360 DEALS BREAK DOWN


Record companies are trying to adapt their business models to the new

realities facing the music business. CD sales are decreasing, and neither digital

distribution of singles nor streaming is proving to be as profitable as traditional

album sales. Established artists are making a larger percentage of their money

from touring, and some feel no need to re-sign with a major label once their

existing contracts expire. Established artists are already well known to the pub-

lic. Their “brand” already exists.


New artists, or less established ones who wish to make it big in the music

business, still need record labels almost as much as ever. As profits decline, la-

bels have sought to find other ways to make money from their investments in

building an artist’s brand. For the most part, labels now seek to make deals

whereby they profit from all sources of an artist’s income — not only from the

recordings, but also from non-record sources as well — publishing (income

made by an artist as a songwriter), concerts, merchandising, endorsements and

all else. These so-called “360 deals” may or may not be the dominant contrac-

tual form of the future because it’s too soon to tell how these deals will work

out, and what the push back from talented artists might be.


Nevertheless, if a new artist wants a record deal today, he or she typically

must agree to a 360 deal. In most of these deals, the record company takes

20% to 30% of artist’s net income from all non-record sources of income. In

most instances, the artist makes his or her own deals with a publishing com-

pany, merchandiser, tour promoter, or other entity. The record company will

not take ownership rights from the artist or the other companies; it just takes its

cut of the income.


The contractual negotiation is not only about the percentage the record

company should take of non-record income, but also what is considered net in-

come. Just as record companies try to make all of their costs recoupable (i.e., charged to the artist), in the case of net income from non-record sources, the

artist’s attorney will try to lessen the net income dollars that must be shared

with the record company. Quite a dance.

1) ROYALTY RATES AND CALCULATIONS

As mentioned, an artist makes money from a record company by receiving

royalties and other payments from the company. The more records you sell, the

higher your royalty should be. Hopefully, I have given you a good under-

standing of how this works. Note that some independent labels will offer an

artist a share of the profits instead of royalties if the artist is willing to forego an

advance, or takes only a small advance.

Also, do carefully review any provision that calls for reduced royalty rates

on “new format” records or technologies. For those who will not accept the

limitations of getting music from the cloud, there will inevitably be a new for-

mat that replaces the CD as the most popular way to physically purchase music.

Also, watch out for reduced royalty rate contract language on “new format” dig-

ital distribution. Don’t rely on the iTunes model to always be the dominant way

music is shared digitally.


2) LENGTH OF CONTRACT/OPTIONS

Generally, major labels insist that a new artist sign a contract that lasts nine

months after the artist has delivered one completed album. Major label record

companies also insist on receiving anywhere from three to five consecutive op-

tions to extend the term of the contract. As an artist, these options may require

you to make many albums at a reduced royalty rate. Every effort should be made

to limit the number of options the record company has to extend the term of

your contract. The original contract should contain a clause that states the roy-

alty payments due for each album recorded under subsequent option periods.

The artist’s attorney should negotiate for higher royalty rates for each new

album recorded.


3) RELEASE OF THE RECORD

Just because an artist signs a record deal and makes an album does not

mean that the album will be released or distributed unless the artist negotiates

this into his or her contract with the record company. The release of the album

should be guaranteed by the record company, or, at the very least, the contract

should allow the artist to go elsewhere if the album is not released. Also, in the

case of a major label, the artist will want the album released on the record

company’s main label, not on a smaller label that the record company just ac-

quired or is starting.


4) PROMOTION, MARKETING & INITIAL RUN OF THE RECORD

It is critical that your record receives adequate promotion, or it will die. You

should attempt to get the record company to commit to a certain dollar amount

that will be spent on the promotion of your records to radio stations and music

streaming services, and on the marketing of your records to stores — tradi-

tional and online. If the record company will not do so, you must question its

commitment to you.


Additionally, if there is a bidding war for your services, you should attempt

to get the record company to commit to hire independent promotion people on

your behalf. These people are well connected with radio station programmers,

but are not part of the record company’s promotions department. You also

want to limit how much of what a record company pays to an independent pro-

moter is considered an advance to you, and therefore recoupable. Finally, the

initial run of the record (before a record company is allowed to make the record

a mid-line item) should be at least twelve months.


5) TOUR SUPPORT

Record companies want you to tour because doing so sells records (and in

360 deals, the record company participates in any profit). Unfortunately, many

tours are actually money losers. “On Tour.” If your tour is a money loser, generally 100% of the costs advanced by the record company for the tour are recoupable by the record company. Try to get the record company to guarantee tour support, at least for your first tour.


6) MERCHANDISING

As part of the 360 deals that record companies are asking new artists to

sign, record companies insist on the right to sell merchandise (T-shirts, caps)

with your likeness or logo on it. If you grant the record company this right (ei-

ther directly, or through one of its affiliates), make sure that you actually get

paid a royalty from the sale of merchandise, and that your share of the profits

are not used to offset any loss the record company claims you have from record

sales.


7) VIDEOS

Today, almost all record related music videos cost more money to make

than they ultimately bring in, but having a video is one aspect of achieving high

record sales. Videos appear less frequently on television than a few years ago,

but they appear all over the internet. If you enter into a deal with a major label, it

is imperative that the label provides the funds to make a good video. Exposure on YouTube is important and possibly profitable. Typically, a record company

will agree to charge only 50% of the cost of making a video as recoupable

against the audio (i.e., the record), but they will charge 100% of the cost of

making a video as recoupable against video streaming income and the sales of

videos, should there be any.


8) LIMITATIONS ON COUPLING AND COMPILATIONS

Try to limit the record company’s ability to force you to participate in these

arrangements. They may be good for the record company in the short run and

bad for your career in the long run. You should have final control over your

image, not the record company.


9) LIMITS ON MULTIMEDIA EXPLOITATION

Try to limit the record company’s ability to license your performances with-

out your approval. Whether it’s on the internet or in the movies, you want final

control over your art and image.


10) ALBUM COVER ARTWORK

Speaking of image, within the bounds of decency, whether you or the

record company controls the album artwork is negotiable. This can be

important for your image, and perhaps in determining to what extent you, or the

record company, profit from merchandising associated with the artwork.


11) TERRITORY

For less established artists, a record company’s territory is usually defined

as the entire “universe.” This means that the record company can sell your

records anywhere. Limit a record company’s territory if they are unable to effec-

tively market your album somewhere. For instance, if you expect your music to

be especially popular in Japan, it is important that the record company can

effectively sell your music in Japan. As more and more records are sold outside

of the U.S. and Canada, the size of a record company’s territory, and your roy-

alty rates from those territories, must be negotiated more seriously than ever

before.


12) RESERVE LIMITATIONS

For physical record sales, try to negotiate the reserve percentage down.

Also, try to limit the amount of time a record company can hold on to the re-

serve once it knows that your records were actually sold to the public. With the

widespread use of Soundscan®, which tracks record sales by scanning the

UPC code on the back of each record, the record companies have a pretty good idea of which albums are selling. If your records have already sold, the reserve

should be reduced accordingly.


13) CONTROLLED COMPOSITION CLAUSE

In a typical record contract, the money you earn for writing songs that ap-

pear on a record is reduced if you are the artist on the record. This limitation is

contained in the controlled composition clause of the contract. I will explain this

clause in the next part of this book. You need to understand how songwriters

get paid in order to fully understand it. For now, know that it is a critically

important part of the artist’s record deal.


14) OWNERSHIP OF THE MASTERS

Ownership of your master recordings allows your record company to ex-

ploit them. Hence, record companies wage legal wars against “free” websites. If

you are a major star, you can probably insist that ownership of your masters re-

vert to you at some point in the future. But if you are a new artist, having all

your master recordings revert to you is more difficult to successfully negotiate.

Because you never know if, or when, the record company might drop you

from its roster, try to negotiate to obtain ownership of all the masters you

recorded should you and the company part ways (including masters that were

never released). This way, should you be dropped from the label, you will be able

to exploit the masters, or, at the very least, not be haunted by them when the

label that dropped you releases “The Early Years” album, which will surface two

years after you become a star, and will no doubt be a collection of unfinished

works.


15) OWNERSHIP OF YOUR WEBSITE

Most record companies insist on the exclusive right to set up the artist’s

official website. Make sure the rights associated with the website revert to you

when the term of the record contract ends.


16) ACCOUNTING AND AUDITING RIGHTS

Be sure that your contract requires a periodic accounting from the record

company that details your record sales, expenses charged to your account, and

royalty payments. Also, insist that the contract allows you to conduct a detailed

audit of the record company’s numbers. The more rights you have, the better.

This can help prevent the record company from becoming sloppy with your ac-

count.


17) EXCLUSIVE RECORDING

For contracts with record companies in California, note Civil Code §3423(e)

and Code of Civil Procedure §526(5), both of which deal with personal service

contracts. Essentially, these code provisions deny a record company the right to

obtain an injunction to stop you from recording for another company (even if

you agreed to provide the record company with your exclusive services), unless

the record company pays you a minimum compensation of $9,000 in the first

year, $12,000 in the second year, $15,000 in the third year, and substantially

more in years four through seven.


Record labels are still looking for the right pricing model, and the right use allowance formula, to maximize profits from the internet. Today, singles down- loads and music streaming are much less profitable than traditional album sales. The search for the right model is likely to play out over many years. For now, make sure at the very least, that your record company applies the same percentage royalty rate payable on your singles downloaded from the internet, as are payable on your regular album sales. In other words, your full base rate. Unfortunately, most pre- internet contracts didn’t contemplate the revival of singles as a profit center, so artists with these older contracts may be paid royalties on sales of internet singles at a reduced rate.


Strive to make sure that your record contract calls for you to receive your full royalty from any new source of income that the record company receives, unless another split or royalty rate is specifically set by legal statute. Because new unforeseen sources of artist income are inevitable from the ongoing digital revolution, make sure your lawyer covers future looking royalty and other income opportunities. Who would have expected to make money from cell phone ringtones twenty-five years ago? No one even had cell phones back then.

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