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Legal Beat: The Disappearing Royalty

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I just read a newspaper article concerning the severely reduced royalties artists are receiving as a result of streaming sites like Spotify. (I’ll tackle this in a separate column). Touring is one method bands have to offset this, but this too, is not always entirely sufficient. What’s left? Merchandising.

It’s relatively easy to pack up T-shirts, CDs, and other items for the booth. But there are a number of other ways to sell merch on tour. Many larger bands license their name and likeness to other companies who are granted the right to sell certain items on the tour. This is seen in all types of entertainment including the NFL. Who do you think sells all those jerseys and hats, the QB from the trunk of his car?

Merchandising deals are relatively simple, with the band getting a percentage of gross sales. Many of my musician friends tour internationally and so the royalty rate is actually lower than a domestic rate, which hovers between 26 and 40 percent. As an added complexity, if you’re playing a larger venue, the hall will provide the sales space and personnel for your band’s merchandise for a fee. The goods are delivered and checked in. All sales receipts and unsold goods are then returned at the end of the night less the hall fee, which might be 35 to 40 percent of the gross receipts. Like anything else, this is subject to negotiation. The royalties paid to the artist are a set percentage of the gross receipts and so the hall fees typically do not affect royalties. That is, until the artist royalties begin to negatively encroach upon the merchandiser’s fee, in which case the artist may be compelled to pony up the hall fee when it exceeds a certain percentage of the gross. This is in effect a hedge that protects the merchandiser’s profit. If this happens, also be sure to include a provision that gives you, the artist, a certain percentage of the savings below a certain maximum level.

Another method is to set a fixed percentage royalty/hall fee so that the artist shares in savings as well as absorbs any increased hall fees. The merchandiser then receives a fixed percentage as well. This is where a good agent earns his keep.

Another aspect of merchandising is advance payments. Bands that are large enough can command an advance on future royalties, which are then paid back as a credit to the merchandiser in the final accounting. But even these deals come with strings attached, and if even one of these strings is disturbed, it can trigger a payback provision where the advance must be returned, with interest. Now that’s nasty. Such conditions can be a certain minimum advance of ticket sales, or starting the tour on or before a certain date.

Most merchandising deals also require exclusivity, prohibiting you or others from selling your merchandise within a certain radius of a show for a certain period of time.

Finally, be sure to retain all creative artistic control over pictures, layouts, drawings, designs, artwork, and the quality of such items.

In the case of smaller bands, you may initially want to design and manufacture your own goods to sell at your shows. This should be done only when you have trustworthy people to handle the transactions. Otherwise, selling out of the back of the van isn’t unheard of.

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