Introduction

It's every young artist's dream to be signed by a major record label and become rich and famous. In reality that first part might not be the smartest career choice, it might not even be an option. Many artists work in a genre that would be better served by one of the smaller independent record labels. And, many artists will be able to do just fine without a record company's help at all.

My purpose here is to give just a short primer on the services record companies can provide and what those services would cost the artist. The major focus will be on what one of the major record labels might offer a promising new singer/songwriter. Let me insert a disclaimer here: This article is not all-inclusive.  There are many books on this subject that go into more detail.  Also, I highly recommend that artists retain an attorney specializing in the entertainment industry before entering into any industry related agreement. A number of highly qualified attorneys are listed in the OutboundMusic "Resource Directory".

Are all record companies the same?

The obvious short answer is, No. Record labels range in size from one or two person operations to companies with hundreds of employees. A small company might perform only minimal management operations while the larger companies can develop and sustain all aspects of an artist's career. Record companies also tend to specialize by genre. While the bigger labels do have separate divisions within the company specializing in specific genres, even they don't deal with all styles of music. Small independent record labels tend to limits themselves to only one or two genres.

There are tremendous differences in a record companies' available assets-both hard assets (physical items under their control) and soft assets (networking connections and the like). These assets determine a company's ability to develop and produce projects, to direct manufacturing and distribution and to effectively market. Some examples: The major record labels can market worldwide while a smaller company might have only a regional footprint. Also, a label based in Houston couldn't be expected to tap into the same studio capabilities that a New York or L. A. company could. And while the Internet is a potential equalizer, large companies still have easier access to national distribution networks.

Business philosophies differ between record labels and this should be an extremely important consideration to the artist. All record labels are in business to make money, and that's not a bad thing in itself, but many of them don't give a fair return for that money. Some companies will attempt to sign many young artists, do as little initial work as possible and then focus their efforts on the one or two artists showing the most promise. Other companies will do a better job of scouting potential clients and then only sign those they believe in. In both cases there are companies who will negotiate fair contracts and companies who negotiate contracts that are decidedly one-sided. I should point out that what is fair for one artist might not be fair for another-it all depends on how much each brings to the negotiating table. In contract negotiations each side wants something from the other and each side has something to offer. The point of the negotiation is to agree on the terms of fair exchange. That said, it's almost a general rule that the bigger the company the more they feel they can dictate the terms.

With all the above in mind, before deciding on a record company an artist needs to do some self-evaluation and some investigation. First an artist needs to asses his/her talents, abilities, accomplishments and needs. Then he/she should identify the type of record company most likely to complement that assessment. Final, the artist needs to investigate the record company candidates-looking at past history, talking with current and past clients, consulting an attorney.

What can an artist do to enhance his/her bargaining position?

Certainly an artist should polish his/her skills; songwriting, instrumentation, and stage presence.  But there are also some simple business considerations that should be addressed. Below are listed a number of items that should get attention. In fact, a working singer/songwriter should already have done most of what's on this list.

1. Form your entertainment entity (yourself or your band) into a legal business.     If you're performing for money this should already be done. It just defines     and protects your legal interests in so many ways.

2. Register the copyrights of all your original material. If the size of your     catalog is large you can register it as a single volume of work (see the     companion article "ABCs of Song Copyrights").

3. Affiliate yourself as a songwriter with a performance organization (BMI or     ASCAP, SESAC is by invitation only so this is not usually an option).

4. Form your own publishing company and affiliate it with your performance     organization.

5. Keep a log of your performances and include locations, dates, and crowd size     and makeup.

6. Maintain a mailing list (email list) of fans.

7. Maintain a music-review and music-news scrapbook of your performances or     recordings.

8. Maintain a website and keep site tracking data.

The first four items establishes control over your own body of work. The last four items are so you'll have at your fingertips some basic statistics. A major record company would have scouted you pretty well before making an offer but they won't bring up any favorable reports about you during a contract negotiation--you just might have to remind them.

What will be the major points of negotiation?

Again I will assume the negotiations are between one of the major record labels and a promising young artist who performs his/her own material.

Singer/songwriters have a number of assets:

1. The music
2. Personal marketability

Major record companies do their homework. They will know the level of your craftsmanship and marketability. What's important here is that you have an honest understanding of your strengths and weaknesses.

Singer/songwriters have a number of possible revenue sources:

1. CD sales
2. Live performance fees
3. Mechanical royalties
4. Television/Movie use royalties
5. Print royalties

The big three here are CD sales, Performance fees and Mechanical royalties (Television/Movies use royalties can be lucrative but that is usually a closed market-and the subject of a future article).

The major record company assets include:

1. Know-how
2. Contacts
3. Money

Whether a record company has producers under contract or not or whether it operates its own recording studio or subcontracts is pretty immaterial. What they really bring to the table are Know-how, Contacts and Money. They can get the job done because they've done it before and they have the all the money and talent needed to do it again.

The major record companies also have sources of revenue:

1. CD sales
2. Licensing royalties
3. Consulting fees (this is where you pay for their know-how).

This is where it gets interesting. In the negotiation both the artist and the label will want to maximize there revenue potential and they will be using their assets as justification. But like I said before the major record labels come to the table believing that they have the most to offer and deserve the lion's share of revenues. In fact they usually approach contract talks as dictates not a negotiations.

Here is pretty much what a major record label might offer our hypothetical singer/songwriter:

1. The sale price of a CD will be the list price minus 25%. That 25% will be the     fee for CD graphic design, manufacturing and packaging.

2. The artist will receive 8-12% of CD sales based upon the above "sale     price".

3. The artist will be responsible for paying the producer's royalties-typically     3% of CD sales.

4. The artist will be responsible for all productions costs.

5. The artist will be responsible for all promotional costs.

6. The artist will be responsible for all tour costs.

7. If the artist is also his/her own publisher the label will only pay 75% of the     mechanical royalties set by statute. If the artist is not his/her own publisher     the label will take on that role and then pay the artist 50% of mechanical     royalties.

8. The artist assigns exclusive rights to the label for the number of projects     specified in the contract. (This usually includes one or two projects plus     some option projects.)

9. The artist may not record any projects for other companies until the terms of     this contract are fulfilled.

10. All financial obligations will be paid before the artist receives any CD sale's     royalties-the artist does receive any mechanical royalties due.

Items 1,2 and 3 are standard. There is a little negotiating room in item 2, but not much.
Of course there will be a lot of hidden costs in items 4, 5 and 6 especially if the record label acts as the contractor or subcontractor here-which it pretty much insists on. Item 7 is another argument for an artist forming his/her own publishing company. Items 8, 9 and 10 are set in stone.

Can an artist do better on his/her own?

There are many areas in which the artist can get the same service for a lot less money.

Consider Item 1 above, if the list price for a CD is $16 that would mean $4 per CD is being earmarked for design, manufacturing and packaging. As an independent you could easily shop around and match the record label's quality product for about $2 per CD for 10,000 units (the label's price will be based on a minimum of 25,000 units and probably really costs $1.50 per CD-the rest is just their markup). And of course if you're acting as an independent you will control 100% of the CD list price, not 8-12% of the sale price.

Production costs is another area where you can save money. Most often a record company will use the same recording studio available to any independent artist. And an independent artist can get the same results out of the studio that the record company could. The artist's can do this at a fraction of what the record company would charge. But to do so the artist needs to educate him/her self about recording studios and the people who run them. The higher price a record label charges to an artist's royalties account is justified the by companies knowledge of the studio process--this is knowledge an artist can easily obtain.

The best argument for signing with a major record label is their marketing and promotions capability. It would be very difficult for an independent artist to match the monster-marketing engine of a major record company. An artist can become a star with effective marketing and OK music. An artist will remain a star with OK marketing and good music. And this is what a major label offers. Fifteen years ago, maybe even five years ago there would be no logical counter argument to these assertions but now we see the beginning of a potential alternative. As the Internet matures it will become ever easier for an independent artist to affectively reach around with world with his/her music. The problem will no longer be how to reach multitudes of people but how to distinguish yourself from everyone else who is reaching those people.

I listed Touring separate from promotions to highlight a point. Most artists consider touring as a money making endeavor. On the smaller level it is the local independent singer/songwriter supporting him/her self by playing clubs and venues. On a much larger scale it is the likes of the Rolling Stones or Elton John or Billy Joel making major money doing dinosaur tours. It seems only in the realm of the Record Label supported tour is there money lost. While there is always enough money to pay for the labels support the artist either gets very little or a loss is charged to his/her account-remember, that loss must be paid back before any royalties are paid.

Again, I believe all singer/songwriters should form their own publishing companies and item 7 above highlights that point. There is an obvious bargaining benefit if an artist is negotiating with a record company but there are also benefits for the independent artist. You can read more about this in the companion article, "Music Publishing (How to become your own publisher and why.)"

So, how to choose?

It comes down to this: An independent will get a bigger piece of the pie but the pie might not be too big. With a major label the cut of the pie will be a lot smaller but it's more likely to come from a really big pie.

There are many independent artists who make a good living in music, Ami DeForst and Neil Young are two that spring to mind, and there are many well known signed artist that aren't making a lot of money. Each artist has to decide how much work they are willing to do on their own and how much they are willing to give someone else to handle the rest.