RECORD ROYALTIES: PHYSICAL SALES VERSUS DIGITAL DOWNLOADS
The system used by record companies to calculate royalties has never been entirely fair to the artist. With the advent of the World Wide Web and downloadable music, now it simply doesn’t make any sense!
Record royalties are almost always based on the suggested retail price of a record less several deductions. These deductions include packaging costs, free goods and breakage (to name a few). When a consumer purchases a CD from a retail store such as Tower Records, a new artist is credited a royalty of which is typically around $1.00 per sale. For singles it’s far less. When a consumer logs on to a web site such as Amazon.com and downloads the contents of a CD directly to their computer, is it reasonable to apply the same royalty calculation that is applied to a physical product?
Package Costs
For one, a royalty deduction for packaging costs is pointless since there is no packaging included. Even if the artwork, lyrics and liner notes were offered as part of the transaction, the consumer would still have to go out buy the pre-folded photo paper to print it on, the jewel box to put it in, and the CD writable disk (CD-R) to burn their own CD. Some people may not even care about the packaging at all. In fact, statistics show that many kids could care less for it.
Free Goods
A royalty deduction for free goods also makes no sense in the world of digital downloads. Free goods are a so-called purchasing incentive that is offered to retailers in order to encourage sales. The royalty deduction is typically 15 percent. For every 100 records shipped, the record company theoretically invoices retailers for only 85 records. The 15 free records are non-royalty bearing records; therefore the artist is not paid for them. In the case of music sold via digital download, a royalty deduction for free goods is meaningless. No records are sold or shipped to retailers. In fact, the record company’s profit margin significantly increases because they don’t incur any manufacturing, distribution or freight costs. Yet, The artist does not get one dime more!
Breakage
Moving right along, deductions for breakage are especially ridiculous when calculating royalties. This deduction dates back to the days when 78’s were commonly in production. 78s were manufactured from shellac and were susceptible to damage during shipping. Even though CDs and cassettes replaced 78s long ago, some record companies still insist on breakage deductions of approximately 10 percent. For every 100 records sold, the artist receives a royalty for only 90 percent. Subtract an additional 15 percent for free goods and the artist is now paid for only 76.5 percent of all records sold. Can this deduction justifiably apply to the calculation of digital sales? Don’t answer that.
New Technologies
Another deduction to consider is CD reduction. Record companies typically take a deduction for new technologies like CDs since manufacturing costs are high in the beginning. Despite the fact that CDs are not particularly new anymore and manufacturing costs have leveled out, record companies still get away with this deduction. CD reduction is usually 85 percent of the royalty rate for cassettes. Chances are there will be a deduction for digital downloads as well. Rumor has it that it will be 85 percent of the rate for CDs? Only time will tell.
Foreign
There are so many more issues to discuss regarding royalties for physical sales versus digital downloads. Take deductions for foreign royalties for example. Artists receive a record royalty that is 75 percent of their U.S. basic rate for major markets such as Japan, the United Kingdom, Germany, Holland, France and Italy. For other territories in the world the royalty is 50 to 60 percent of the U.S. basic rate. But how can territories be defined over the Internet for both physical and digital sales when the World Wide Web is a global market? This is a very serious issue that may take years to resolve.
So where is all of this mess concerning royalties going to end up? Don Passman, author of the book All You Need To Know About The Music Business has an interesting theory called “The Passman Theory of Technology Cycles.” It goes something like this: Every time a new technology is discovered, it sends the record industry into a frenzy. Right now downloadable music is still a new technology and the record companies don’t know its economics. Despite the fact that digital sales may seem more profitable, there are huge costs for setting up download capability. This results in a royalty structure that is not particularly fair to the artist. Eventually a reasonable system for computing digital downloads will be devised and an industry pattern will form. By then, the next technological advancement will be discovered and the cycle will begin all over again.
Copyright 2002 Bobby Borg.
Excerpt taken from "The Musician’s Handbook: A Practical Guide To Understanding The Music Business,"
scheduled for release in the Spring 2003 by Billboard Books.
For more information or comments, visit http://www.bobbyborg.com,
or write: mailto:bborg@earthlink.net, or Bobby Borg, PO Box 18564, Beverly Hills, CA 90209.
