So you wanna be a rock 'n' roll star? Better buy a good calculator.
That's the lesson of Incubus, a rising star on Sony Music Entertainment Inc.'s rock roster and the latest act to learn that music business math is getting tougher as the ailing record industry fights to protect its bottom line.
By last October, the Calabasas band had sold 2 million copies of its hit album "Morning View." So the quintet did what successful musicians have done for years: They asked their label for better contract terms and a multimillion-dollar advance before recording again.
Sony Music, its profit plunging, said no.
The refusal touched off a brawl that went public in January when Incubus sued Sony Music in California, demanding to be released from what the band says is an onerous contract. The Sony Corp. unit, in turn, sued Incubus in New York to try to force the band to deliver four albums owed under the agreement.
The band and its manager, former Sony Music executive Steve Rennie, are coming to terms with the harsh realities of music industry compensation. Sony Music has paid Incubus $4.25 million for three hit albums and a series of other products since 1996. For each band member, that has amounted to about $121,000 a year -- a salary a junior recording executive, not a chart-topping rock star, would expect to make. And if Incubus' albums don't continue to sell briskly, it won't get a penny more from the label.
For Sony Music, the profit on Incubus' roughly $76 million in sales in the last seven years has been $35 million, or 46% of the total, industry sources estimate. The company declined to comment for this article.
Whatever Sony Music netted from Incubus, it wasn't enough. The company's operating profit for the first nine months of its fiscal year was down 77% from the year-earlier period. In fact, all five major record conglomerates are suffering from widespread piracy and sky-high expenses. And as a result, artists are seeing their demands for more lucrative contracts turned down as recording companies contend with the financial damage.
"When there's a lot of money around, everyone gets a piece," said Fred Goldring.
"When there's not, everybody starts fighting over the same dollar," added the veteran music attorney, who represents such acts as Alanis Morissette. "That's what's happening now."
Executives at several record labels said privately that it's only sensible for a company to take a tough stance in the contract renegotiation talks that frequently take place when a band has established itself, as Incubus has in recent years. The dismal music marketplace makes it increasingly hard for labels to gauge whether the money they wager on an act -- even an established star -- will ever pay off, the executives say.
That argument doesn't fly with artists and their supporters. State Sen. Kevin Murray (D-Culver City) introduced legislation last month to reform recording industry business practices, promising to reprise a political battle that ended with a similar bill's defeat a year ago. In New York, an artists' coalition is preparing to hold a concert series this year to raise awareness about musicians' complaints.
Last year, Clint Black, Don Henley and other artists publicly excoriated the companies for their business practices, including what they see as deceptive accounting that renders royalties nonexistent for all but the very biggest names.
Indeed, some observers believe the industry's health depends as much on contractual reform as on increased sales. Artists "demand large advances because experience has taught them they will never see real royalties," said attorney Londell McMillan, who represents such acts as Prince and DMX and co-founded the Artist Empowerment Coalition, an advocacy group. "If we worked together, we could save the business."
Incubus' manager, Rennie, called the compensation system for artists "a false promise."
"They don't get paid," he said.
Labels retort that bands make plenty from publishing, concert ticket sales and tour sponsorships. Rennie declined to disclose what Incubus has earned from those sources since 1996, though he said the band does make far more on the road than from CD sales.
Record executives also argue that their labels earn fair profits considering that they risk hundreds of millions of dollars each year on unknown acts -- most of which fail -- and bear the cost of operating massive marketing and manufacturing machines.
When times were good, labels were usually quick to keep winners happy by offering generous terms in renegotiated contracts and offering rich advances for future work. For instance, Sony Music paid Incubus $4.25 million in advances, or about 5% of the group's gross sales to date, after its second Sony album, 1999's "Make Yourself," sold more than 2 million copies.
But these days, even when a relatively young act like Incubus scores on the album charts, companies often refuse to give when it comes to rewriting contracts. In any case, contract arithmetic can be brutal.
Incubus, whose albums have sold 7 million copies worldwide, is supposed to earn royalties equal to 33% of a CD whose wholesale price is $12.04 -- which is what Sony Music charges retailers for "Morning View," which has had a suggested retail price of $18.98. But actually, for royalty-accounting purposes, Sony defines the base price as $10.84. And then come a series of deductions standard in the industry.
* Giveaways. From the $10.84, Sony music knocks off 15%, or $1.63, to account for albums known as "free goods" -- free CDs provided to retailers as an incentive to showcase it in stores. Artists have long complained that far less than 15% of their volume is actually distributed for free.
* "New" technology. Of the $9.21 left, the label subtracts 20%, or $1.84, under a 20-year-old practice intended to make artists share the burden of investment in once-new CD technology. This is another sore point with artists, who say the major investment in CD manufacturing plants was long ago recovered.
* Packaging. In another bitterly disputed practice, the remaining $7.37 is reduced by 25%, or another $1.84, for the cost of packaging. This deduction was born in the 1960s, when companies began replacing brown paper sleeves on 45-rpm singles with more elaborate color covers. Artists insist that the charge far exceeds the actual cost of most packaging.
Those deductions create a base for calculating royalties, which, in the case of "Morning View," would be $5.53. So, at a 33% royalty rate, the band would earn $1.82 per disc for that product -- and a total of $11 million for all of its releases, after the discounts and adjustments that all acts must pay for their Sony Music recordings.
Under its contract, however, Incubus, like every other band, doesn't get paid until the label recovers a substantial share of the money it spent on studio and recording costs, music videos, and tour support among other things.
People in the industry estimate that Sony Music has spent as much as $18 million worldwide on Incubus. Rennie, the group's manager, said that -- based on his experience marketing Incubus and other bands during his stint as a senior vice president of Sony Music's Epic Records -- he thinks the company has put out only $12 million or so. Either way, the so-called recoupable portion of the total is about $5 million; a company takes recoupable costs out of a band's royalties to pay for the act's share of promotion, tour support and other expenses.
Beyond that, an additional $2 million in outside producer fees has been billed to Incubus, leaving it with royalty earnings since 1996 of $4 million, short of its $4.25-million advance from its label. The band is, in industry jargon, "unrecouped" and won't get any more checks from Sony Music until its CDs have pulled in enough to pay the balance.
For their part, recording executives say the probable $35 million in profit Sony Music has so far made off Incubus is fair, considering the company's many expenses. But a lot of artists don't buy the arguments their labels make about those expenses.
For example, many charges involve potentially lucrative intra-company transfers, sources say, as when Epic Records essentially pays its corporate parent a distribution fee of about 17% of sales. About half of that winds up on Sony Music's bottom line as profit, sources say, on top of what the label earns from sales of the CDs.
"The record contract, as it exists today, guarantees artists and record companies will be fighting forever," Rennie said.
"The future will decide whether they want to fight to sell records or fight with their artists."