Music Biz: 360 Deals Pt. 3

by Tony Berman

Researched & edited by Howie Cockrill

In Part 1 of this article, I introduced the "360 Deal," which is similar to a recording agreement between an artist and a record company but encompasses much, much more than just recordings.  I also provided a bit of history to put the 360 Deal in context.

In Part 2, I delved into the specifics of 360 deals to give you a flavor of how they work.

Now, in Parts 3 and 4 I will explore some issues that all parties thinking of signing a 360 deal should consider.

ISSUES WITH THE 360 DEAL

IN HOUSE VS. OUTSOURCE  

As record companies try to get more pieces of the artist’s pie, will they attempt to handle those revenue streams in-house, or will they outsource to smaller specialty firms? 

On the one hand, if record companies handle this “full service” in-house, the individual specialty firms that have traditionally addressed tour support, merchandise, web presence, marketing and promotion may have cause to be worried. That is, unless record companies decide to buy out those firms and bring them in-house. 

On the other hand – if record companies out source these jobs, it could mean a huge boon for these firms.

There is much speculation as to whether record companies, which specialize in producing, manufacturing, distributing and marketing records, will be able to translate their success in that area to other areas like live events and merchandise. 

The prevailing view of attorneys representing artists seems to be that until a record company brings in significant revenue from record sales, the record company should not be given control over other, less familiar aspects of an artist’s career. 

After all, merchandise and live event deals a record company might strike with third parties are vastly different from recording deals with an artist.

TRICKLE DOWN EFFECT 

In my own practice, I have begun to see smaller independent record companies follow suit with their own version of 360 deals. 

The major issues presented here are whether these independents have the money to pay artists for these new rights, and also whether these independents can create the expansive infrastructure necessary for the 360 deal. 

Of course, these issues are the same ones that major record companies are having to face as well. 

In their favor, independents have long been known for having the patience and long-term vision necessary for artist development (something that the majors have been criticized for lacking). 

Perhaps independents with relatively few bands and a hardworking staff can pull off a 360 deal that will provide their artists with an efficient and profitable touring, merchandising and marketing strategy. 

ADVANCES 

As noted above, the 360 deal could mean a bigger advance for artists. Although advances are recoupable from royalties 99% of the time (meaning that an artist won’t see royalties until the advance is paid off), artists are usually advised to get as much money up front as possible. 

The 360 deal will up the stakes of this notion. 

Is there a limit to how much an artist should take up front in exchange for handing over comprehensive revenue rights to record companies? 

Will these multiple revenue streams translate into a faster rate of recoupment for artists, or will towering advances keep artists in debt to their record company indefinitely?

REVENUE SPLIT VS. RIGHTS OWNERSHIP 

There are many ways to structure compensation in any contract for copyrightable creative output, mostly revolving around the points of copyright ownership and revenue participation.

The participation/ownership issue is an important one in the context of 360 deals, where multiple rights abound. 

Regarding ownership of the copyrights in the content, copyrights can be wholly owned by one party, or sliced and diced between multiple parties. 

Regarding profits made from the content, these can be wholly retained by one party, or divvied up between multiple parties. The percentages each party receives can be based on gross profits or net profits.

In traditional recording deals, it is quite common for a record company to own the copyrights in the artist’s masters created during the recording agreement. The artist typically receives a percentage of net profits, usually around 15%.

360 deals expand the scope of this ownership/participation dichotomy far beyond the recorded masters. 

Publishing rights will likely be a key point of negotiation, with record companies preferring to own the publishing and offering the artist’s a percentage of publishing revenue. Artists would, of course, prefer the reverse.

Interestingly yet unsurprisingly, major publishers are not asleep at the wheel in the age of these new deals. 

Coming at the content from the other side of the looking glass, publishing companies are exploring 360 deals of their own, which will no doubt involve negotiations over the ownership of and revenue from the masters if the artists are not tied to contracts with record companies. 

Additionally, publicity (aka “name and likeness”) rights are another point of negotiation. In a typical recording deal, an artist would grant a record company a free license to use the artist’s name and likeness in the promotion of albums.

Late last year, however, the estate of Frank Sinatra inked something of a 360 deal with Warner Reprise for the remastering and re-issue of a large portion of Sinatra’s enormous catalog, much of which is out-of-print or has never been released. In the deal, Warner Reprise bought the rights to the Chairman’s name and likeness.

This means that if you’re a Sinatra-junkie, go ahead and buy that Sinatra bobble-head doll. By doing so you’re subsidizing the re-release of that rare album you’ve needed to complete your collection.

ARTIST'S TEAM 

Managers and lawyers who help sign artists to 360 deals may have more to gain than ever if they’re working on a contingency for a percentage of advances and/or royalties from a record company agreement. 

Using as an example an offer of an advance on 15% of record royalties, followed at the record company’s option by a second larger advance also on a larger percentage of royalties (this time from touring, merch, sponsorships, etc.), an artist’s team may see a nice pay off when the artist signs on the dotted line with the record company. 

Not only this, but in a 360 deal, the artist has yet another pie splitter – the record company. 

This is important because, as writer Bob Lefsetz says on his blog, “if you pay your manager 15%, and your attorney 5%, and your business manager 3%, and your agent 10%, you can’t afford another revenue-sharer….So, unless the majors suddenly become managers, they’re cost prohibitive.” 

Even if the majors became managers, though, the record company’s buy of the previous manager’s contract would likely be added to the artist’s recoupable advance. 

LEVERAGING 

With a record company pulling the strings not just in recording sessions and record stores but also on stage and at the merch stand, it is conceivable that a record company using a 360 deal would “leverage” their interest in one area of an artist’s business to “guide” an artist’s decision making process in a way that profited the record company. 

For example, a record company could threaten to lower the marketing budget for an album unless the artist agreed to a particular tour schedule or a particular merch dealer.

Check back with MELON for Part 4 of this article, where I will explore even more issues related to 360 deals.