Closer look at the profit distribution

I've stated what I think regarding the 13 year contract term, (Click here to read that post) so let's look at the distribution of the profit. Please note that the contract I'm using was downloaded from the Korean Central Court website, so it is an official document. (Link to Korean Central Court website)

There are many fans who bashes SM for exploiting their artists with such "slave" contract after reading many biased articles regarding the profit from blogs, fan sites, k-pop sites, but once you know the details of the contract and learn how to read it, your opinion will change. If you haven't already, check out this post and read the translation of the contract.

As you can see from the contract, there are more sections than what those articles mention. Glance through the distribution of the profits, and what do you see? There are categories that give no profit to TVXQ, but there are also portions where TVXQ get 70% of the profits. Check out where most of the higher percentage shares are for: Overseas Activities. As we all know, TVXQ had most of their activities in Japan and the contract pays them highest percentage of profits from the overseas activities.

Now look at the parts where the profit share is lower. Most of them are income generated without much involvement from TVXQ themselves. In other words, those are revenues generated by utilizing existing contents, so most of the work is done by the company so it makes sense for the company to get more share (e.g. licensed products, toys etc) Also look at the 10% from the overseas activities. TVXQ gets 10% from the actual amount received, which means whatever cost there is need to be deducted from the remainder of the payment.

When you negotiate a contract, you give up some, and you gain some. There's no such thing as a 100% satisfying contract unless one side gets 100% of everything. So it is natural for some parts to look unfair, and some parts to look fair, and even for the sections that look unfair, you won't see the whole picture unless you know exactly how much can be made from each sections. Also, you need to know about that particular industry the contract is written for because "fair" distribution is not the same for different contracts.

Now let's talk about the most popular sections of the contract SM bashers like to bring up, the album sales. I did explain about the album sales briefly on my other post, but here it is again. You see that 2%-5% share TVXQ get, and you naturally think that it's a total ripoff. TVXQ only gets up to 5% and SM gets to keep at least 95%, right? Not so fast!!! You need to see that 2% is from the SALES, not from the profit. We all know that there are costs involved in selling CDs. There are copyright fees, studio costs, session musicians, manufacturing costs, paying the distributors etc. So SM doesn't keep the rest, they need to pay for the costs before seeing any $$$. I do not know exactly how much SM makes, but let's see how much a US artist supposed to make from the sales.

Check out this link: http://entertainment.howstuffworks.com/music-royalties6.htm

Above link shows how much an artist who sells one million CD's make. You can read the article above, but the conclusion is that after deducting all the costs, the artist make less than 1% of the sales. Well, you know your profit percentage increases as you sell more CD's since some costs stays the same, which means TVXQ who's best selling album was Mirotic(about 500K), would've made much less than 1% of the sales according to that calculation. For TVXQ's other albums, I think they would've either lost money or barely broke even if paid like US artists.

So if you look at it that way, the 2% TVXQ gets after selling over 50K looks really great. With 50K sales, the company definitely would've lost money, but the contract still pays TVXQ. Over 200K sales? I don't know exactly where the break even point for the company is, but I hightly doubt company made much there either, but TVXQ still gets paid, and they get paid 5% compared to less than 1% for US artist. I'm sure company makes more money than TVXQ, but US record labels are the same way. According to the above link, US companies take about 70% more or less, but they have to pay for their cost of doing business as well, and so does SM (it costs money to run a business and they need to make money too).

So from this, you can see the distribution is reasonable, and it's definitely not a "slave" contract.

Also, if you read the court documents (not translated yet, will be done some day), it shows that the contract was amended 5 times, last changed on February of 2009, so you know TVXQ were continuously renegotiating their contract and SM is open to changes.

One more thing, the portions of the contract that was amended in Feb 2009 include better percentages for the albums sales, and SM applied the new figures for the Mirotic album, which was released in the previous year even though they didn't have to. SM is really a bad company, isn't it? :)

By now some of you may heard the news that the Korean Fair Trade Commission(KFTC) approved the amendments made voluntarily by SM to the contracts of SMTown artists. SM changed 3 sections of their standard contract, and the profit distribution WAS NOT one of them, which means there was no problem with the distribution of the profits to begin with according to KFTC.

Next: I will analyze other parts of the contract, and that means more translation...(sigh)