Net Receipts In Music Industry Licencing: Here’s What Artists Need To Know

Imagine you’re an artist putting out a new album. When it comes to licensing your music, the label gives you a choice: take a 20% royalty (or sometimes less) on the cost of each album sold, or take a percentage of the revenue (usually 50% or more) that the record generates, but only after all expenses have been deducted.

Which licensing model would you choose?

These two licensing models–Published Price to Dealer (PPD) and Net Receipts, respectively–are two of the most likely deals to be presented to artists. While PPD has long been the most recognizable model, more Net Receipt deals are starting to pop up across the industry.

The big question: are Net Receipts a better deal for artists?

For entertainment industry lawyer Matt Buser, Esq., whose client list includes Grammy and award-winning stars, the answer is yes (with the caveats you’d expect from any savvy legal counsel).

“Net Receipts are better for artists because it allows, and often obligates, them to have more oversight over the process,” the Tampa and LA-based lawyer explains. This invites them to come to the table as more of an equal player with the label and instills a sense of ownership over the entire project (beyond just the creation of the master recordings).

“These deals are becoming more prominent because, for one, there’s far more material available these days on the internet discussing why a PPD deal is worse and why you shouldn’t sign to a label that takes approximately 80% or more of your record income. There’s more dialogue around the many past horror stories and artists now understand the importance of monetizing their assets differently,” he continues.

Buser explains that while the definition of “net” is pretty standard (gross revenues less all the costs and expenses), there’s room for negotiating how that will look in the specific contract at hand.

“When we dive in,” he says, “we have to decide what are the recoupable costs and expenses. That forces the artist team to submit budgets so that we know what’s going to come out of the artist’s side of the process.”

When it comes to the budgets, this is a collaborative process that requires some give and take.

“We rarely, if ever, want the label to have the overriding vote on creative decisions,” Buser says, “but we often lose in a negotiation battle about overriding votes of the business terms—especially with newer artists and artists with inexperienced teams.”

Hence, the beauty of the Net Receipts model: both parties are coming in as collaborative partners seeking to mutually agree, but following meaningful consultation and good faith discussions, both sides hold power on the aspects they know best.

While Net Receipts tend to get Artists a bigger piece of the pie when the album is wrapped up, marketed, and sold, there’s sometimes a longer wait to get paid than in the PPD model. This is because of recoupment.

In typical PPD deals, the primary costs recoupable first by the label are the expenses of recording the album itself. The costs of marketing and distribution, among other areas, are sometimes non-recoupable or only partially recoupable. In a situation where the artist’s marketing costs are nominal, those artists make money basically the moment their recording expenses are covered. Of course, in either model, the artist must always recoup his or her in-pocket advances (those monies paid as “signing bonuses”) and the artist’s legal fees in the event that the label covered such fees, which Buser says is quite standard these days.

In a Net Receipts deal, the artist essentially realizes profit at the same point the label does–at the end of the long journey of commercial release and worldwide marketing. This gives artists an active stake in managing the amounts the album costs to release and market, rather than in the PPD model where the artist defers more to the label’s budgeting and use of funds. That doesn’t just change the bottom line, this drastically shifts the relationship between creator and distributor.

“With the changing model,” Buser says, “it’s no longer a situation where the artist simply records pursuant to a recording budget, delivers, and collects a royalty. There’s another layer of involvement and oversight. If the artist team is not active in this, that’s on them, because in a net receipts model it is intended to be more like a partnership.”

However, as with most changes to long-standing business models, there comes ripple effects that can create some challenges–like when handling subsequent clearances. Even when an artist is on a Net Receipt deal, their producers and mixers are typically still contracted off PPD, or negotiations with them are based on this model.

“Artists don’t get a dollar from the label until their entire account in the aggregate is recouped, including their advances. There’s usually no flow through because of the net receipts model,” Buser says.

This creates a challenge when you tell producer counsels that their talent must stand behind marketing, promotion, advertising and packaging costs before they can get paid–rather than their typical position in line right after master-level recording costs. Not to mention that artist in-pocket advances can be extravagantly high for “viral” acts, and these rich advances cause accounts to take much longer to become recouped.

“We either have to negotiate a flow through of royalties so that we can, despite the unrecouped status, pay producers, or we have to ask the label to accommodate deemed royalty extracts that we attach to producer agreements to issue producer royalties on a PPD basis,” Buser explains.

This invites the use of a hybrid model for licensing, one that blends PPD and Net Receipts to make sure everyone involved is getting a fair shake. As with any new territory or advancement, this is still something that Buser and other attorneys in the space are navigating.

“This is definitely an industry where I learn something new nearly every week,” Buser says, “that’s one of the things I love most about it.”

The specific details that go into Net Receipts contracts create new technical considerations when artists and labels arrive at the negotiation table–and on a larger picture represent the way that power dynamics are shifting in the music business.

We’ve all heard the woes that have come from the PPD model, especially in a digital era where profit margins for the major labels continue to rise. The rise of Net Receipts is an answer to this, as artists, their management, and their legal representation push for more ownership and a bigger piece of revenue from the music being released to the world.

For more entertainment industry insights from Matt Buser, Esq., follow him on LinkedIn.