Livin' the Singles Life

Slow to start, authorized Internet downloads of individual sound recordings now exceed one million per week. For recording artists, this may mean a return to the heyday of singles sales experienced in the '50s, '60s and the disco era of the '70s, when singles were created to stand and sell on their own, with little or no relation to other tracks contained on an artist's album. A single in that era routinely consisted of a record with an A and B side, the sale of which rarely produced anything more for an artist than promotion for the artist's live performances. However, with increases in royalty rates and CD retail prices during the '80s and '90s, successful major label artists were able to negotiate provisions in their recording agreements allowing for greater advances and royalties from the production and sale of albums in CD form. Over the past few years, major labels, in large part, have discontinued the release of commercial singles in an effort to eliminate the cannibalization of higher-profit margin CD album sales. As a result, recording artists and their representatives are carefully watching the consumer change from purchasing albums in pre-recorded CD form to purchasing individual tracks from the Internet. Undoubtedly, a return to living the singles life could have severe financial ramifications for recording artists who have become accustomed to living the CD album life.

In reality, single sales have thrived through the growth of the CD compilation market. The major record labels' success in licensing hit singles in the late '80s to foreign licensees that released the tracks in their territories as a part of compilation albums spawned the market for the domestic release of CD compilations of current hits such as the popular NOW compilation CD series. (The current release, NOW 14, debuted at number 3 on the Billboard Top 200, selling 322,000 copies during its first week.) In order to keep the labels from placing their artists' singles on competing compilation albums, many artist representatives negotiated cross-coupling provisions restricting the number of their artists' single tracks that could be licensed or “coupled” with tracks from other artists on compilation albums. The purpose of the provision was to limit the number of an artist's current tracks that could be licensed for use on a compilation album without the artist's consent.

In the days when artists had no choice but to live the singles life, they didn't expect to generate significant advances or royalties from the sale of the various configurations of single recordings: 45s in the '50s and '60s and maxi-singles in the '70s. However, if the success of Apple's iTunes, BuyMusic.com and the newly reinstituted Napster sites are any indication, the sale of individual music tracks via the Internet will grow exponentially. While recording artists and record companies are pleased that the new Internet reality includes consumers who are making the choice to legally purchase instead of illegally share music, artists may have reason to be leery about the prospects of having the sale of singles dominate album sales through this new distribution medium.

Royalty Accounting Changes

In the late '90s, entertainment lawyers, including this author, raised objections to efforts by major labels to insert provisions in new and renegotiated recording artist agreements that allowed container deductions (usually 25% of the suggested retail list price (SLRP)) for new media, including Internet downloads, in addition for the CD configurations of sound recordings. The container deduction has long been disagreeable from the artist's point of view. This is a crucial point of contention in efforts by artist representative groups to get labels to change various provisions of their standard recording agreement, as it is widely known that the actual cost for manufacturing and packaging is about 60 cents per CD.

Within the past year or so, some of the major labels have adopted new accounting measures, abandoning what was a standard accounting method of applying the artist royalty percentage to the SLRP, less container deductions and special sale promotion discounts. Perhaps in anticipation of the oncoming era of Internet distribution of music, some major label contracts were drafted to allow the labels to elect to utilize a royalty base price derived from the wholesale price, rather than the SLRP. Recently, for example, WEA changed its royalty base price from retail to wholesale and, in the process, eliminated the container and free goods deductions in determining the royalty base price. An excerpt from a major label sample provision reflecting the royalty base change from suggested retail to wholesale price states:

The royalty rates provided in this paragraph … shall be applied against the Royalty Base Price for … percent of records sold which are paid for and not returned.