Free Goods: Music Industry's Favourite Scam

Back in the day, Record Labels figured out a very clever loophole to deflate artist royalties and inflate their own earnings, with no one finding out for over 20 years

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What’s up, folks?

In an effort to get a better understanding of how the music industry works, I recently started reading what is considered a bible for anyone trying to make it in music.

Titled ‘All You Need to Know About the Music Business, in a pretty self-explanatory way, it is written by Donald Passman, an LA-based 76-year old American Lawyer with multi-decadal experience over how the entertainment business works.

Passman managed an enviable client list boasting some of the biggest artists of all time, such as Taylor Swift, Adele, Green Day, Stevie Wonder, and Paul Simon, among many others.

Donald Passman is considered one of the 100 most powerful figures in the music industry

Originally published in 1991, there have been 10 editions released of his book, which in itself is a yardstick to measure the insane amount of changes that have happened to how the music business works; over the years.

While it’s quite technical for the most part, Passman has done a pretty good job of keeping the writing style informal and filled with real-life anecdotes of how complicated the music business is, and how streaming changed everything 🎧

One of the stories that popped out for me was his explanation on how the calculation of Music Royalties worked, back in the day, and how Record Labels used to exploit innocent artists (they still do), who were none the wiser about the complications of music royalties, which he compares to NASA’s rocket science formulas 🤦🏻‍♂️

Without further ado, let’s get into it 👇🏻

Historically, the artist’s royalty was a % of the suggested retail list price of physical records (also called SRLP).

The SRLP had absolutely nothing to do with what one paid at a local record store (back when people actually bought records)

It was just a way to compute royalties.

From this price, the company first deducted a packaging charge. In theory, this was the cost of the "package," and it was deducted because the artist should get a royalty only on the record, not the package.

In reality, it was a charge of much more than any package actually cost, and thus was just an artificial way to reduce the artist's royalty.

The packaging charge was stated as a percentage of the SRLP, and the industry norm was 25% for CD’s, 20% for cassettes, and 10% for vinyl 💽

Here's an example of a royalty computation using numbers I just made up 👇🏻

Retail price of CD: $10

Less: Packaging (25% of $10.00) -$2.5

ROYALTY BASE: $7.50

Thus, in this example, if an artist had a 10% royalty, they got 75 cents

Seems pretty straightforward right?

Retailers could simply return the CD’s which were not sold, back to the Record Label without any costs

However, being the money-sucking lawyers as the record label folks were, they figured out a very clever loophole in this entire game 🌀

Selling 100 records at 85 cents each was the same as selling 85 records for $1 each and giving the customer 15 "free" records for every 85 they bought (the retailer gets 100 records either way, and the company gets $85 either way).

Then they realized that, because 15 of these records were "free," they didn't have to pay the artist for the free records.

I mean, how could an artist have the gall to ask for royalties on a record for which the company wasn't being paid, right? 🤷‍♂️

So by raising the price and giving away records for "free," the companies saved royalties on 15 records out of every 100, while making the same money.

Remember, the artist's royalty was based on retail price, so they didn't get any benefit from an inflated wholesale price 📈

Not too bad, huh? 🤔

Early Record Labels exploited artists to an unimaginable degree in terms of bad contracts and loopholes

If the above seemed like gibberish to you, let’s go back to our previous example 👇🏻

Retail price of CD $10

Less: Packaging (25% of $10.00) -$2.50

ROYALTY BASE $7.50

Using a 10% royalty as before, and assuming sales of 100,000 CDs, the artist's earnings would be $75,000.

However, since the company "gave away" 15% (or 15,000 of the 100,000 units in this example) for "free," these 15,000 units didn't bear any royalties.

Thus, the artist was only paid on 85,000 units, and instead of getting $75,000, the artist only got $63,750, (85% of $75,000)

Makes sense right?

It took recording artists more than 20 years to figure out that these "free" records were hardly free because the economics to the company were exactly the same as if all the records had been sold at a lesser price.

How about this for a scam? 😅

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