The 2012 movie “Searching for Sugar Man” belatedly made a minor star out of the musician Sixto Diaz Rodriguez. Its basic premise is that somehow his records became hits in South Africa but everybody thought he was dead, so they went looking for him. In fact, he was alive all along in Detroit, pursuing a modest career as a day laborer. Rodriguez was signed to the independent label Sussex Records. One of the dramatic highlights of the film is when the interviewer confronts Clarence Avant, the label’s owner. “What happened to all of the royalties?” the interviewer asks. Avant becomes visibly agitated and is unable to offer a satisfactory answer to the question. In fact the mystery of the missing royalties is not that difficult to assess. While it remains hypothetical, this note sets forth the most likely scenario.

Rodriguez signed a contract with Sussex obligating him to deliver an album, with options for more. At least one of those options was exercised, because the label put out two of them: “Cold Fact” in 1970 and “Coming from Reality” in 1971. Rodriguez evidently was recording a third album when Sussex dropped him, meaning that it exercised an option but then decided not to proceed. As was standard at the time, the contract paid Rodriguez a royalty rate on net sales of records equal to 10% of the wholesale price, with deductions for packaging, free goods, discounts and other similar sales inducements. Sussex paid for all recording costs, including studio, side musicians and producer. Those costs were “recoupable,” meaning they could be recovered by the label at the contractual rate, before any further royalties actually became payable to Rodriguez.

Being an independent label, Sussex was reliant upon an unreliable network of independent record distributors to bring its records to market. This was a day and age long before the advent of internet streaming, digital downloads, even the CD. Records were physical goods made out of vinyl. Tower Records just was starting. While there were some small chains like Discount Records and Wherehouse, there were no major record store chains like Musicland or Transworld (there aren’t any now, either). Most stores bought either directly from a distributor or through intermediaries known as one-stops, i.e. the small store made “one stop” to buy all of its product requirements. Record distribution was doled out by territory, with each distributor jealously guarding its turf. There were plenty of inside deals, kick-backs, payola, hookers and color TV sets.

A label’s ability to get its records distributed, and get paid, depended solely on the clout of its artist roster. The label also needed a continuous flow of product so the distributor was incentivized to pay, because it knew the label would have more records coming later. At the time, Warner Bros. Records was independently distributed — this was before the creation of WEA Corp. — and it got paid. But this was the exception, not the rule. A small independent label with a one-off record didn’t stand a chance. If it got paid at all, it got paid very little. Furthermore, it had no effective mechanism to remedy any payments deficiency. It was inexpensive, relationship-disruptive and most likely personally dangerous to pursue any shortfall.

Sussex’ position wasn’t helped by the fact it went out of business in 1975. When a label goes out of business it’s a green light for distributors to embargo any and all cash. In fairness to distributors, that’s also the signal for retailers to return any unsold quantities of records back to the distributor, knowing the label will not be in a position to market or promote them further. The distributor then will have to credit the retailers for the amount of the returns. If the distributor already has paid the label, then returns credits will be at the distributor’s expense, further disincentivizing the distributor to make any further payments.

Sussex was in a particularly vulnerable position because it was sub-distributed by another independent label, Buddah Records. Buddah either advanced funds to Sussex on a line-of-credit basis, or paid Sussex an overall label advance, which Avant retained without parsing it out to any of the label’s artists. Buddah also charged Sussex a high distribution fee–greater than its actual costs to distribute. It also made a margin on manufacturing costs. Avant was in a condition of subservience to Buddah and had to beseech it for money on a regular basis, much of which became unaccountable. Buddah got to recoup these amounts before it had to pay anything further to Sussex.

Compounding the problem, Buddah treated Sussex as a single accounting unit, that is, it cross-collateralized sales by all of the Sussex Records artists before it was obligated to pay anything to Sussex, even if funds advanced had been recouped. So, if Sussex had one hit artist but nine failures, then Sussex never would see any money on account of the one hit artist, because its net sales were absorbed by the other artists’ losses. This created tremendous cash flow issues at Sussex, which didn’t have enough resources to adequately market, advertise and promote its artists–even less so one like Rodriguez. “Sugar Man” is a catchy tune but it was off-template for the times. While I don’t doubt there was plenty of chicanery at the Sussex level, one need not necessarily hypothesize this was so, because Sussex wasn’t getting paid, Rodriguez wasn’t selling, and there’s nothing either Sussex or Buddah could do to drive Rodriguez records through the system. Rodriguez sold in miniscule quantities, far less than required to recoup the amount of recording costs Sussex incurred for the two records and some sessions for the third.

The situation internationally was not much better. This was a day and age long before the multimedia international conglomerates that now dominate the music business, such as it is. Labels licensed out rights on a haphazard, patchwork quilt-like, territory-by-territory basis. As part of its distribution deal, Sussex assigned all of its international rights to Buddah. Buddah in turn shopped all of its international rights (including the Sussex rights) around the world. For a modest advance, it licensed all of its albums for the entire continent of Africa to a company in South Africa. Buddah kept the entire amount of the advance without paying any of it to Sussex.

Africa was not considered a major territory. Many labels were unsuccessful in licensing any rights there at all. If a record became popular, record companies in South Africa simply would start printing copies of the record. Who was going to stop them? Surprisingly, though, the South African licensee did a good job in stimulating local enthusiasm for Rodriguez. Selling records is like blowing on an ember; you hope it conflagrates into a fire, but more frequently it just goes out. Through whatever combination of cultural taste, the tempo of the times, good marketing and promotion, some disc jockey liking it or other mysterious concatenation of circumstances, people started buying it. Buddah’s contract with its South African licensee obligated the licensee to pay royalties to Buddah after the amount of the advance was recouped. The South African company, however, never made any such payments. There’s no business reason why it should. What was Buddah going to do, go down to South Africa to sue it?

Even if money trickled from South Africa to Buddah to Sussex, Rodriguez’ contract with Sussex obligated it only to pay him half of the domestic royalty rate. No such payments ever were made or received. So, as a practical matter, there was no way to extract foreign royalties either. The South African company even put together a compilation album, “At His Best,” combining masters from Rodriguez’ two released albums with some of those from the unreleased third album. No payments were made to Buddah on account of that record. Since it had continent-wide rights, the South African licensee may have sub-licensed the Rodriguez masters to other companies in Africa. It also may have sold finished goods records to distributors in other territories, such as Australia. Sensing action on the project in much the same way sharks sense blood in the water, other companies throughout Africa, Australia and Southeast Asia started manufacturing and distributing records, even though they didn’t have a license. What was there to stop them?

The situation for music publishing should have been somewhat brighter, but it wasn’t. Rodriguez’ musical compositions were published by Interior Music. Under a typical music publishing deal for the time, music publishing revenue was split 50/50 between the songwriter and the music publisher. If there was a composer and a lyricist, they would share the songwriter’s 50% equally, i.e. 25% each. The two primary sources of music publishing revenue were mechanical royalties on account of sales of records, payable by the record company to the music publisher; and performance royalties, payable by radio stations to the publisher’s affiliated performing rights organization on account of radio airplay. Interior Music appears to have been owned by or affiliated with Avant. Mechanical royalties are set by statute. At the time, the statutory royalty rate was $.02 per song (two cents per song). A record with 10 songs on it therefore would have attracted a mechanical royalty rate of $.20, payable by the record company to the music publisher. Rodriguez’ record contract, however, may have provided that compositions that he owned or controlled would be licensed at a rate lower than the statutory rate. It also may have been cross-collateralized with his music publishing contract, i.e. music publishing royalties would not be payable until recording costs and other record company advanced costs had been recouped. Even if not, Sussex never paid mechanical royalties to Interior. Why should it? Both were owned by the same person, i.e., Avant. Interior never paid Rodriguez his share. Interior was affiliated with BMI. Rodriguez should have been able to collect performance royalties directly from BMI. However, due to limited radio airplay, because of limited promotion, because of limited money, no performance royalties were reported or collected.

The situation with foreign music publishing royalties is more complicated. Rodriguez should have been able to collect them. However most likely they never were paid by the applicable record company licensee, sub-licensee or whatever company simply undertook to release records on its own account.

In conclusion, while there may have been duplicity at Sussex, most likely the reason why Rodriguez never got paid royalties is because there were no royalties to be paid. Avant’s defensive reaction to the question about royalties in “Searching for Sugarman” suggests that where there’s smoke, there’s fire. If the scenario I’ve outlined is even remotely accurate, a better discursive strategy for him to employ would have been to look the interviewer straight in the eyes and tell him just that.