Steve Albini and The Problem With Royalty Base Record Deals

MBW Views is a series of exclusive op/eds from eminent music industry people… with something to say.  The following op/ed comes from UK-based Hunter Giles (pictured), who co-founded and leads Infinite Catalog, a royalty accounting software + service company.

Whenever I talk to artists who want to sign a profit share record deal, the 50/50 kind, I always think of them in a particular context. Imagine a pond, about twenty feet wide and ten feet deep, maybe sixty yards long. I imagine the artists at one end of the pond and the people from the indie label at the other, waving hello and, with sheepish grins, holding a profit share deal waiting to be signed.

The indie label people are gesturing, saying get in, it’s fine! Maybe not the most pristine pond of all time, and there’s always some risk in swimming, but it’s perfectly safe and you’re welcome to swim as long as you like. All the artists jump in, and despite the fact that most aren’t strong swimmers yet, they all paddle around, try out some strokes, and splash each other with playful camaraderie.

Two artists get to the label end first. To one, the label says, “You’re obviously great, but we don’t think signing you would be the right move for either of us. The pond is a great place to keep developing, and we’ll be rooting for you from here.”

To the other, they say, “We’d love to work with you, even though the odds of success are long and the road is hard. We don’t care. We believe in you.” And they do.

Next to this pond is a trench of decaying shit. This is where you swim if you want to sign a royalty-base record deal.

i. Steve Albini and The Problem With Music

We lost Steve Albini last week, and I thought I’d pay tribute by revisiting his The Problem With Music, a seminal text of the DIY and indie scene that is still relevant today.

From the colorful opening to the spine-shivering final line, it pulled back the veil on the dark underbelly of the music industry circa 1993. Names are named. The middle section is a rant about recording. The entire shell game of a major label “royalty base” record deal is unmasked with the parable of one band’s seemingly-positive journey ($250,000 advance, $3 million in record sales, a bus tour) that nevertheless leaves them -$14k in the royalty hole.

Albini might have scoffed at my intro above, an inversion of his intro to The Problem With Music, where sadistic major label A&R flacks demand artists swim backstroke through a trench of decaying shit. I wouldn’t argue with him if he did. The challenges and pitfalls of combining art and commerce do not just dissolve because people call themselves DIY or indie, use one kind of deal vs. another, or say they care more about artists than money.

In fact let’s state it for the record: plenty of indies get exposed for shady deals, faulty royalty accounting, and not paying artists. I started my company Infinite Catalog to help people avoid and address this not-uncommon fate.

Attention-grabbing pond-vs.-trench intro aside, just because a label is independent or does profit share deals does not mean they or the deal is inherently “good,” nor are the majors or all royalty base deals inherently “bad.”

But they are different, these deals.

The Problem With Music made the reasons for the music industry’s terrible reputation crystal clear. That’s what made it such a powerful piece, and Albini, unafraid to speak truth to power and one eloquent motherfucker, was the perfect messenger. His impact on music as an engineer and artist was profound and is rightly getting most of the attention, but it was The Problem With Music that changed my life.

Because when I read it, I’d also recently learned about the other kind of record deal – the profit share (50/50) ones that had been used by indies for decades, which better align the label with the artists. He’d perfectly described “the problem” and profit share deals seemed like the obvious solution to me, especially given I didn’t and don’t think the people handing out royalty base deals are greedy psychos.

If more people knew how the deal types differed, maybe artists would stop signing up for the shit trench, or the people involved would stop forcing artists to swim backstroke through it, because there’s a perfectly good pond everyone can use instead.

That’s what I thought then, and it’s what I think now. With all due respect to Steve Albini, he didn’t mention profit share deals in The Problem With Music, or think to compare the two for the same scenario.

Nor did I until he died last week. That’s what this is.

ii. The Two Types of Record Deals

Net profit record deals work like this: the label pays for most of the expenses and any advance up front, collects all the income, and if they break even, splits the profits (usually 50/50) with the artist. If the label doesn’t recoup the expenses and advance, the artist doesn’t have to pay them back.

In royalty base deals, the artist gets a “royalty rate” that’s typically around 15-20%, and physical sales are accounted at a “PPD” rate (“Published Price to Dealer”) set in the contract which may or (much more likely) may not be the same amount of income the label actually collects from the sales (since in the real world there’s lots of different prices, discounts, etc).

These deals often include a more generous “license rate” that’s typically 50% for things like syncs and other non-sale income, and you’d think this would be the rate they apply to income from streaming and social (since there’s obviously no way to set a standard rate for that), but last I checked they mostly still use the physical sales rate (unless you sue them).

Manufacturing and distribution costs do get shouldered by the label entirely in these deals (in profit share all costs end up “shared” between the label and artist if it recoups), but there’s typically a 10% “packaging deduction” from the royalty rate to cover the former, and if they’re a major, they own the distribution company too, so that “cost” is going in as income in a separate part of their business.

This means that in the morass of the royalty base shit-trench, it’s difficult and often impossible for the artist – and even the label itself – to ever really know what a record actually earned or how much the label profited compared to the artist. At the label, the real income is handled on the accounting side, while the “calculated” income is handled on the royalties side, and rarely the twain shall meet.

The misalignment between label and artist caused by these royalty base deals is, in my opinion, the longest running problem in the history of popular music, harming not just artists, but literally every music fan that missed out on untold records that were never made, because the careers of great bands they never got a chance to hear were doomed once the ink on their royalty base deal was dry.

It’s also a problem we can fix. To paraphrase an artist who broke away from a major and started their own label the first chance they got, this war can be over tomorrow (if you want it).

iii. There’s These Bands

There’s these two bands. They’re both really fucking good, have attracted followings, and are getting some serious heat from some serious industry players. They’ve both been self-releasing through an aggregator that only costs them $20/month with no cut of royalties, so they’ve already started earning real cash on their own.

But they’re both ambitious, and they know that really breaking through means doing a deal with the devil that is the music industry. Originally they wanted to be like Chance the Rapper and stay totally DIY, but look what happened to him, right? No thanks.

So they get seasoned managers and lawyers, people THEY pay to look out for them. Besides, since they’re already having success self-releasing, they hold all the cards! They’re not going to sign napkins in bars or take the better of two bad options. If they don’t like the deals, they’ll just walk away.

But wow, not only are they getting offers, there’s a full blown bidding war going on!

They narrow it down to two deals each. One’s more of an “old-school” royalty base deal – bigger advance, but a smaller royalty rate. The other is a profit share deal, with a smaller advance, but a higher royalty rate. Both bands get offered the exact same deals, one of each type.

One band goes with the profit share deal. Maybe they’re thinking “long term” or maybe they just like that label better.

The other band goes with the royalty base deal. Maybe it was the bigger advance, maybe they just liked that other label better, maybe they thought ya know, nothing’s for sure. This way if it flops, at least they got the bigger advance, and if it hits, it hits! Can’t lose right?

Their records drop and their identically priced videos and PR teams get to work, and both are in fact hits! The records each make a million and a half from streaming, another $500,000 in physical sales, and $100,000 in license and other random income.

Here is the math that shows what a huge mistake the royalty base deal was:

These bands made the music industry around three million dollars richer each from these records alone, but the royalty base band is -$14,000 in the royalty hole.

They’ll recoup eventually, but they’re earning just ~ 20% of every $1 in income generated. What they’ve got leftover from their advance for themselves at this point is less than if they’d worked at a 7-11.

The dissonance of their success and their royalty balance drives a rift between them and the label, and the relationship sours. The label picks up their next option anyway but the band doesn’t want to work with them anymore. The stalemate kills their momentum and their career goes into the proverbial shit-trench.

Meanwhile, the profit share band has made themselves and their team far more money, and their label is doing just fine. Not only are they over $250,000 ahead of the royalty base band at this point, they and their producer are making a combined 50% of every $1 that comes in. All sides feel great about everything, and they keep swimming together for years to come.

Profit share deals are almost magical for how fair, flexible, and transparent they are. Rarely do people complain about these deals, even when things don’t work out.

Nobody likes royalty base deals except the labels that do them.

Not the artists who never recoup and see their careers over far too soon, not the few who do recoup and limp along, not even the tiny fraction who by a statistical miracle make it big on these deals, because the label – an administrative and marketing apparatus they temporarily worked with – is making around 80% of the money forever.

“Some of your friends are probably already this fucked.” – Steve AlbiniMusic Business Worldwide