Below is an article that I wrote in 2014.
Just thought I'd publish it anyway
As I was thinking about how to improve publisher deals in the mobile gaming world, I came across a book called "All you need to know about the music business" (8th edition) from D. Passman. It seems to be industry standard literature and I thought why not elaborate on some deal terms between a record company (RC) and an artist that are discussed in the book. Surely, there might be some interesting findings we might get from their industry norms. Here are some fundamental principles of a record deal.
Basics of a record deal
- The RC pays artist an upfront royalty payment (or advance payment)
- Advances usually cover record costs
- After sales start, the RC keeps money until the upfront payment is paid. This is called recoupment. (see below for clear definition). In other words, "the process of keeping the money to recover an advance is called recoupment, and we say an advance is recoupable from royalties. The amount of unrecouped monies is called deficit or red position".
- Usually, the RC carries the risk of recoupment, which means in case actual revenues are not exceeded by upfront payment, it is never paid back by the artist
- In case there are more record deals between the RC and the artist, the upfront payment is cross-collateralized which means unless the sum of record A and B recover the advance payment, no royalty payment is being made to the artist.
- Deficits of A and B are carried forward to the next album sequentially and the artist has a red position. ("under this or any other agreement")
- Royalty % going to the artist can range between 13 - 20% with latter being "super stars".
- Royalty % can also escalate. E.g. after x units are sold royalty % increases by 1-2% as an example.
CD Revenues for an artist:
PPD after discounts 9,00 €
Royalty % 15%
Royalty 1,35 €
Net Rate 0,99 €
Producer % of PPD 4%
Royalty PD 0,36 €
*PPD = wholesale price
Note that a personal manager (PM) of a usually gets 15% of the artists gross revenues (usually capped at 50% of net )
PM Fee as % of gross 15%
PM Fee in € 0,20 €
So the artist would have to deduct 20c from 99c net rate = 79 cents
The net rate implies that the artist is "all-in" meaning he/she is responsible for recording the song and paying the producer.
Today most recording deals are structured as funds. A fund is a set amount of money that may be payable to the artist as an advance. So any excess amount outside of recording costs goes into the pocket of the artist.
Usually there is a formula for advances which caps upside and downside of a deal from the RC's perspective. The advance for the second album is 60-70% of earned royalties of the first album (within the first 6 - 18 months after release). The floor (ceiling) is the minimum (maximum) amount for the advance for the next album. This could look as follows:
Album Floor Ceiling
1 175.000 € n.a.
2 175.000 € 400.000 €
3 200.000 € 450.000 €
4 200.000 € 550.000 €
5 250.000 € 700.000 €
6 300.000 € 800.000 €
For the sixth album, artist will not get a higher advance than 800k $ in fund advances.
The problem is that when the collateralization is mingled with this concept and the artist is "in-red". There needs to be a subfloor meaning a minimum amount which is needed at least to finish the recording.
Note that the floors ceiling curve is steeper to protect the RC's downside
RC's want a share of the total income of artists. This also includes touring, songwriting, merchandising, fan clubs, sponsoship money, etc. Usually a record company will get about 15 - 30% of net-income from those revenue streams or 7,5 - 15% of gross revenues.
Although I am sure that not all concepts are new to the mobile gaming industry, there some valuable concepts:
- Collateralization: Interesting in particular when developer and publisher work together for a longer period of time
- Floor: To incentivize developers for the next project regardless of past failures
- Ceiling: To keep publishers cash flow under control
- 360 deals are a great way of publishers to earn from the brand-building of lets say characters within a game.