Ninety-five times out of 100, the label never recoups, and the artist never derives any income from record sales.

  • Non-recoupable items: In a conventional record deal, the artist is ultimately responsible for all costs incurred by the label in the marketing of an album. Attorneys for buzz bands frequently demand that certain of these costs become the responsibility of the label instead. In deals for the most sought-after acts, even a significant percentage of the artist advance is sometimes made non-recoupable.

  • Controlled composition rate: Until the advent of bidding-war deals, labels typically insisted on a standard reduction of the rate they were required to pay songwriter/artists and their publishers for the use of self-written songs contained on the artists' recordings. This standard reduction was 75% of the full statutory rate, which is set by law, presently 6.95 ¢ per song, on a maximum of 10 songs per album. This reduction would mean that instead of earning 69.5¢ on each album sale, the writer/artist and his/her publisher would receive three-quarters of that amount, or 52.125¢ per album. Recipients of buzz-band deals, on the other hand, almost invariably are granted full rate. Since the vast majority of artists never earn money from record sales, this issue is particularly significant from the perspective of the writer/artist.

  • Reversion of master ownership to the artist: The most significant concession of all, in that master recordings are the income generators of the record business, and the owners of these masters are the recipients of this income.

  • Creative control: Gives the artist the sole right to select the material and producer of each recording project, and sometimes grants the artist the right of approval over such items as album packaging, advertising and videos.
Got that? Yes, there's a lot to this area—and we've only scratched the surface. But it's essential for anyone who aspires to a career as a recording artist to understand as much as possible. Now for the conversation with Jim Zumwalt:

True or false? Record deals are fundamentally different now than five or six years ago.

The truth of the matter is I don't feel that there have been a lot of dramatic changes in the way deals are done. I think philosophically the deals that I'm doing are conceptually still very similar to deals I was doing five years ago. Some deals are real big; some deals are smaller. Album budgets haven't really changed that much. Budgets can run, for an indie, from $5,000 to $25,000, all the way up to $75,000. For a major, albums can run from $75,000 up to $300,000. with some signification portion of that allocation front-end-loaded.

But there's a big difference between conventional artist contracts and deals that result when several labels are after an act, right?

Overall, I think the industry is slightly more conservative on normal deals, but the cost of bidding-war deals has escalated. It's not unusual in a bidding-war deal for it to be heavily front-end-loaded, and for there to be a three-album-firm commitment, and an allocation of $500,000-600,000 per album, with some significant part of the allocation on the front end. So a deal like $750,000 up front with three albums firm at $400,000 per album, for a $1.95 million commitment, would be a bidding-war deal.

However, because [the record business is] in a very moderate recession, and we're all worried that it's going to increase, that is somewhat changing the economics of the business. Everybody's worried that we're signing too many artists and putting too many records out, there are too many records that aren't great, and there's a lot of them that aren't even good. I think labels are willing to spend the big bucks to get something they feel they have to have, but on the other hand, they're trying to be more selective and conservative in their overall signing philosophy.

Apart from the advent of buzz-band deals, what other new factors are involved in negotiating record deals these days?

I think the biggest change in the last three or four years is the advent of independent labels, custom labels, band-owned labels, and therefore, the proliferation of indie records that are out there. When you make a major label deal, taking in the context the ownership of the existing masters, defining if the band is going to retain their indie masters, or if an indie label retains those masters. How does a major label position itself relative to those masters? What commitments do they seek from the band to restrain or resist from exploiting those masters? What can be done? What can't be done? Where can they be sold—through indie distributions or just through the band's live performances, through the fan club, through the Internet? Those are all issues that are more coming into deals in the last three years than existed before that. In my mind, that is the biggest area that I deal with in contemporary deals that differs from maybe four years ago.

So the question of who owns the band's previously recorded masters—the indie that put out the record, the band, or the major label that signs it—is an added complexity in that regard.

You've got to think all of that through very carefully. When you're a lawyer for a band, you've got to really know your band and what your strategy is; when you're a lawyer for a record label, you've got to really dig in and find out as much as you can about the band and then figure out before you go into the negotiations strategically what you ultimately want to do regarding the band's catalogue. To me, that's an added sophistication.

Beyond that, I'd say that there's a slight trend to record companies becoming a little more liberal in the negotiation of the controlled composition clause [which reduces the per-song amount a label is obligated to pay a writer/artist]. This isn't an absolutely dramatic change, but it's a subtle change. I think lawyers are extracting more and more benefits for their artists relative to controlled compositions. That's a trend I've been seeing for three or four years.

How frequently do you see bands getting full-rate on controlled compositions rather than the previously standard three-quarter rate?

Only in a bidding-war situation. When I say bidding war, I mean where there's a competitive deal where there is more than one label bidding for the band's services, and then where the lawyer representing the band makes it a major strike point from the getgo.

I'd imagine the label's lawyers would be reluctant to agree to full rate, since that means that the label has to pay another 25% to the act's writers. But if the head of the label wants the band badly enough, they'd be willing to make that concession, right?

The job of business affairs [the record company's legal department, whose attorneys negotiate record deals] is to mitigate the cost of mechanical royalties. So if you allow that issue to become totally and solely a business affairs issue, business affairs is likely to prevail. If a lawyer [representing the artist] prioritizes that issue in a competitive situation, the lawyer is more likely to be successful. I have found in the last three or four years that lawyers are becoming more and more successful in attaining concessions in controlled compositions. And that's a really important area, because those royalties are essentially paid from the first sales, whereas artist royalties, even though computed from first sales, are [generally] being recouped against the artist side. The mechanical side is a much more immediately viable economic issue for a band.

In terms of recoupability, most record deals make the band 100% responsible for most marketing expenses, from tour support to advertising to the cost of independent radio promotion. The one expense labels traditionally have been willing to split with their acts is the cost of video production. Is that still the case?

I think everybody's becoming more conservative about videos. I don't think that the deal philosophy has changed, other than labels are more reluctant to put video commitments [regarding the number of videos per album and their budgets] in deals, and artists are more and more reluctant to having to commit to do videos. It depends on the type of music and the type of band. You can't really generalize about that one.

Have you heard about the kinds of more innovative, artist-friendly deals that people like Jim Guerinot at Time Bomb are trying to do, including offering significantly higher royalty rates and allowing ownership of the masters to revert back to the artist after a certain period of time? Considering the fact that record deals have typically been weighted to the benefit of the label rather than the artist, would you consider these sorts of deals as the redressing of a long-standing inequity, or is it simply that the buzz-band phenomenon allows in-demand artists to get rich before they've actually done anything to deserve the big bucks?

I think every company, basically and ultimately, has the same philosophy, which is to own masters on artists and to tie up artists as long as they can. Now, if in order to be competitive, a company comes along and says they're only going to sign an artist for five albums, rather than seven albums, then that's a more artist-friendly deal. Maybe that's what that company has decided is the way they want to spin it so that they have a vehicle of having more artists wanting to come to that company because they are more artist-friendly or that they treat artists more fairly.

The bigger companies have a more rigid philosophy about what they do in deals, and it's up to the A&R person and president of the label to spin any individual signing so that it works for that label. Things like mutual [creative] control or total control on selection of producer, selection of material, creative elements in a deal—all of those can be spun in a different way depending on who the artist is, and how bad they want the artist, and how together the artist is.

In terms of getting away from record labels owning masters, I don't see it. I think every record label wants to own the master. That's what they're doing—they're building equity.

If they don't own the master, they have no long-term equity. They're merely "renting" the services of the artist.

That's right. Then they just have an income participation. The business isn't set up that way to want to do that. I don't see that changing. There are lots of different ways you can spin an artist-friendly environment. I own a label, a little indie called Paladin Records, and we sell that profusely. We spend lengthy time saying how we're different philosophically from the majors. I think indies and smaller labels are selling their "boutiqueness" and their sensitivity to the artistic process; the big boys are selling their power, their leverage, and their clout.

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