(Originally published in the Entertainment Law column of the New York Law Journal, August 22, 2008)
During the last few years, recording artists have been entering into so-called “360 agreements” with record companies and entertainment corporations in increasing numbers, changing the relationship that existed for decades among artists and major labels. Instead of focusing solely on sales of recorded music, the record companies now are sharing, through these agreements, in performers’ income from a 360-degree range of professional activities. High level artists such as Madonna, Jay-Z and Nickelback signed such agreements with Live Nation, a large promoter of concert tours, while traditional record companies have attempted to use this approach as the new “norm” in signing new artists. These developments reflect the difficulties encountered in the music industry as electronic transmission of recordings has become dominant and piracy rampant, making the financial returns from sales of records insufficient to justify the cost of creating, marketing and promoting recorded music.
Traditional Agreements
The traditional agreement between a recording artist and a record company gave the company exclusive rights to the artist’s services with respect to master recordings created during the term of the agreement. The record label would pay the recording costs and the expenses of manufacturing, distributing, marketing, promoting, and advertising the recordings; create promotional videos; and provide tour support. The artist received against a negotiated royalty rate, which would be a percentage of the retail or wholesale price of records (and would also be charged with recording costs and some of the promotional expenditures).
If the artist wrote the musical compositions he or she sang, or just controlled the publishing rights in them, the record company customarily insisted upon a reduction of the “mechanical” royalty rate that otherwise would have been payable for a compulsory license under the Copyright Act. The label also would cap the total mechanical license fees it agreed to pay per album irrespective of whether the artist or a third party controlled the compositions. These demands required the artist to obtain corresponding concessions from music publishers. In many instances, the record label also encouraged the artist to enter into an agreement with the label’s publishing affiliate for the administration of the copyrights in the musical compositions, often with a transfer of ownership, too. The artist negotiated that deal independently and received a separate advance.
A major record company generally would not share in the income an artist received from other professional activities such as live touring performances, acting roles, and general merchandising, although there were some exceptions. For example, record companies did merchandise the images found on album covers and other properties they created in connection with the artist’s records, and sometimes when a record company had an affiliate in the merchandising business, there would be a separate negotiation for those rights. Major labels did not seek, however, all-encompassing multiple rights deals. (Independent labels, on the other hand, more commonly offered recording deals that included publishing and sometimes even merchandising components.)
Justification for 360 Treatment
Some who are critical of 360 deals have argued that record companies should function in difficult times as other businesses do: by cutting costs without changing their business model. The companies answer that the digital age has not changed basic economics of the record business enough to let them overcome their problems with cost-cutting. The costs of engaging producers, the studio, engineers, and side musicians as well as editing, mastering and mixing have not diminished. Marketing and advertising expenses in the United States still are incurred on a national level, and recording artists still expect to receive advances for their living expenses while recording.
Major labels also point out that their reduced earnings are not simply due to losses from piracy. Digital copies that consumers buy usually involve one master recording and one composition at a time rather than an entire album of 10-12 tracks, which previously needed to be purchased to obtain 3 or 4 key songs. In the digital environment, the consumer can collect and compile precisely what he or she wants without investing in entire albums.
The companies say they are correcting an imbalance through 360 deals by requiring that artists, who benefit from successful recording careers financed by record companies, share with those companies the revenue streams enhanced by that support. When an artist’s career is newly launched, it presents the most unattractive ratio of risk to reward to record companies. Once an artist achieves fame and success, he or she not only enjoys more public recognition and a more secure sales base, but also the ability to realize substantial financial rewards from digital sales even if physical CDs are not selling well. Some of the more successful artists have spoken in favor of “free” digital deliveries without apparent concern for the negative impact that might be felt on their record sales. This may be because they derive revenues primarily from live concerts for which their recordings serve as promotional items. (This is not a new phenomenon; it was treated as common knowledge that “The Grateful Dead” did not seem to object when concertgoers taped their music.)
Against this backdrop, record companies and other entertainment companies have turned to 360 deals to share in all the ancillary methods by which an artist generates income. These money streams may include music publishing income, such as music synchronization licenses, performance rights and revenues from sheet music; merchandising income, such as t-shirts, endorsements and use of the artist’s names and likenesses for other commercial purposes; live performances; and professional appearances outside of the music business, such as acting engagements.
Components of 360 Deals
The industry components involved in 360 arrangements vary from deal to deal with the stature of the artist and the nature of the company.
Currently, most companies involved in 360 agreements have more expertise in a particular segment of the of the music business and not in the full range of entertainment categories. For instance, Live Nation is a formidable live performance company but it may still turn to labels to make recordings and perform other services that record companies traditionally handle. Similarly, record labels are not yet in the touring business and are only marginally in the merchandising business, so they tend to delegate those responsibilities to third parties. In both cases, the companies incur costs and perhaps a diminution of returns by sharing these responsibilities and their proceeds.
In almost all 360 deals, the artist will be paid an advance that can range from a modest sum to the multi-millions reportedly payable to Madonna and Jay Z. All or part of the advance will be applied against sources of income derived from the artist’s efforts. In the past, the negotiation of royalty provisions related mostly to rates and the application of wholesale and retail calculations, varying by territory, format and pricing. The allocation of shares of net profits used to be relegated to areas of ancillary exploitation, such as flat fee licenses. With focus shifting to the question of how different revenue streams will be shared, the manner in which “net” is defined and the costs deductible in its calculation become much more central. Further, the allocation of different royalty or net receipts rates may take into account additional artist-specific factors. For example, an established artist capable of earning large amounts on tour but not in music publishing (e.g., when the artist does not write his or her own compositions), might expect a greater percentage on the performance side.
These distinctions provide fertile grounds for negotiation, which can be considerably more complicated compared to pre-360 days. The new mixture of product lines and services creates new questions: To what extent will there be cross collateralization among the “revenue buckets” of income? What expectations does the artist have with regard to areas of exploitation that are not within the prime expertise of the acquiring company? Can the artist at some point of dissatisfaction take particular areas out of the contract — or at least demand a change in management talent — if a minimum level of performance is not met? And what controls and approvals, if any, will the company have over the tour schedule, the personnel involved on tour, and tour expenses?
In the recorded music business prior to 360 deals, the artist’s right to end a contract generally hinged on the record label’s failure to record or release the product. In a management contract, the artist often had the right to terminate if a certain amount of income were not obtained over a given period of time. But when the scope of the contract includes all of the artist’s “entertainment business,” what happens when some aspects of the businesses are going well and some are not? Will the contract permit the 360 relationship to be completely unraveled, undone in part, or proceed without change?
For an established artist, a transition to a 360 deal from the batch of separate deals he or she has previously made, also raises issues. For example, if Live Nation wanted to enter into a 360 agreement with an artist who owes two additional albums to a record company with whom the artist is under contract, those obligations to the first company would continue during the new relationship. Live Nation might require the contribution of those earnings toward the recoupment of its risk money, but there may be limited comfort in that contribution. Not only might those earnings be encumbered by prior costs and advances but also they may be subject to unknown expenses – under the control of third parties — if the albums have not yet been recorded and the costs of production are not yet finalized. Similarly, a record label that wants to include an artist’s merchandising opportunities in the deal may have to wait for the current merchandising contract to run its course and settle in the interim for a share of earnings from those arrangements. Like any other negotiation, such variables will influence the size of the advance that the 360 company is willing to pay.
Conclusion
There is much to learn for artists’ representatives and for record companies as they gain experience with this new business model. The 360 agreement will necessarily evolve as its pitfalls and benefits are explored – and as the music industry continues to look for ways of coping with a changing marketplace.
The authors gratefully acknowledge the assistance of our partner, Nick Gordon, in the preparation of this article.