Flow Through
In the music industry today, producers and production companies are signing a large
number of artists to production deals, which are essentially record contracts. Then,
the production company will enter into a recording agreement with a record company
in order to obtain distribution and marketing for the production company's releases.
Hence, the artist is actually released by a label with which it has no direct contact
or contract. This situation presents a unique problem both to the artist and the
production company with respect to royalty computations in particular. I will explain.
The artist fears that the production company will receive a higher royalty percentage
from the record company than the artist receives from the production company. Oppositely,
the production company fears that it has given the artist a higher royalty percentage
than it will receive from the record company. For example, the artist's agreement with
the production company reduces royalties paid on foreign sales by 50%. Yet, the
production company's contract with the record company only provides for a 25%
reduction in royalties on foreign sales. In this instance, the production company
gets a windfall because it gets seventy five cents on the dollar, while the artist
only gets fifty cents. In another example, the artist's agreement with the production
company caps free goods at 20%. Yet, the production company's contract with the
record company limits free goods at 30%. Here, the artist receives the windfall
because the production company must pay the artist on the basis of one extra
record for every ten records sold.
There are various ways to handle this inconsistency so that the playing field is level.
First, and most popular, is what is known as the "flow through" provision. This means
that no matter what the agreement between the artist and production company, the artist
will receive the benefit of any more favorable royalty computation in the production
company's contract with the record company.
Second, the production company and artist agree that the artist's royalties will be a set
percentage of what the production company receives from its agreement with the record
company. For example, 50% of the money received by the production company from the
record company will belong to the artist.
Third, and least definite, is for the artist to attempt to negotiate the highest royalty
percentage it can get from the production company.
The "flow through" model can be applied to other main provision of the artist's contract
with the production company (e.g. term). The key is to make sure that the provision
offered by the production company will match the provision the production company receives
from the record company.
Copyright 1998, Ben McLane
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