Deconstructing Pop Culture

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Steve Miller’s Two Contracts

September 17th, 2006 by David Kronemyer · No Comments

The other day I heard a couple of old Steve Miller tracks on the Internet radio station Technicolor Web of Sound, which, incidentally, I highly recommend. Music has this power to catapult me back, into the circumstances when I first heard the song, or listened to it a lot. This can turn into a very visceral experience, much more so than with other any other sense, even that of smell, which typically is pretty powerful. You feel as though you actually can traverse space and time – not just “seeing yourself” as you were, then, but rather, actually “being yourself,” as you were, then. And, as you transform into that person who once was, so do your attitudes, orientations, and outlooks. But, instead of dealing with whatever the reality was of that era, this you-facsimile finds itself in the midst of the modern world. And, you begin to wonder, how would the “you-of-then” deal with everything the “you-of-now” must contend with – an interesting meditation, indeed.

The Steve Miller Band of San Francisco in 1967 was a far different creature than the Steve Miller Band of the 1970s – 1980s. For one thing, there were people in it besides Mr. Miller, including Boz Scaggs, who later went on to considerable success as a solo artist. I remember reading an interview with Mr. Miller once where, reminiscing, he characterized the band as “a bunch of hippies who wanted to be musicians,” or something like that, presumably intending to denigrate their musical abilities. But, I can recall many afternoons listening to Children of the Future, and Sailor, his first two albums, respectively, both of which I thought were brilliant. The next two records after that only were half as good; and, the ones after that, eminently forgettable (though accounting for most of his hits, which he later would play to accolades on stadium and arena tours throughout the country).

So, I dutifully dusted off my Children of the Future and Sailor CDs, and listened to them, in a contemplative, yet strangely open-ended, frame of mind. Fortunately, they sounded just as good as I had remembered them, maybe even better (for one thing, I have a better stereo, that’s for sure!). They hadn’t succumbed to the dreadful syndrome of “just because it’s old, it must be good,” which so often afflicts records of this sort.

This in turn got me to thinking about Mr. Miller and his two contracts with Capitol Records, which is the subject of this story. Unfortunately, Capitol was a day late and a dollar short when it came to San Francisco bands during the Summer of Love. Clive Davis, then of CBS, had signed up Santana and Big Brother and the Holding Company; Warner Bros. had signed up the Grateful Dead. Capitol, on the other hand, still was being run by fusty obsidian geezers left over from the 1950s, who had turned down the Beatles, and barely could cope with surf music, as epitomized by the Beach Boys. Like Hendrix sang, “you’ll never hear surf music, again!” But, somehow, amidst the chaos, Capitol ended up with two memorable acts – Mr. Miller, and the immortal Quicksilver Messenger Service, of which more sometime later.

OK, as with all posts of this sort, here comes the boring part. It turns out that, at the time, there was a law in California limiting the term of personal service agreements, like record contracts, to seven years. Nobody had been paying much attention to it – that would come a bit later, with Don Engel’s great victories over the record companies, based upon a vigorous brandishing of that statute, and another one that’s related to it, mandating minimum artist compensation.

The only thing that was on the books then, however, was an old case involving Olivia de Havilland, which had been won years earlier by the esteemed firm of Messrs. Gang Tyre & Brown. In that decision, Ms. De Havilland was victorious over her arch-nemesis, Jack Warner, who repeatedly sought to extend the term of her agreement with his studio, by putting her on “suspension,” and other devious stratagems.

Economic factors, such as the demise of the “studio system,” saw the studios move away from term contracts, and into a modality of episodic, ad hoc, single-shot, one-off contracts, where everybody literally was a free agent. The record business, though, stuck with (and to this day, still has) term contracts.

They are justified on several grounds, including the cost of developing an artist, and the need for the record company to maintain a balanced portfolio of artists. On examination, though, both of these reasons are more-or-less bogus. Unlike the fabled days of yore, today there is no “grace period” for an artist to develop a following, absent sales. If the artist isn’t successful – and I mean, like, really successful – right out of the box– then the record company is likely to drop the artist.

And, whenever record companies start talking about the virtues of a diversified roster, it makes you wonder, at whose expense. The whole concept of keeping under-performing artists means that the successful artists are getting screwed, because they in effect are the ones who are funding untimely or misguided repertoire decisions by the record company. In a more efficient contracting environment, the hit artists would be rewarded commensurately, and the record company simply would have to figure out some other way to finance the under-performers.

I think this basic economic inequity is one of the main factors propelling super-star artists’ requests for high “advances” against royalties. An “advance” is not a loan from the record company to the artist, because it is not unconditionally repayable by the artist to the record company. Rather, the record company merely enjoys the prerogative to “recoup” the amount of the advance, at the specified contractual royalty rate, out of sales of records, as and when they occur. If the number of units sold multiplied by the contractual royalty rate is less than the amount of the advance, together with any subsequent add-ons, of which there can be many, then the artist is said to be “unrecouped.” On the other hand, if that sum of money in fact has been collected, then the artist is said to be in an “earned” position.

Please note, the concept of an act being “recouped” has nothing to do with whether or not the act is “profitable” for the record company. Recoupment only pertains to the record company’s financial position vis-à-vis the artist, and to nothing else. Many bands spend their entire careers being unrecouped, whereas the record company has made millions.

Because the artist is perennially unrecouped, its only source of revenue is money from publishing, most likely, mechanical royalties and performance royalties; and, money from performing engagements. It’s not hard to see how this works against a new, developing band. They’re in hock to the record company, their songs aren’t being played much on the radio (thus no performance income), they aren’t earning a lot from gigs (thus little to no touring income), and, in fact, their expenses of being on the road well might exceed the amount of revenue earned.

This basic economic reality, though, migrates over to all types of other acts; for example, Tom Petty was unrecouped even up to his insanely wonderful record Damn the Torpedoes, at which time he actually declared bankruptcy in an effort to annul his then-current contractual relationship with MCA, and free himself from the shackles of his unrecouped balance. It was like a set of leg-irons, and he was every bit as fettered by it as a convict on a chain-gang.

For the record company, though, the situation is somewhat different. Applicable accounting principles require the record company to write off the amount of the advance, at some point, after it becomes reasonably foreseeable that it will not be recouped. This gives the record company considerable leeway as to just when it wants to expense it. It may seem counter-intuitive, but a “conservative” record company will write-off the amount of the advance, as soon as possible; whereas, one trying to fortify, or “bulk up” its balance sheet, will amortize it much more slowly, because it makes it look as though the record company has an asset, i.e., the amount of the advance recoupable from the artist, whereas in fact there’s nothing there. Capitol-EMI, for example, never carried the value of the Beatles catalog as an asset on its balance sheet, even though it obviously was a significant earner.

So what’s the artist to do? The simple fact of the matter is that a high advance is the only way for the artist to achieve comparative economic parity within the record company system, as the royalty rates aren’t going to vary by more than pennies in either direction. Furthermore, a high advance minimizes issues with record company chicanery, when it comes time to calculating recoupment status or, God forbid, earned royalties.

I’m not suggesting that the record companies are doing anything dishonest – I don’t think they would have the capability to do so, as it would entail the maintenance of a duplicate set of books, a cadre of motivated co-conspirators, and similar non-present factors. Rather, it’s just a consequence of the system; the way that it’s set up, with absurd calculations and equally absurd contracts based upon historical precedents that long since have become outmoded in this, the modern digital era.

When properly negotiated, an artist royalty contract should approximate a functional 50-50 split of net proceeds between the artist and the record company, after payment (and accounting for) of relevant cost centers, including items such as manufacturing, distribution, marketing and promotion. The typical major-label artist royalty contract just uses a lot of words to get at this result, and tries to shave off pennies in the record company’s favor. This being so, why not start off with a simple contract, setting forth this objective?

You wouldn’t want to characterize it as a de facto joint venture, although some artists (e.g., Metallica) have taken that approach. There are too many legal risks (for both parties) associated with joint venturedom. One of the primary hazards of this approach is that it imports into an ordinary commercial relationship a higher level of “duties” – indeed, “fiduciary” duties – that both parties owe to each other. This typically isn’t the case with a “royalty” contract, although various legislative moves are afoot to re-characterize their status.

I’m sure that thoughts something like these were going through the heads of Mr. Miller’s representatives when his contract expired sometime in the mid-1970s. Not these precise thoughts, of course, but thoughts similar to these. While I wasn’t associated with the company until several years later, and therefore can’t replay their moves exactly, I’m sure that a number of alternatives were coyly bandied about, including the band’s desire to move to another label, that (ostensibly, at least) would do a better job of marketing and promoting their records. The two major labels at that time were Warner Bros. and CBS, so I’m quite confident their names were mentioned; in many respects, and for a variety of reasons, Capitol had come to be considered as a kind of second-place finisher.

Conversely, it would have been disastrous for Capitol to lose Mr. Miller’s services. By this time he had elevated into close-to-super-star status, if not outright super-star status. Long gone was the pleasant hippy-dippy band from San Francisco circa 1967. In its place was a hard-drivin’, hard-chargin’ hit machine, with a variegated catalog including songs like “Space Cowboy” and “Livin’ in the U.S.A.”

Even if Mr. Miller had left, Capitol would retain the catalog of masters that he had delivered to date. Except in the rarest of instances – e.g., Garth Brooks – the record company owns the masters, and has the right to commercially exploit them, through any and all means, whether now known or hereafter devised, throughout the world, in perpetuity. I can vividly remember going into a Tower Records store and seeing all of Bonnie Raitt’s records being wonderfully marketed, up front and on sale, at a time when she had a top 40 record with Capitol.

However, Capitol had no reason to perceive that Mr. Miller’s talents would decline. Rather, it had every reason to expect that he would continue to deliver hits. Furthermore, while it shouldn’t seem to matter, Capitol would suffer significant loss of industry prestige, if Mr. Miller were to leave, with (presumably) a correlative decline in its ability to sign new artists in the tightly-knit community of managers, agents and lawyers that typically end up handling such matters.

So, given this dynamic, Capitol management made a fateful decision. Rather than extending Mr. Miller’s “old” contract with the label, they simply would enter into a “new” contract – the term of which would commence, say, a day or two following the expiration of the old one, so as to avoid potential claims that the contract was invalid, because it was too long, under the aforementioned “seven year rule.”

Furthermore, these two separate contracts would not be “cross-collateralized.” While this sounds like a big word, the concept is simple – royalty payments from each of the two contracts would comprise separate accounting units, therefore, debits from one would not be set off against credits from the other. Thus, for example, Mr. Miller had long-since recouped whatever advances he had received, and recording costs, under the now-expiring contract. He was in an “earned” position, and the record company (at least, in principle) actually would write him a check for royalties every quarter, based upon his contractual royalty rate, and the number of records he had sold.

However, it was inevitable that there would be a period of time when he was unrecouped on the second, new contract. Everybody hoped this would be a short period of time, because of Mr. Miller’s prowess in writing songs, playing the guitar, and singing them, in a manner that the concert-goers and record-buyers of America found to be satisfactory. But there would be a period, nonetheless, when Capitol (a) was paying out royalties on the old contract, even though Capitol (b) was unrecouped on the new contract.

Then, there came that day when Mr. Miller delivered his first record under the new contract. It was called Italian X-Rays. This was such a wonderful, happy, celebratory occasion, that management actually threw a listening party across the street, at when then was known as the Palace. Everyone was invited, refreshments were served, and conviviality prevailed.

Unfortunately, the record was a horrific stiff. And so were all of the other records that Mr. Miller delivered under the new contract. So precisely the unlikely scenario the parties envisioned a couple of paragraphs back, prevailed. And to this day, Capitol is busy writing checks to Mr. Miller, while at the same time admiring the multi-million-dollar debit balance it has accrued.

Ain’t life grand?