Some of you have asked if I could touch on royalties and how they work. More importantly if they're worth it. I'd be happy to share what I can and know about this. A quick rundown of what royalties are first for those that aren't familiar with them. If you are earning royalties as a producer of an album (these are usually called points) you will earn a percentage of the gross sales for the album and/or song you've produced. 1 point is a standard. 2,3,4 or even 5 points can be given depending on the circumstances and your negotiation with the artist. Let's just stick with 1 point for the examples. So for this example, you earned 1 point on an album you produced. That album now sells 10,000 copies at an average price of $8. That means this album would have gross sales of $80,000.00. You as the producer and your 1 point would be entitled to 1% of that gross sale. So in this case, you would earn royalties of $800. You can see where this could be lucrative. If you were the producer on a hit record that went gold (500,000 copies) and you had 3 points on it, with the same $8 average sale price, you would earn $120,000.00 in royalties.
That's a quick rundown of how they work. In most cases you will be earning your fee upfront or at completion of the album. The royalties are just an added bonus if the album does well. So usually you'll be earning a combination from both income sources.
Now that we have that out of the way, let's discuss how to figure if you should keep or sell your royalties. Also, if you were unaware that you can sell your royalties. You can. There are a handful of websites out there that can handle the process for you. Another option would be pitching them to local investors that would want to earn a good return. Buyers will usually be looking for a 10-20% return annually on their investment. What that means to you, is you can sell your royalties for 5-10 times what they made over the last 12 months.
Here are some basic guidelines I use.
#1 – Did I make enough upfront with my fees? If I was paid good for producing the album upfront and the royalties are a bonus, I will most likely keep my royalties and let them earn me some extra money every year. If it was a situation where I didn't charge much to the client upfront in exchange for royalties. I've written posts on this before, where I give the client as much as I can in order to get a credit on their album or a chance to work with them. In that case, I will most likely sell the royalties in order to get a lump sum, because lets face it, bills need to be paid. That is unless.....
#2 – The album becomes a huge success. If that is the case, you are better off keeping them I believe. Successful albums don't just go away. You will be earning a royalties for years and years to come on this. When the artist puts out a new album, usually previous albums get a bump in sales also. Hit albums get used worldwide on many other projects for years and years. Lets run a little math here to show the difference. For this example lets say you produced an album that sold 1 million copies. You had 3 points. The average sale price was $8. You would earn $240,000.00 that year for the royalties on this album. If you went to sell them, first of all the buyers out there with this type of money will be very limited. Also, to them this would be a specialty investment. Meaning you'll be lucking to get 5x your money for them. Lets just say you sell them to a big time investor though for $1,000,000.00 Yes that is very nice, and you could probably reinvest that into something else. However, this isn't an investment newsletter, so I'm not going to touch that. Most records sales numbers will drop over 80% after the first year. So for this example, in year 2 of this albums life it would still sell around 200,000 copies, earning you $48,000. That number will go up and down, but if that artist is successful you should get a pretty good bump every time they release something new, or go on a new tour. Your opportunities are almost endless. That's why I would keep them. On top of the fact that this was free money. You were already paid for the services. The royalties were a bonus. - Catamount Recording