Legal Loan Sharking: The Music Industry’s Draconian Business Model

A film studio buys a script from a screenwriter. The screenwriter is paid a fee and the studio owns the script, and as such, the copyright to the script. Imagine if the film studio said to the screenwriter, “We’re going to loan you money to write a script. When you’re finished, we’ll own the script and you’ll owe us the money that we loaned you.”

A publisher buys a manuscript from an author. The author is paid a fee for the right to publish the manuscript, but the author retains his or her copyright to the manuscript. Imagine if the publisher said, “We’re going to loan you money to write a book. When you’re finished, we’ll own the book, we can publish it when and however we like, and you’ll owe us the money that we loaned you.”

In the music industry, labels front artists a recording budget — a loan — to record an album. Artists record their albums, then turn them in to the labels, who then own the exclusive copyright to the master recordings as well as the exclusive right to publish the album. For their services, artists receive a small royalty rate that’s paid against the money that the labels fronted (loaned) them. Seem fair?

Music, easily one of the most important components of popular culture, is a booming business for radio, television, online publications, and more. On the surface, you’d think that recording artists, the music makers and actual bedrock of music itself, are well, if not reasonably, paid. Think again. Sure, some of the A-List recording artists score fat royalty checks, in addition to huge concert/show paydays. Still, even most A-listers’ contracts are tied to the music industry’s model of loan-and-own. Some A-Listers work deals that grant them ownership of their masters, but this is rare and usually only after some considerable time in the business. The truth is, the overwhelming majority of recording artists are locked into the loan-and-own model, which means that most never see a royalty check throughout their entire recording career.

The reason why most recording artists never see a royalty check is because when it comes to recording contracts in the music business it is, and has always been, a legalized form of loan-sharking. The comparison of a bank loan is the most popular analogy of for how recording contracts work in the music business. The idea is that a record label loans money to a recording artist for the purpose of creating new art. When this new art is marketed and sold, there is a split in profits between the label and the artists. The split is typically 88-93% for the label, and 7-12% percent for the artist. In other words, artists routinely sign contracts that give them a base rate of 7 to 12 cents on the dollar. Throw in a 5 cent royalty for each song that an artist writes on the album, and an artist can earn up to 40 or 60 cents per album sold. But none of these royalties are paid until the artist is recouped — i.e. until the loan is paid back.

It’s important to remember that the masters of this newly created art belongs 100% to the label — unless some proportional agreement is made to stipulate otherwise, which of course is extremely rare. Though artists are entitled (supposedly) to a cut of the returns, there is no split in ownership between the labels and the artist. Further, the label retains the right to withhold royalty payments or apply would-be royalty payments to the debt (all monies the label spent on the artist) of the artist. Once an artist has recouped, satisfied their debt, presumably they begin to receive royalties. Note: When an artist has repaid their entire budget, they are said to be fully recouped. But typically, artists never fully recoup. And thus, it’s very common that artists wind up owing their label indefinitely.

This is why the bank loan analogy, that many people like to use, is grossly inadequate. Even a traditional bank loan for consumers with the lowest credit scores is more favoring than the loan terms that recording artists are forced to agree to in a standard recording contract. For example, when a person with absolutely flawless or appalling credit receives a car loan, they gain 100% total use of a new/used car. For all intents and purposes, the car belongs to them. At anytime within the agreement, this person can refinance or actually sell the car. Moreover, at the end of the agreement, usually no longer than five years, the car belongs to them free and clear. In the music business, recording artists almost never own their work, even after the initial agreement that they entered is long over. Furthermore, the only actual usage right that artists retain of the music they create is the right to perform the album at concerts and such — i.e. touring. They can not however resell it, without the permission of the label that they’re signed to.

Because of the labels legal-loan sharking and other practices, I caution people to remember that independence is not merely avoiding relationships with the labels, but rather learning how to preserve the best terms for you as an artist. The biggest advantage to working with a label is being able to access their marketing, promotion, and distribution power. But this access should not come at the cost of a draconian business contract. Hence, I always advise artists (producers are also artists) to form their own entities so that they are better prepared to negotiate with labels. For instance, I release all of my music through my company. If and when I were to ever enter an agreement with a major label or distributor, the agreement would only be for distribution. Which means that regardless of whatever money the label or distributor fronts me, I own the copyright to my masters.

Today, many artists are self-contained and are recording complete albums long before labels get involved. So you would think that artists are increasingly signing straightforward distribution deals. But that’s largely not the case. Even most self-contained artists are still signing loan-and-own deals and giving up ownership to their masters. But know this: If you have a finished album, you don’t have to give up your ownership to your masters. If a major label or a distributor is interested in your project, you can and should avoid the legal-loan sharking system.

The music and videos below are presented here for the purpose of scholarship.

Check out DJ Jazzy Jeff (pre-Will Smith Hollywood fame) as he talks about the highs and lows of winning a Grammy.