Kanye vs Universal: Learning Points
By: Karl Fowlkes
Tags: Music Business, Music, Technology, Business, Entertainment

Photo by Jen Theodore on Unsplash

I will start off by saying deals are getting better. There are more players in the ecosystem and technology has led to more transparency than ever before. Even with that being said, treacherous deals exist and happen everyday.

Kanye West as Kanye West always does, did something bold recently. Kanye did the unthinkable and actually posted his contracts to Twitter, revealing confidential insights to contracts that held together some of Hip Hop’s most coveted and respected music projects.

The main focus here will be taking a dive into Kanye’s Exclusive Recording Agreement in 2005 that really is the Agreement that set off a chain reaction. Artists of Kanye’s magnitude have shared their discrepancies with the world but rarely have any, if ever, shared to the world their actual contracts.

As always This article is intended for informational purposes only, and is not intended to, nor does it create an attorney-client relationship. The content provided here is not intended to communicate or imply any future results or success. I strongly recommend that you speak with an attorney regarding the specifics of your case.

Lets dig in.

Kanye’s Exclusive Recording Agreement:

On an agreement from 2005 between Roc-A-Fella Records and Kanye West’s West Entertainment Services Inc., Kanye agreed to one (1) initial contract period with six (6) options. In the Agreement, you can see the first album “College Dropout” has already been submitted and released. Granted the success of that project, it’s safe to safe it’s an easy decision to pick up that option.

The next section that is particular relevant to the Ownership conversation is the “Rights” section. The second sentence in the section is an infamous sentence that still applies in contracts these days. “All Master Recordings recorded during the Term which embody the performances of Artist, from the inception of the recording thereof, all artwork created for use on or in connection with Phonograph Records or other derivatives of such Master Recordings including, without limitation, Mobile Materials shall be deemed “works made for hire” for RAF. The “works made for hire” language is extremely important because Record Labels in the past have tried to deny Artists any reversion rights granted in US Copyright Law because they claim they were always the rightful copyright holders, not the Artist. It’s always important to remember “Authors of copyrighted works can reclaim the copyrights to their original creations after a period of 35 years[ii].” So if you have assigned your copyright you can get it back but if someone is claiming “works made for hire” you might be out of luck.

Next you will see the all important advance language that sees Kanye West recieving a $2.3 million dollar advance on full execution of the contract and an additional $1.2 million dollars for Recording Costs. While most Artists would struggle to use $1.2 million dollars, Kanye is one of the few that not only would use such funds but make good use of it. It’s also important to remember Kanye’s sample and collaborative workstyle can be expensive.

Next we get to the royalty section which is clearly from the pre-streaming era. For singles through retail channels, Kanye’s royalty rate was a measly 8%. For the second contract period, Kanye’s royalty jumped to 12%, albeit still measly. For albums, the Royalty Rate with respect to Master Recordings during the initial Contract Period was 14% with incentive based escalations all the way up to 18 1/2%. 3 important things to always remember about royalty rates, they are paid out on “Net Sales” or “Net Receipts”, only after recoupment of those advances and recording costs (or really any cost), and differ via format.

Although there are other really important sections in this Agreement. Focus on these three until you get a deeper understanding.

Overall Deal Grade: C-

Analysis: This Agreement sets the tone for the leverage Def Jam/Universal has had over the years. The biggest thing here is the 7 album’s Kanye owed to Roc-A-Fella Records (RAF), and later Island Def Jam. In 2020, 7 album deals probably still happen but I’ve personally never done one and would never allow a client to do one. While the amount of albums might seem like a generous notion of belief initially and labels will use terms like ROI (Return On Investment), Six Option Periods is incredibly long. To be quite frank, I’m also tired of the “ROI” language from people trying to justify predatory contracts.

Additionally, context matters, this Agreement is dated April 13, 2005 yet Kanye’s critically acclaimed album “The College Dropout” came out February 10, 2004. The College Dropout debuted at number two on the US Billboard 200, selling 441,000 copies in its first week of sales. The album spawned some of Hip Hop’s most cherished records including, “Through The Wire”, “Jesus Walks”, “All Falls Down” and plenty other hits. It looks as if Kanye’s Legal Team prioritized money over anything else. As noted above Kanye was to receive a $3.5 Million Recording Fund including a $2.3 Million Execution Advance for what would be known now as “Late Registration”. In the first week of release, Late Registration debuted at number one on the US Billboard 200 and sold 860,000 copies. Late Registration produced gigantic hits like “Gold Digger”, “Touch The Sky, “Heard Em Say” and many more.

For this Album, Kanye received a royalty rate of 18% which is very similar to the number you will see today in a lot of Recording Agreements. Sometimes the Royalty Rate is 16% and sometimes it’s as high as 20% in a Traditional Record Deal in 2020.

There are a couple ways to look at it. One way is to look at the massive investment the label financially invested in Kanye. The industry hadn’t yet hit rock bottom because of pirating (and the economy, etc) but it was close. To receive that kind of financial commitment during that time, I guess you could be happy. Nonetheless, this was also a time where most albums were selling for $9.99 and up, hard record sales. Without factoring in Distribution costs and other charges, the label is bringing in $10 Million Dollars at a $10 price point if the album were to go platinum. Factor in single sales and ringtones and that number becomes gigantic.

Would you be happy with $3.5 Million knowing the Company is making $50 Million? Even in a world where we acknowledge the financial risks labels take, we’re talking about penny’s on the dollar. Knowing the Kanye West that we all love today, the cost of creation almost always goes over budget but he delivers and delivers 10x and we probably knew that after the First Album.

Notwithstanding there are a couple key notes. In 2005, Radio was almost certainly the most important driver of music. Labels have a stranglehold on radio relationships. In 2020, Radio still matters and Labels still have a stranglehold but in the streaming era, playlists are cutting into the relevance of Radio. Playlists are also a bit more democratized than Radio although you still have a better chance at cracking through if you are signed. In 2005, there was definitely more of an incentive to sign with a Label than there is in 2020. I’d also point out that money was the name of the game in the previous eras. A great deal meant a massive advance and budget. In 2020, more and more, Artists and their teams are cutting through the fluff and realizing a great deal means better terms and ownership.

I’m completely okay with Kanye getting “enlightened” for whatever reason even though the system has certainly benefited him. Although Kanye was getting pennies on the dollar, at some point his art was supported enough financially, creatively and promotionally to become a global superstar and music icon. Arguably a Top 5 Artist ever. Artists are taught that you need a Major Label. I guess in some ways there is some truth to that. Still we need to be completely objective when looking at these things from the way companies even do recoupment.

Learning Points:

Keep Options Limited

Regardless of whether it is a traditional record deal, distribution deal or some new-era hybrid, keep the option periods low. I’d always recommend doing deals for 3 projects or shorter.

Remove Album Language

The EP and Mixtape have ushered a new era in the music business operating with Record Labels. In earlier times in Hip-Hop, words like mixtape meant street tapes often times with uncleared music used to promote an Artist before an album. Parts of that hold true today except mixtapes and E.P.s often spawn hit records and are often marketed like albums. In these cases, Labels own the music just like they would an album and have a budget for such. If possible you want these to count toward your delivery commitment.

Take Less Money

It’s okay to take less money. I doubt Kanye regrets any of the money he received for his Art creations that have inspired a whole generation. But it’s clear he chose more upfront money to fund his dreams instead of renegotiating for ownership. We’re talking about several amendments and side agreements that prioritize funding, which again, I’m not sure he regrets that decision. Still the idea should be take what you need and only a bit more so you have more flexibility.

Strike While The Iron Is Hot

For Kanye, he’s always been successful. Every project he puts out either over performs or performs as expected. For Artists, there are a couple times when the iron is hot. One is when you’ve built a real, sizable fanbase and you are coming to the table with real leverage ala Russ. Russ genuinely doesn’t need a label. Another is when you have an insanely viral record like Curtis Waters — Stunnin or Arizona Zervas — Roxanne. Both Artists have the ability to leverage these records into favorable terms. The other time is after you have dropped a couple successful albums. You are a proven commodity that has made the label tons of money. In these scenarios, renegotiate your freedom. Wait too long and the leverage is gone.

While Kanye was able to get his Masters for Yeezus and everything after that, some of his most acclaimed works are owned by Universal. This is the point of contention.

Watch-out For Money Hungry Team Members

It’s tough to make the right decision when team members are in it for self. Lawyers and manager have an obligation to do what's best for their client. Sometimes teams members however focus on upfront advances because that is their big pay day. Understandable given how back loaded music money can be, still you have to resist those urges at all times. Picking the right team will forever be the most important decision.

Reversion

Remember the word reversion. Labels do have a right to protect their investment (albeit not take advantage), but Artists should have a fair chance at ownership. It’s a balancing act. Thus after recoupment + a certain amount of years an Artist should be able to get their Masters back. If more Artists were to have reversion rights in deals, this would be a major hit to the Major Label system because a lot of their money is made off of catalogue music. If their catalogue growth continues to shrink, they might feel squeezed.

Conclusion: You might question Kanye’s intent but you can’t deny that what he did was a bit admirable. In a space where things can be hidden and inaccessible, giving people insight into his terms is a real move. Still, their is plenty to learn from these Agreements and I’d focus on strategy more than the legal language (get a lawyer). Short term decisions often times have long term consequences. Additionally, I’ve seen a lot of takes that Kanye should have re-negotiated better and he’s not a victim. Those things can be true but those people are missing the point too. Ownership should be a standard. Also labels can profit without taking advantage of underrepresented kids and black artists. 7 album deals, owning the music and giving people pennies on the dollar is predatory.