The Economics of music for attorneys and others: A redux (part four)

By John F. Sase, Ph.D.
Gerard J. Senick, general editor
Julie G. Sase, copyeditor

“Aside from the creative and technical aspects of recording an album, there are legal and contractual issues that must be considered before even entering the studio. The artist or label paying the expenses of recording must be sure that everyone is on the same page regarding whether fees and/or royalties are to be paid and, if so, how much is to be paid to each party.”
—Howard Hertz,
entertainment attorney,
Hertz Schram PC,
Bloomfield Hills, MI (www.hertzschram.com)

Depending on the individual foci of law practices, attorneys may take cases regarding intellectual property and contracts in the music industry. Often, composers and performing artists remain neophytes in matters of the economic and legal issues of their industry. This month, we continue to address the basics of economics and law that intermingle in the production, recording, manufacturing, and marketing of recorded music. For the benefit of our readers, we will minimize our economic techno-speak as we present our basic treatise on issues involving the market for music. We hope that our efforts will aid attorneys, both individually and in the education of their clients who pursue a career in the field music.

The Basic Business of Music

Legal and economic perspective complements the artistic and technical side of recording. For legal issues, our go-to entertainment attorney Howard Hertz explains that any tangible contribution to a song (the composition) or a recording (known as the master) may result in issues of copyright ownership or performance rights being held by any person who contributes to the work. In order for an artist or record label to emerge from the studio with an album that they own fully and may distribute for sale to the public, agreements must contain proper “work-for-hire” language. In essence, work-for-hire implies that such contributors relinquish ownership claims on the composition or master by stating that all of the work was performed for equitable compensation received.

Hertz further emphasizes that all producers, engineers, and side-person musicians who have worked on the project must sign these agreements. Typically, the artist or label should own the copyright to the master recordings, contractually. Alternately, the copyright ownership in the underlying composition may be owned by multiple writers and other contributors to that piece of music. However, all of the parties involved may agree in writing that the artist or label may “buy out” these rights. Due to the potential complexity of such agreements, contributors often fill out a “split sheet” for each work following the recording of the compositions. This sheet lists the determined percentages of the song or instrumental that each contributing party provided along with the percentage of rights owned by the publisher for each party involved. Then, all of the contributing parties sign the split sheet, thus making the determined split a legally binding agreement.

A Band as a General Partnership

Many musical groups that lack the understanding of business law overlook the fact that the law will treat them as a general partnership rather than as a limited liability company (LLC) or as a subchapter-S corporation (which differs from a subchapter-C entity in our U.S. Corporation Laws). Operating as a general partnership implies that the law considers that all partners hold equal-ownership shares if no written agreement exists. In respect to the business of music, Hertz says that, according to the court, each writer who has contributed words or music to a composition owns an equal share in it. It is important to note that this decision holds true when no written and signed agreement exists to the contrary, despite the percentage of the writer’s contribution. Hertz provides this illustration: “[I]f three writers contribute to a work and have no signing to the contrary, they each own one-third of the copyright, even if one of the writers only contributed one line of lyrics and might have likely agreed to a five or ten percent share of the song if it was put in a split sheet.” A word of wisdom to all musicians, audio producers, and engineers:  have a qualified entertainment attorney on your side to guide you through these choppy waters.

Replicating and Marketing the Final Product

The 500 hours of time, energy, and artistic angst invested in the production of an album buries itself as a sunk-cost. We define sunk-cost as the non-retrievable fixed cost associated with the production of recorded music for sale. In the act of producing recorded music, time constitutes the major portion of the upfront, fixed, sunk-costs.
These costs cover all of the work and expenses incurred up to the point at which the glass, metal, or ceramic master and the cover and disc artwork used in the replication of commercially manufactured CD and vinyl products are made. In respect to these costs, we note that a downloadable MP3 and similar formats may not require this final step.

The amount of funds that an artist needs to invest in order to reach this point depends upon the location (New York, Los Angeles, and Nashville versus everywhere else in the country), the amenities, and the reputation of the studio employed. Reportedly, the current high-end studio cost exceeds $3,000 per hour. Ignoring incidentals and not including upfront fees to contracted producers, engineers, and side-person vocalists and instrumentalists, studio costs may necessitate a project budget in excess of $1.5 million (500 hours x $3,000 per hour). Based on the sales needed to recover these costs, not many artists go “gaga” (or should we say “Gaga”) over this price tag. As noted previously in this series, the average studio cost per hour in urban areas outside of major markets appears to fall in the range of $75 to $200.00 per hour. This recording route reduces the average studio cost to $168,750 ($75 times 500 plus $200 times 500, with the total being divided by two) per album project, assuming that the artist(s) does double duty as producer/engineer.

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