Music Biz: 360 Deals Pt. 4

by Tony Berman

Researched & edited by Howie Cockrill

In Part 1 of this article, I introduced the "360 Deal," and in Part 2, I delved into the specifics of 360 deals to give you a flavor of how they work.

In Part 3 I explored several issues that all parties thinking of signing a 360 deal should consider. 

Part 4 is a continuation of my look at specific issues regarding 360 deals.

ISSUES WITH THE 360 DEAL

CROSS-COLLATERALIZATION

"Cross-collateralization" in the music industry typically refers to the ability of a record company to apply revenue from any of an artist’s albums to any recoupable advances or expenses from any other albums released by that artist. 

Thus, an artist with a “cross-collateralization” clause in their record company contract would not see royalties for Album B if they still owed the record company money for Album A.

In a 360 world – record companies will certainly strive to have cross-collateralization clauses apply to far more than just albums.

Consider the following situation: 

Many artists may end up getting larger advances because record companies are taking a larger chunk of artist’s pie. 

The advance is larger. Thus, the amount of money the artist owes to the record company is more. 

However, there are more artist revenue streams, and you can bet that record companies will attempt to cross-collateralize all the revenue streams, siphoning them off for repayment of the record companies’ expenses.

But how will the ratios work? Is it as simple as “smaller advance / less to repay / fewer revenue streams” and “larger advance / more to repay / more revenue streams” or is it more complicated than that? 

Is it possible that in this new system, it could take an artist longer to climb out of debt to their record company? 

Record Companies have only been able to float this debt because of the earnings of their blockbuster artists. But the digital music market is indicating that there may not be as many blockbuster artists, or at least blockbuster artists that are still affiliated with record companies. 

If record companies can no longer afford to float big debt from artists with low to mid-level sales, then it dips into revenue streams other than music sales. 

However, doing so will mean expanding their businesses and major cash outlays, thus creating a perfect storm of cross-collateral currents. Taking money to make money (to take money to make money).

DECLINING MUSIC SALES 

Dove-tailing on the cross-collateralization discussion above, with CD sales declining every year (down 14% in 2007 alone)– the ability of record companies to throw cash around to develop these new revenue streams is also going to be difficult. 

It seems a little like boot-strapping – record companies are losing money, so they are taking on hugely expensive endeavors to make money.

It may work in the long run, but in the short term – artists may not receive the huge benefits the record companies promise. 

Record companies are implicitly promising to be more patient with artists as they help artists to develop all aspects of their brand. However, record companies may not have the time to be patient, especially as music fans are becoming more and more attention deficit.

TIRED ACTS 

360 deals could work to the great benefit of buzz artists and mega stars because these are the money makers for record companies. 

What happens, though, in 5 years when the Next Big Thing is Yesterday’s News? 

Will their record companies continue to push as hard and as comprehensively for their brand – or will their record company leave these less-popular artists in the lurch, tying up their rights in the meantime?

Retired artists and the estates of deceased artists can still stand to make a good deal of money in 360 deals, despite the fact that there is no touring income or new hit single. 

In these instances, publicity rights are front and center.

A & R 

Record companies typically sign artists based on a belief that the artists will make records that will sell. 

The 360 deal may make different kinds of artists appealing to record companies – artists with devoted fan bases, strong tour schedules, merch-friendly images and draw for sponsors. 

The consensus of my industry colleagues is that 3 particular genres stand to benefit greatly from 360 deals. 

One is jam bands, who often embark on relentless tours playing for fans who will drive hundreds of miles and camp out in parking lots for shows. 

Another is hip hop artists – whose albums tend to be expensive to produce but who can magnetize a wide range of sponsorships. 

Finally, and not surprisingly, radio-ready pop artists may profit from a record company’s efforts in getting radio, TV, film and advertising placements, not to mention touring and sponsorships.

CORPORATE SPONSORSHIP & ADVERTISING

It is unclear whether the 360 deal will be a panacea for the music industry’s chronic ailments, or whether it will at least help artists make more money. 

But one thing is certain – commercial sponsors and advertisers will reap enormous benefits. 

If record companies can tap all areas of an artist’s career to make back record company expenditures – they will seek to brand every aspect of the music experience with sponsor placements and advertising, hopefully making fistfuls of dollars (or euros or yen) in the meantime. 

OUTRO

As the first decade of the new millennium comes to a close, the “dis-intermediation” of the record company has become too noticeable and pervasive to ignore. 

Independent artists can record and distribute their own music and connect directly with their fans using an extensive arsenal of creative and viral online tools. 

Many artists seem to have a knack for this, but most could use the help of a benefactor with far-reaching connections and deeper pockets – a problem which the digital democracy has so far failed to solve. 

Thus, just as pundits were declaring record companies “DOA (disintermediated on arrival) in the digital age” – record companies may have found a way to “re-intermediate” themselves as the gatekeepers to the artist’s keymaster. 

The 360 deal will give record companies far-reaching power to commercialize and brand all aspects of the music experience, which could be a win-win situation for record companies and many artists. It will definitely be a win for advertisers and sponsors. 

But whether the 360 deal will be a cure-all for an ailing industry and whether it will ultimately allow starving musicians to quit their day jobs and make music full time remains to be seen. 

One thing is certain – while this bold “hail mary” pass is still up in the air, the players on the field will be shuffling to best position themselves and the armchair quarterbacks will continue dissecting the play from every angle.