Your startup hires a hacker. The hacker earns a salary. So why does he get to have equity, too?
It's not a matter of principle here, it's a matter of how bad the bargain is in reality. In my example, the employee receives a decent guaranteed pay but low percentage of the upside. The founder receives low guaranteed pay but more upside. The label though receives most of the upside and most of the guaranteed pay too.
"So, the labels charge the bands for everything they do for them? So why do they then also take 90% of the income?"
Because, as the article explains, many bands (presumably most of them) never pay back what the label invested. If TMJ never earns them a penny, they have to cover their losses with those who do.
According to the article TMJ probably earned the label back all the money they lent them, but from a different revenue stream. The loan doesn't get paid back from all the money the band generates, but from a small percentage of it.
Let us say that an album sale makes $6 for the label and $3 for the band, then the label first takes the $6 and then also takes the $3 to pay down the advance. So even though that album sale in effect gave the label $9 in revenue, they only decreased the loan by $3. So in this example the losses from a 90k$ advance will be completely recovered after 10k sales, but the band will still 'owe' the label until they've made 30k sales. So just because a band still 'owes' a label hundreds of thousands of dollars, that does not mean that the label lost that money.
The labels, are, in effect, lending the money the band needs to start and promote itself. If you give me 100K today and I give you back 100K three years from now, I won't expect you to think we are even.
However if I gave you 100K today to start a company with the condition that I get 60% of every sale you make plus you still have to pay me back the 100K out of your 40%, then it is certainly possible for me to make out very well from the deal even if you never actually manage to pay me back the full loan. At what point we are considered "even" is of course up for debate.
The $100K are used to promote the product, so it is just an investment for the label -- which may be eventually fully paid from the band's money. It looks like a sweet deal to me.
Plenty of businesses have multiple ways of billing.
If you order repeat bank statements from your mortgage bank, are they not allowed to charge you for postage??
As far as the article can show, Warner Bros is out $300K on the deal with little prospect of getting it back. That's presuming the digital download sum was actually $92,000 instead of $65.
You missed the bit where he points out that 90% that Warner take off the CD sales are not deducted from the advance. In his figures Warner only had to sell 15,000 of each CD to break even (which the author seems to suggest they did). At this point the band will still be in the red with the label but the label wont be in the red with the band.
You don't get it. Why does WB deserve to earn any money from sales, if they don't put in a single cent of their own? Every cent they put in, they charge to the artists. So why do they deserve to make any money at all?
Sure, it's in the contact. But it's morally wrong.
LOL! Lecturing me on "not getting it" is not a nice or effective tactic.
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WB put in advance money to make the albums in the first place. Nothing morally wrong there.
Further, lets say that 90% fee on current sales goes into the pool of money for signing new bands who might be successful. Nothing morally wrong there.
WB does not necessarily blow it all on Cocaine binges and executive Porsches.
The numbers are scary: WB claims to be $300k out but they're not accounting for a sizable revenue stream. The post mentions the band earned $12k in 5 years from albums they control, and they expected the albums WB control to earn 2-5X more. Assume 5x$12, and you'll get closer to $200k.
Do that over quite a few years, and they'll end up owing the band money while the band members are alive. Keep telling them $62 over five years and they'll never ever need to write them a cheque.
Sounds more like a court case with WB and not a blog post whinging about the terms. HN Post calculations are worth the paper they're written on.
If anyone is owed multiple $100K, for any reason, there should be motivation to hire a legal team to ask for it. Those sorts of cases happen successfully all the time, and the band guy should start his own action.
But he'd need to be nursing circa $500K loss for him to be $100K in credit by the time the settlement was awarded
There is an interesting interview with the producer of Babylon 5 where in theory he is owed 10's of millions because he traded salary for a large slice of whatever profit showed up.
However, the contract was written so they could do some accounting tricks and make it look like the show was a net loss. He knows the game well enough to know he was never going to see the money. But there was an odd moment where an executive happened to mention the actual billion in profit from the show. And he said something about his cut. At which point the executive said something about how it was still in the red. Even though as a producer he know how much the show cost, he could read the subtext and in the interview he said "I want to keep working in Hollywood and I know the game."
However, if he took them to court he could probably get a large payout at the cost of never working in Hollywood again.
They apparently tried to pull something similar with Peter Jackson and the billions of dollars from LOTR, though Jackson did end up taking them to court.
A mortgage has an interest rate set (in part) by an idependant body. This is generally below 10%. You will find that this deal we're discussing is the other way round the label slicing off 90% off the actual sales. That is their "interest charge" for the loan they provided.
If we're going to stick to this mortgage comparison: do you think it would be fair if all the banks colluded to charge interest rates starting at 90%?
Right/wrong, morally/legally that doesn't bother me. Is it fair? That's the question. The answer IMO is "No".
This is what riles me, especially when as a consumer it is very difficult to find this kind of information so it is difficult to make "fair" purchases to stop this kind of thing.
The difference between a home mortgage and a record label's advance is that the value of the home being mortgaged is relatively stable. If I borrow $450K to purchase a $500K house, and then I can't make my payments, I am likely to still have a house with a market value close to $450K. (OK, in many parts of the US today this is not true, but at least that was the bank's expectation when they authorized the mortgage.)
If a new band approaches a record label for a contract, the label knows how much it will cost to produce and promote their album, but given the fickleness of the public taste, they don't know whether that album will sell ten thousand copies or ten million. And after the band has sold ten million albums, it will have a lot more negotiating leverage in the next round of contract negotiations.
So the record label has every incentive to lock the band into a contract that grabs as much as possible for the label. Bands that only sell a modest number of copies get screwed by this arrangement, but if the band members only expected to sell a modest number of copies of their album, they wouldn't be seeking a deal with a major record label to begin with, right?
> A mortgage has an interest rate set (in part) by an idependant body.
That's typically not true in the US....
> This is what riles me, especially when as a consumer it is very difficult to find this kind of information so it is difficult to make "fair" purchases to stop this kind of thing.
Actually, it's pretty easy. If you're buying in a store, it's almost certainly from a "rip-off record company".
The base interest rate is set by the government and the banks can whack on whatever margin they want (including negative for a period)
Do you think it's "fair" that banks offer Interest Only[1] mortgages, where you the householder can pay off 100% of the price of the house... and then owe the bank the same amount again?
I understand why you are riled... but see my other post about my friend who offered better terms to bands and got no business[2]
Yea, I used to work in the mortgage industry. Interest only mortgages are there for people who have investments to cover the cost but just to want to ensure the liability doesn't increase.
What is unfair is selling these mortgages with endowment plans as a "dead cert" to consumers like banks did in the 80s in the UK. They were all successfully sued and settled in the late 90's / 2000s.
In the UK the council that sets interest rates is an independant entity.
You seem to miss the difference between "legal" and "morally defensible". Sure, bands with no knowledge of business or law (most of them) can sign horrific contracts tremendously skewed toward the advantage of the record labels, all perfectly legal. But that doesn't make it right.
What is it with lecturing me about missing stuff...???
Come on. I have a different viewpoint. I happen to think it is completely "morally defensible" thank you.
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One of my best mates at University (in Sydney) graduated in Law and set up business helping unsigned Bands on equitable terms for low fees.
Unfortunately for him, there were not enough bands who sought his low-cost, equitable contracts. They preferred the expensive, "morally-indefensible" contracts with terrible terms.
My friend is now a primrary school-teacher and enjoying life a lot more.
What do you have to say about that? Or will you just say I'm "missing something"? or "you don't get it"
I think InclindedPlane was referring to the fact that the article emphasizes that Warner Bros. technically is not out $400k. They've recouped their expenses from the TMJ loan by taking 90% of the band's profits throughout the years. There is no negative cash flow here.
What they are missing, however; is the payment from the band. Presumably they agreed to pay back the full amount out of their pockets in the original contract. And where does their personal income flow from? Royalties. This is how I see the numbers if they were to pay back the loan:
Gross Profit: $4,000,000
TMJ Share: 400,000
Warner Share: 3,600,000
TMJ Profit: $0
Warner Profit: $4,000,000
Warner Bros. will essentially make a 10x ROI before TMJ earns a dime. Just because bands willingly sign these contracts does not make them morally defensible. The record labels are clearly making a killing off artists who simply break-even, and I think people are finally starting to realize this...perhaps your friend's business was just ahead of its time.
To be fair, the record label profit is more like 1/3 of the revenue, not 100%. Still, compared to 10-15% less every expense imaginable, they make out far better (even on "unrecouped" bands) than the artists.
Well they definitely can't make 100% of the revenues since they do incur expenses. What I'm saying is that in order for the band to make enough money to payback the loan, their music would have to gross $4,000,000 in profits. I'm assuming that the band receives 10% of all profits from sales. So $400,000 / 0.1 would be $4,000,000 going to the record companies (3.6 mill they pay themselves, and the other .4 is the repayment from the band). I know this is an oversimplification of the process but I'm simply emphasizing the corrupt nature of the labels here.
Thank you for that. She made far more coherent and intelligent points than what I would have previously given her credit for. Written in 2000, I wonder if we've made any progress for her:
"If you're going to start a company that deals with musicians, please do it because you like music. Offer some control and equity to the artists and try to give us some creative guidance. If music and art and passion are important to you, there are hundreds of artists who are ready to rewrite the rules."
Albini doesn't reference the Satellite Home Viewing Act 1999 though. That bit of Courtney's rant is interesting. Also the reason why this article doesn't appear on her own site anymore is interesting.
It's all interesting stuff and this is an area where there is limited information. Read both!
The numbers are scary: WB claims to be $300k out but they're not accounting for a sizable revenue stream. The post mentions the band earned $12k in 5 years from albums they control, and they expected the albums WB control to earn 2-5X more. Assume 5x$12, and you'll get closer to $200k.
Do that over quite a few years, and they'll end up owing the band money while the band members are alive. Keep telling them $62 over five years and they'll never ever need to write them a cheque.
His point is that the company is misrepresenting money promised by the contract; if the contract were actually enforced, the band might completely repay their advance in another five years and be owed money.
It's like in The Producers... Whether intentionally or not, the record labels are banking on the fact that people do not look too closely at the accounting of a losing enterprise.
As the copyright extensions and DMCA demonstrate, the big media companies own the gov't. It's not theft if it's legal, and it's not illegal if the gov't won't prosecute.
What are these "points" Albini is talking about in his article?
Like here: "Wasn't it Buffalo Tom that were only getting 12% less 10? Whatever. The old label only wants 50 grand, an no points. Hell, Sub Pop got 3 points when they let Nirvana go."
Percentage points on the gross retail revenue. Look at the spreadsheet under the article - the producer gets $90,000 (-$50,000 advance), being 3% of $3,000,000 record sales.
I am conflicted about whether I am actually being a petty jerk by pursuing this, or whether labels just thrive on making fools like me feel like petty jerks.
That's what's great about the internet. Fuck the distributors.
Want to be a journalist? Start a blog or a site.
Sell shit nationwide? Make a website, ebay, Amazon, etc.
Be famous across the world? Youtube.
Distribute an indie movie? Video sites and online stores.
The important feature of the internet here is that it allows anyone to be a distributor. Survival of the fittest can work more ideally. No more people/companies being there simply because they were there first.
> That's what's great about the internet. Fuck the distributors.
> ebay, Amazon, etc.
> Youtube.
> Video sites and online stores.
Unless you are selling directly from your site there is still a middle-man/distributor. As a content-creator, 'distributors' are a middle-man between you and the retailers, but the retailers are middle-men between the distributors and the end-user/customer.
The internet is really for reducing costs, but doing something like selling streaming HD video (or just HD video downloads) is not something you can economically accomplish on your own with just a hosting service. You need a framework (iTunes, YouTube, etc) and they become the new distributor. They may be a better distributor (or just more 'barebones'), but they are still a distributor.
>Unless you are selling directly from your site there is still a middle-man/distributor
Right. And I said:
>The important feature of the internet here is that it allows anyone to be a distributor.
Anyone can be the distributor, so competition is fiercer. Monopolies/oligopolies are harder to maintain. Competition can be more ideal.
> doing something like selling streaming HD video (or just HD video downloads) is not something you can economically accomplish on your own with just a hosting service.
But more companies can jump into the space, even if one cannot do it individually. The barrier to entry to a lot of industries is reduced because of the internet.
My point was not that it makes everything accomplishable by one person, my point was that the internet lowers the barriers to entry and encourages more ideal capitalism.
> ...they are still a distributor.
Yes, and if you self-distribute, you become the distributor. There will be a distributor. My "fuck the distributors" statement was directed at the current distributors. It was a statement directed at all the inefficiencies of their current systems.
Distributors will always be there. Of course. But the internet will allow more distributors, because the internet gives all access to the world.
> Yes, and if you self-distribute, you become the distributor.
I interpreted your post as saying that everyone can become a self-distributor on the internet. So I was commenting that if you use iTunes/Amazon/YouTube/etc you are not a self-distributor, you've just moved to a different distributor that may provide better service/terms/etc. So we are essentially on the same page.
My point was that companies will have to be more legitimate. It will be harder to maintain their dominance by using their stature. Companies will need to stand more on their merit. I did not mean to imply that companies won't be able to use their stature to gain influence though.
Do you really think companies will have to be more legitimate? In what ways have "Hollywood accounting" or "music biz accounting" (by which I mean the practices which lead to creative people being f*cked over by movie/record companies and earning next to nothing on their intellectual property in stark contrast to the companies) changed in the internet age?
The big companies are still maintaining dominance. "1000 true fans" doesn't work for probably about 99 % of artists - it's a make-believe myth perpetuated by the people who want to believe in the power of the internet. Sure, it changed the music biz, but creative people didn't (in general, exceptions prove the rule) feel much difference.
There is still no way to adequately pay creative people for what their IP is worth (and adequately pay "support staff" for what they're worth), not in writing, not in music, not in movies.
The internet lowered the barrier to entry for distribution. This means more entries, and that means more competition. More competition means more volatility. More volatility means less stable goliaths. Less stable goliaths means more bargaining power for the little guys. Artists can switch over to self distribution, or using some sort of alternative.
Terrific read, as unfortunate and common as the content may be.
As an aside that some may find of interest, and since the article mentions the Red Hot Chili Peppers, I forwarded it to a friend who works with the firm that does royalty audits for the Chili Peppers. His response (the auditor's name has been removed):
"The Chili Peppers use ____ to audit their royalty statements, which they pay ____ a lot of money for, and they always get checks for hundreds of thousands of dollars when ____ settles the audits with Warner Bros. Obviously, Too Much Joy can’t afford ____’s level of expertise. So the little guy gets screwed... No surprise there!"
What I find reprehensible about this is that while he believes he'll never repay WB, it looks to me as though he could be at least a hell of a lot closer to $0. So why should it be OK for WB to say keeping him further from $0 is OK?
You are not being a jerk by trying to zero out your balance. If what you said about your other albums is correct, you could be at $250K currently rather than the $400K. That means reaching "recouped" (whatever that means in this insane contract you're bound to) could be possible in 10-15 years.
That’s how much they spent on us, and we don’t see any royalty checks until it’s paid back, but it doesn’t get paid back out of the full price of every album sold. It gets paid back out of the band’s share of every album sold, which is roughly 10% of the retail price. So, using round numbers to make the math as easy as possible to understand, let’s say Warner Bros. spent something like $450,000 total on TMJ. If Warner sold 15,000 copies of each of the three TMJ records they released at a wholesale price of $10 each, they would have earned back the $450,000. But if those records were retailing for $15, TMJ would have only paid back $67,500, and our statement would show an unrecouped balance of $382,500.
Just because the artist is unrecouped doesn't mean the record company isn't making money.
Good thing startup founders are usually a little bit better at math. Seems like it'd be about like this:
"Advance" your startup $1M (really, advanced to yourself,
since you're hanging onto the money)
Sell the startup dubious services at outrageous prices,
force them to make your dumb cousin an SVP
"Pay back" the loan with %10 of the *profits*
When the profits top $10M, the founders *start* seeing
10% of what comes in (after expenses, of course)
I'm in the wrong line of work.
edit: As I read this, I'm realizing that there probably are termsheets out there that aren't far off from this.
Re: music industry, banks and suits, there's the old story about Branson and Virgin back when they were just a label.
No idea if it's just an urban legend or if it really happened. The story says that Virgin was practically bankrupt, and that Branson went to their bank - a very stodgy, conservative British bank - and on purpose avoided wearing a suit contrary to all advice. He apparently got there dressed in his normal casual clothes, sat down and asked for huge increase in their credit facility without any plans or anything to back it up other than some vague claims about needing money to expand.
The thought was supposedly that if someone in his business showed up to the bank in a suit with a detailed plan for "how to save the business" they'd smell the desperation and get rid of him as quick as they could, so instead he went looking like it was any other day and it really didn't matter to him if they said yes and no, but hey, it wouldn't hurt with another half a mill to grow a bit faster, hoping that they'd figure that business had to be great if he was that casual about those kind of amounts.
Not that I'm advocating that approach in general..
It's entirely possible that all of the numbers are being moved around by hand through various large Excel spreadsheets rather than in an actual accounting system. You might think this unlikely for a large corporation, but it happens. In this case, shuffling around the numbers for the 80% would be extra time and money.
edit: Maybe I should mention that I'm not defending them, just pointing out that there could be a plausible explanation. In this case, the plausible explanation is that their accounting people are idiots (they probably think that their system is more reliable because an accountant is looking at all of the numbers instead of some automated process, not taking into account that MS Excel isn't exactly bullet-proof software).
Assuming royalties are often incorrectly calculated, what's the likelihood that the innaccuracies are almost always in the favour of the record company? I suspect very likely indeed, and IMO it constitutes fraud.
When record companies deprive artists of income through misaccounting, they should be charged with copyright infringement, and fined at the same high rate per copy that they have bribed legisltors to apply when others infringe copyright. And if that means they go bankrupt, it's no more than they deserve.
I'm not defending them either, just using my knowledge of the music rights industry (involved in legal side of Music Startup FYI)
The rights of each track are tortuous and split. There are many different responsible bodies that need to be consulted as to who owes how much to whom.
* Mechanical Rights
* Production Rights (maybe split say 30% 30% 35% somehow)
* Recording Rights
These are all spread around different collecting bodies. There may be different societies for different artists, countries.
It is a difficult, time-consuming and manual problem to allocate the monies.
There must be bands near recouped, that would be but for some dodgy accounting. So while for the author it doesn't really make any difference, there must be artists missing out on actual cash.
Can they somehow count unrecouped monies against profits on their accounting sheets and so reduce apparent profit and pay less tax? Sounds like some sort of accounting scam (as well) whether this is possible or not.
You get a profit if you make an investment, but if you charge for all your services, you didn't make an investment, so why do you deserve a profit?
But, I guess it works, since people are doing it.