There is a lot of noise being made by Nikki Sixx about  a term called “BREAKAGE” that appears in recording contracts.

For the uninitiated, breakage is a record label trick. To understand breakage you need to understand how it all fits in with the creative record label accounting machine.

Artist gets signed and they get an advance. That advance will be paid back to the label (recouped/recouping) from the artist royalty share. That royalty rate ranges between 10% to 18%. That leaves between 82 to 90% of the money earned on a recording to the record label.

That there is plenty of cash that makes its way into the label’s bank account.

For example, Shinedown sold over 500,000 units in the U.S.

Gross sales  of that album is $5 million dollars earned at $10 a unit.

However the royalty rate is calculated from the NET AMOUNT. Let’s be generous and say that the net amount is $7 per unit. That brings the net sales of the album at $3.5 million.

Okay let’s say that the royalty rate is a generous 20%, so that means $700,000 is due to be paid to the band for sales.

Now for each album that is recorded there are recording costs, promotions, videos, tour support, breakage, free goods, container charges (jewel cases and CD inserts) and miscellaneous expenses. Plus there is the ADVANCE. Plus there is the managers cut, the lawyers cut and the accountants cut.

All of these monies need to be paid from the royalties that the band has earned. The fact that the label has already pocketed over $2.5 million from the recording is of no concern to the label. As far as they are concerned the band still hasn’t recouped.

And now to the new word of the month;

BREAKAGE.

Breakage Rates came about 50 years ago when vinyl was known to break during shipment. The rates for breakage vary, however the labels still try to get a higher rate. These rates can range from 20% to 40%.

So maybe back in the 1950’s breakage rates existed. However with the introduction of CD’s that didn’t break so much, the rates still remained. And now with digital mp3’s or streaming which has NO BREAKAGE whatsoever, the breakage rates of the past still remain.

For the labels this is PURE PROFIT.

So with so such a big cut for people who really have nothing to do with creating the music, why would anyone want to create the music. It’s funny because all of the propaganda that comes from the labels and the RIAA is that with piracy rampant, the Governments need to pass stronger COPYRIGHT laws so that new artists have an incentive to enter the industry and existing artists have an incentive to create new works.

What they fail to mention is that due to secrecy and a lot of creative accounting that is not transparent, artists are getting ripped off and they are losing incentives to create.

One of the contracts that I was offered in 2009 had the following wording (this is the exact wording, I kid you not);

9. For the estimation of the number of vinyls, CD’s, DVD’s, etc. that will be sold from now on, the label will have the right to deduct any income and credits of all kinds, including without any limitations:
a) Those because of any privilege of a return or exchange,
b) Defective merchandise,
c) Mistakes in customer debit and in merchandise shipment.

When I asked the label to define the above paragraph and to put some actual metrics in place, as it was very ambiguous I was told that it is just “standard legal stuff” and that it doesn’t mean anything. So when I asked them to remove it, they ignored my request. Seriously, I even showed the contract to a lawyer and they couldn’t really make proper sense.

Safe to say I didn’t sign it. However, every contract offered back in the day had something similar.

Now the above is purely based on SALES of recording music.

If the music is LICENSED out, then those monies earned also go through the deduction process, which again leaves a lot of money in the record label bank account and a very small amount or zero in the artist bank account. So unless you are an artist that has huge bargaining power, you are forced into the ONE SIDED BUSINESS MODEL.