We at L4M have written quite a bit about 360 deals. The 360 deal has become the standard recording agreement. Gone are the days of multiple album deals. (Who records and releases full length albums these days anyway?) Artists today must be multi-faceted. Income has to be generated from a bunch of sources. The old system of paying back advances via record sales has gone the way of the DoDo bird and Eagle Eye Cherry.
The origin of the 360 stems from the steady decline in album sales over the last decade. Labels were funding artists with advances and would recoup based on record sales and royalties. All other income would go straight to the artist or her affiliate. While record sales have plummeted, concert ticket sales and merchandise sales have stayed fairly strong. The result was strong earnings for artists and pissed off labels who were not able to recoup their initial advances. Not surprisingly, the labels dropped a lot of artists and repositioned themselves (slowly) to adapt to the changing music economy. Savvy investors also came on board, sometimes replacing labels, and presented more mainstream, non-music industry, proposals that work more as a partnership rather than a label/artist venture.
While each 360 deal is different, you can pretty much bet that each will contain the following core elements: The label/investor who funds a band, either with an advance or an investment, will receive a percentage of income from:
1. Royalties (publishing/sometimes writer’s share)
2. Record Sales (all formats)
3. Tour Income
4. Merchandise Sales
5. Licensing Income
Some 360’s go even further and give the label/investor a share of personal appearance income, solo (if it is a band) performance income, dj income, book/tv/movie income etc. Basically income from anything that a band or an individual in a band may earn while under contract could theoretically be collected by a label/investor in a 360 deal. If there is any hope of a 360 deal working, you must negotiate certain removals or certain untouchable categories as well as negotiate the percentages of income shared.
As I have written before, a 360 deal is not the worst thing in the world if it is drafted and enforced in a fair manner. This may come as a surprise to my readers as I tend to be a bit slanted toward artists, but if you think about it, a 360 may just work for some bands. If you get a label or investor who is looking to share in all streams of revenue, then you must have an agreement that certain benchmarks or obligations of the label must be met. If the label plans on sharing in your tour income, they should also be spending money on tour support and promotion. If a label wants income from your personal appearances, the label should help secure such events. The principle behind the 360 is that without the investment made by the label/investor, the band would not succeed. Typical of many labels, they will sign a band to a 360, supply them with a small advance and then disappear. Then the band works its collective ass off to get gigs and sell gear and the label still collects its share. That just plain old sucks.
If however, you have a fair label that wants to share in a 360 deal, they will expect to help you earn more money by promoting all aspects of your career. Whether it is hiring a PR company, street teams, securing world wide distribution, etc., a label that works with and for the band has a much better claim that sharing in all of their artists income is fair.
So do your research, advocate for yourself and your band and make sure that if a label or an investor wants a piece of everything you do, they are helping you achieve everything you want to achieve. (FYI: 360 deals are beasts and should always be negotiated by an attorney)
In the old days (about 10 years ago), artists would get fat advances from labels who would cash in on the traditional sale of music. Bands with one hit song could sometimes even afford to pay back the advance and make even more money from the royalties earned via record sales throughout the world. Labels would give away small fortunes to successful bands with the security that they would make far more money than the band ever made through lopsided royalty rates.
Today; not so much. Labels have crumbled under this model (thus the 360 deal). Royalties today account for a very small percentage of the total earning potential of a successful band. Don’t take it from me, here’s what Irving Azoff said in his Business Week interview with Jon Fine: Today, ‘recorded music is down to less than 6%’ of major musical acts’ revenues. 6%! that’s it. Think about that; a big name band like Coldplay or Greenday who still sell hundreds of thousands of albums still make about 94% of their income from sources outside of royalties.
So where is the rest of that income coming from? Number one is still touring. The concert scene seems to be recession proof as thousands are still packing arenas, clubs and festivals. Europe, Asia, and Austrailia continue to pay top dollar/euro/etc. to see popular acts. Corporate partnerships and sponsorships are also huge money makers. Corporations realize the marketing value that music can bring. Partnering a popular band with a product is nothing new it is just more prevelant today. Christinia Aguilera, Gwen Stefani, Madonna, Britney, P-diddy, J-lo all have fragrances in partnership with established cosmetic companies. Even Weezer just recently announced that they are going to partner with Snuggle (the fabric softner). Redbull consistently sponsors up and coming artists across the country.
Merchandise is also still a big money maker. The web makes it easier to sell more stuff to more fans in more areas. Cheap manufacturing and easy distribution create high profit margins for everything from hats and t-shirts to ipod cases and cell phone apps.
Finally, licensing takes up another chunk of that 94%. Licensing can go hand in hand with corporate partnerships, but also expands to movie, tv and commercials.
You cannot wait for your music to sell itself. More importantly, you cannot to sustain your career through the strenght of traditional record sales. Remember, you create your own market. Just like a savy investor, you have to diversify and look for all possible money making avenues for the business that is your music.
SHAMELESS SELF-PROMOTION OF THE WEEK: LEBRON V. KOBE COMMERCIAL FEATURING THE COOL KIDS
The Cool Kids are one of the best examples of the new music business model. Their plan of primarily giving their music away for free has paid off. Great music, working hard and creating a good team have led to incredible opportunities. One of those opportunities was to have their music featured in the most recent version of the Nike commercial series featuring the puppet version of Lebron and Kobe. Check it out:
There is a new standard in record deals. For better or worse, the 360 deal is here to stay. Even though the music industry is as slow as your grandma’s driving, it cannot seem to get away from itself. The slow reacting, one time behemoths of the music industry (the major labels) have only recently come out and publicly stated that its past revenue model is dead.
The way the labels traditionally have made money is to sign a band up for several years and/or several albums. The labels would give the band an advance that would go toward recording costs or possibly tour support but oftentimes toward cars and women. The band, now starting in the hole of owing the label money, would wait until it sells enough records for the label to recoup its advance (and other miscellaneous costs). If the band was successful enough to bring their account back to even, the label would fork over between 10% and 15% of the royalties earned through the sale of the band’s albums.
The problem with this model (from the label’s perspective) is simply that it no longer works. Record sales have plummeted, pirated and web based sharing of music has become the norm. Oh, and the economy doesn’t help either. Labels can no longer depend solely on physical or even digital record sales to turn a profit. During the month of February, the top selling album, Taylor Swift’s Fearless, sold a pitiful 62,000 units. Record sales for the months of January and February of 2009 are down over 28% from just two years ago. These numbers coupled with the ease of distributing music to the masses without the help of a label’s network, has almost run the majors clear out of business.
After years of decline, the labels (albeit unnamed sources) have finally admitted that their business model is not working. An anonymous source from a major label recently admitted that the way majors do business will be extinct by 2013 if not earlier. Check out the full article here. The exec states something that most of us representing musicians have known for a long time, a label cannot survive without forming a partnership with the artist. It has to share in the ups and downs of a band’s career and provide services throughout the entire relationship, not just when the band is hot, to truly do its job. That is why the 360 record deal is the new norm.
I have written about the 360 deal in the past. Click here for the past 360 post. It was a safe prediction that these modified record deals were here to stay. A 360 deal enables a label to share in the revenue a band or artist generates from all sources, not just from the sale of records. That means when Madonna or Jay-Z (both of whom have 360 deals with Live Nation) sell out an arena or sell a new fragrance at Macy’s, some of that money goes to the label. The label shares in all 360 degrees of income of a musician’s career.
While this may not seem fair or just, label execs who push these deals argue that they should share in all income a recording artist makes due to the fact that the label has made the initial investment into the career of that artist. So basically, without the label, the musician would still be selling out Joe’s on Weed Street rather than Madison Square Garden. The label feels that it should earn along with its artist. They argue that their incentive to support and market their artist in all aspects of his career, not just the sale of cd’s, is built into a 360 deal. The label will help an artist land a film deal or write a book or get into acting because they have a cash incentive to do so.
As I have written before, the label’s reasoning behind the 360’s makes sense on the surface. However, just like with everything else in the music business, be cautious. 360 deals come in all shapes and sizes. They still may take complete ownership of all of a bands copyrights without reasonably compensating the artist. Some egregious agreements will have ridiculously long terms allowing the label to continuously benefit from a small investment it made 10 years ago.
I have been working with some forward thinking bands and managers to come up with a justifiable music model that takes the principles of a 360 deal and shapes them into a true business partnership. An investor will form a limited liability company (LLC) and share ownership in the LLC with the artist. The business, that is the artist’s career, will be governed by an operating agreement; just like a normal business (revolutionary, I know). This will allow for flexibility on both sides. An artist could eventually buy out the investor or the LLC could invest in new talent and form a subsidiary. A lot of the things are possible with the right team and the proper paperwork.
If you have questions about 360’s or other business models for musicians, drop me a line. Even better, come to my showcase:
Rather than thinking of an advance as a huge payday, think of it as a loan made to you by a music label. In a typical (old school) deal an advance will be paid out to 1. buy your band’s exclusive services for a period of time and 2. be used to pay for the recording of you album. Oh, minor detail, a typical recording agreement which pays a large advance to the artist usually means that the label paying the advance has just bought the rights to the band’s masters. The advance is not really your money. Its yours to use to make your album (or albums) and possibly live off of while you are recording your album so you can quit your job at Wal Mart. Nice right? Not so fast.
That advance/loan has to be paid back to the label one way or the other. The typical way a label recoups the amount it advances is by taking any profit your record makes first before you get paid a dime. In 360 deals, an advance is recouped not only from your record sales but from your live performances, merchandise and anything else your band sells.
Here’s a depressing example: Atlantic gives your band $100,000 bucks as an advance in exchange for a 3 record deal. Depending on the wording of the recording agreement, that advance is paid to cover the production of your first album with a potential second advance to make your second and third. You have to hire a producer ($30,000), rent studio time ($10,000), pay a mixer and post production house ($10,000), pay some studio musicians ($10,000), pay for clearance of a sample you need for one track ($10,000) and feed and house four band members while making the album ($30,000). Just like that you have spent your advance. Hopefully you got your record made. If not, its back to the label to ask for more money.
Now your album is done and the label spends another $100,000 to market and promote it. Right off the bat your band is $200,000 in the whole. Your record has to sell a lot of copies at the going Best Buy price of 9.99 (which is split amongst Best Buy, the distributor, the wholesaler, and the label and finally you, probably at about $1.00 (if you are lucky) per cd) before the label has gotten its $200,000 loan back. We can save the mystery of royalties for another day.
Here’s another little nugget of bad news: Labels don’t have any money to pay big advances any more. Advances have shrunk right along with the number of physical cd sales.
What does this mean to you? It means you shouldn’t 1. wait for a big advance cause it ain’t coming and 2. try to be as self-sufficient as possible. Bring a finished or nearly finished product to the distributor or label and ink a license deal rather than a recording deal. Rather than take a huge advance, try to work out a better split on royalties. That way you won’t be paying back your advance for the rest of your music career.