Every last one of us in the music industry has, at one time or another, dreamed The Dream: we are performing in some non-descript bar on the outskirts of Hell when a record company executive/A&R man/Talent scoout/promoter/producer approaches us and offers to make us Superstars. As visions of the Hummer and wild orgies with groupies dance in our mind, we reach for the pen to quickly sign up. Later, after releasing our third platinum album, we win the Grammy, American Music Award, the Vibe Award, and Soul Train Award for our artistic excellence and innovation. Many years later, during our induction into the Rock and Roll Hall of Fame, we look back, with tears in our eyes, at the hardships and sacrifices we had to endure, such as eating the brown M&Ms, and humbly accept our place in history. Ah. The Dream.

But now for reality.

The music industry that even remotely resembled the above scenario is long dead and buried. The climb to the top in this field is littered with the carcasses of other artists who have sought such an ascent, only to be dealt one devastating blow after the next. Most artists operating today in the music field need to understand that the ground rules have changed drastically. Nowhere is this more evident than in the contracts offered to aspiring artists by record labels and production companies.

Record labels and production companies have a relationship today similar to major league and minor league baseball teams. The minor leagues are often viewed by the majors as a training camp or “proving ground” in that potential players hone their skills on a smaller scale before they are deemed ready to play on a bigger level in the majors. Production companies often find, nurture, and develop artists in a way the major record labels used to do decades ago. The production companies assume more of the risk than the labels in developing talent by taking a chance on relatively unknown acts. Once the act has proven itself on a local level, the production companies are often approached by major or national labels to take the act nationwide. For their work, production companies often share in the long-term profits generated by the act through such means as production; songwriting; publishing; and/or merchandising.

For an established artist--that is, one who has already released product on the market at some point in their career with one label or production company--finding a label to further their career goals is key. Artists are usually advised by their managers to look for labels or production companies that can expand their talents in other direction and media. For instance, some artists, desirous of breaking into the film industry, seek out labels that have close affiliations with movie studios. These artists reason that by signing with such a label or production company, they stand a better chance of either acting in one of the productions or having their material placed on the all-too-familiar soundtrack.

For artists just starting out--as well as those already established --one of the most important considerations that go into their deciding to sign with one company or another is in how that label is committed to promote or advance the career of the artist. If a label can demonstrate that the artist will not simply sit on a shelf while other acts are developed and promoted, the artist and his manager will be more inclined to sign with the company.

When an artist has made the decision to sign, he or she will enter into a contract which, by law, is called a “personal services” contract, one whose reach can go no further than 7 years. The reasoning behind such a limitation is that the courts have ruled that no person can be bound to a contract indefinitely, or for an extended amount of time. To do so would be a violation of the 13th Amendment to the Constitution which abolished involuntary servitude--slavery. Seven years is therefore the maximum time limit allowed under law.

Under the terms of the contract the artist signs, a “recording advance” in dollar figures is given. With a record label or production company, this is the amount of money that is being allocated to spend recording the artist’s project. An artist may sign a contract with a label for $50,000 as a recording advance with the money designated to go for the hiring of musicians, rental of studios and equipment, advertising, etc. With a production company, however, the money involved in recording a project is usually never seen by the artist. Under a production company deal, the artist is allowed to use the recording and production facilities of the company and billed for the time they are being used. All costs are borne by the production company under “production costs” and later, when the artist’s project is made available for sale, the company recovers or “recoups” those production costs before any other money is disbursed to other parties who have a financial stake in it--including the artist. This “recoupment” process is also granted to the record labels to enable them to also recover the cost of their investment in the musical act.

As the artist becomes involved in his recording project, several organizations also become involved to ensure that the personnel used on the project are adequately compensated for their time. The American Federation of Musicians (AFM) and the American Federation of Radio and Television Artists (AFTRA) represent the musicians and sessions singers, respectively, involved in the project. These musician unions help to regulate the pay, working conditions, and quality of work for their members. As an act advances up the ladder to national prominence, many more organized labor situations will occur, but first and foremost among these are the unions which handle the everyday session activities of their recordings.

Once an act has completed their project, the label or production company then decides upon when--or if--the project will be released. These companies, looking to increase their likelihood of being reimbursed for their involvement in the project, use many factors to determine if the sound or act can be presented to the public. If the act is deemed ready to be unveiled, it is considered a “commercial release”. The record label or production company alone determines whether the act is “commercial” or not. Some labels or production companies, after investing tens of thousands of dollars into a project, have even opted to delay indefinitely the release of a project because the chance of recouping their initial investment was slim or non-existent. Rather than risk any further money on the project, they simply pulled the plug on it and wrote off the losses already incurred.

If the project is released, money earned from it is divided among all the participants who had a stake in it--the writers, the producers, the label and/or production company, and the artists. These royalties are calculated differently depending upon many situations, including whether the money was earned in the country of origin--or “domestic territory”-- of the record company. If the money was earned in any other market outside the company’s home base, they would then be considered money earned in a “foreign territory”. Foreign royalties usually must go through a currency exchange rate as well as other situations such as tariffs and taxes before they are seen by the home base--and artist. As a result, most contracts allow for an extra time--from a few weeks to a few months--before such foreign royalties can be properly credited to a royalty account.

Many of these factors can be far-reaching in their impact upon an artist’s career and viability so those seeking to affiliate themselves with either a label or production company should seek adequate counsel before deciding on which is better.