Once the ink is dry on your new record deal, you may think it is safe to assume that your music will soon be distributed to the masses, but in fact, that is not always the case. The so-called pay or play clause in your record deal gives the record label an out if they decide that they don't want to be in business with you after all.
In a record deal, pay or play allows the record label to essentially buy you out of your deal. They pay you a pre-determined amount of money to release you from your record contract, no matter how many firms and options they committed to elsewhere in the deal. The amount of money they have to pay you varies and is negotiated up front. Sometimes they may have to pay you the entire amount of the outstanding advances they haven't given you and other times they have to pay you far less. Your pay or play payoff amount is largely determined by your bargaining power - in other words, the bigger your sales history and fan base, the bigger the payoff you can demand.
Why would a record label want to buy you out of a record deal they went through all the trouble to negotiate? There can be several different reasons, but most of the time it comes down to a disconnect between the kind of music they want you to make and the kind of music you are actually making. This kind of disconnect can happen for a lot of reasons. Maybe the label has decided to move in a different direction with the kind of music they plan to focus on promoting (for instance, maybe they are only financially able to focus on one genre) or maybe your sound has changed so much that they aren't sure what to do with it (though depending on your deal, they can drop you without pay for that kind of change).
Pay or play can also be exercised for personal issues between the musicians and the label. If both sides agree that they can't work together any more, and the label is eager to sever ties but can't find a way out, pay or play is one way to end the working relationship. This is the benefit of the pay or play clause for record label. It can be in the label's best interest to take a short term financial hit than to continue working with an artist whose music they can't sell or who they simply can't work with. From the artist's perspective, being released from a deal may hurt, but in the long wrong, it's better to be with a label who can effectively work your catalog - and more importantly, who WANTS to - than a label that has essentially given up on the job.
Pay or play clauses are often something that come into effect when major record labels want to settle with big name artists. Mariah Carey was famously bought out of her record deal for millions of dollars, and there have been other high profile cases.
After the pay or play option is exercised, the artist is free to seek out new deals and enter into any new contracts for the music that they see fit. The original label is still required to pay the artists any royalties due on releases they did put out in accordance with the agreement for those albums.
That last point is important to keep in mind. When a record label uses the pay or play option in their contract, it doesn't change the ownership of the albums already released under the deal. You or your new label may wish to take over all of the releases in your catalog after a label cuts you lose, but even if you are able to come to such an agreement, expect it to come with a hefty price tag.
Your record deal should clearly indicate what pay or play rights the label has, how much they have to pay you if they release you from the contract and what happens to the albums already released by the label.