Once again, the Packaging Deduction is based on the price to which the Royalty Rate is applied. But here's a deduction that's based on the number of records sold, it's called the Breakage Deduction. The Breakage Deduction really started and was inserted in the contracts in the 40s and 50s, when records, at that time, primarily 78's, were made of shellac. Shellac is a very brittle substance, very easy to crack, very easy to scratch. Well, record companies legitimately had a concern that the number of records that they manufactured in the plant and shipped out to distributors that were sold to retailers could be broken during that shipment processing, many times they were, boxes would be dropped, people unloading them in the bins could, they could fall from that area, and you can end up with a number of broken records. And basically, the retailers didn't have to pay for the broken records. They could send them back to the record company, and say, look, these broke, I'm not paying for them. And so, record companies could count on about 10 to 15% of the records that they shipped out breaking during that process. Legitimate, 40s and 50s. Here's the problem. These provisions have stayed in record contracts well into the turn of the this century. The Breakage Deduction basically says that the record company doesn't have to pay you for broken records and it got to the point that record companies just decided that, since about 10 to 15% of the records were breaking during this shipment process, the contract would say, we only have to pay you for 85% of the records that we ship, or 90% of the records that we ship. So in other words, if the record company would ship 1,000 records, they only had to pay you royalties on 850, 85% of the 1,000 that they sent. The music industry evolved to records being made on vinyl not on shellac, vinyl is much more pliant, flexible, unbreakable, but did record companies take that breakage provision out of the contract in the 60s and 70s as albums and 45's that were made out of vinyl were shipped and became the predominant configuration? No, what about cassettes? Did cassettes break, cuz some cassettes could break. But in the shipping process, no. I mean, I remember having cassettes and after you played them for a long time, sometimes the tape would come out. [LAUGH] But they didn't break. Not during the shipping process. In other words, was the breakage deduction really a significant, should it have been applied to cassettes, record companies took the position, this provision stays in the contract, 1,000 cassettes shipped, you're only gonna be paid on 850. The breakage deduction of 15% would apply. CDs, I think, is the most ridiculous example of the application of the Breakage Deduction. Here's the thing, CDs, the big marketing point of CDs was that they were indestructible. Vinyl would scratch, sometimes warp. So, the record companies came up with this marketing scheme for CDs, saying that this disc, will never break, it will never warp, it will never scratch, and that was a major, major part of the marketing of CDs, and it worked. Should the Breakage Deduction apply to CDs? Clearly, no. Did record companies take the Breakage Deduction out of contracts in the 80s and 90s? No. And they were very adamant about it. I remember arguing that point in the early 90s with a business affairs person, and I said, you know, this Breakage Deduction is ridiculous. You're only selling CDs now, primarily CDs. Why in the world do you have a Breakage Deduction? I want you to reduce or eliminate that Breakage Deduction all together. And I got a negative response, and the business affairs person says, no, this is how our system is set up, that we're gonna enforce this Breakage Reduction, you know, I might give you a bigger advance, I understand, I'll compensate for it somehow, but the record companies decided to keep the Breakage Deduction in. And it wasn't until about 2004 or 2005 that the last major label eliminated the Breakage Deduction from their contracts. And now, all of the major labels pay on 100% of records sold. So, you might say, well, why should I be concerned about the Breakage Deduction? None of the major labels use the Breakage Deduction anymore. Well the major labels aren't the only companies that sign you to exclusive recording agreements. You have a lot of independent companies. You have a lot of production companies that might sign you as an artist or record you and enter into a deal with a major label. And they're gonna have their own exclusive recording agreements with you as an artist. Many of these production companies, and even some of the independent labels, might base their contracts off of old major label contracts that have these packaging deductions and breakage deductions types of provisions in them. And you need to be aware of those, because if they have that in their contract, they are in the position to take those deductions from your royalties. So, you need to be able to recognize whether or not a packaging deduction, or breakage deduction, is being applied to the payment of your royalties.
