Paul B. Ungar, Esq.

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(IT'S A) THREE-HUNDRED SIXTY (360°) DEGREE WORLD

 

It's an understatement to say that, in the face of increasingly diminishing sales of physical product, the "traditional" record business has drastically changed over the last few years. Besides corporate restructuring, massive layoffs of staff, a scarcity of "brandy new" artist signings and the ever-increasing shift away from "physical" product in favor of digital downloads and other "ephemeral" media, perhaps the most significant shift in the overall industry model now being undertaken by virtually all of the major record companies -  as well as by many of the major "indy" labels -  is the ever-expanding scope of their involvement into areas of so-called "ancillary exploitation" – e.g., non-record activities which are related to the artist's career as a recording artist. In addition to this broadening of their relationship with the artists into areas other than recordings, many of the major and major "indy" record companies have also changed the very way that they calculate and pay royalties.

 

So, welcome to the Wide, Wide World of the so-called "360°" deals...that's Three Hundred Sixty Degrees... as in a full circle...as in Tutti La Frutti (with apologies to Little Richard!)... as in The Whole "Shebangee" (which is legalese for "Enchilada").

 

First, some background:

 

In the past, most record companies' core business was just that – selling "records". (Note that, for the purpose of this article, "records" refers to "any and all devices for the recording of sound, whether or not coupled with visual images, which are intended for broadcast and/or other distribution to the public, through any means and media, and via any and all devices, whether now known, or hereafter devised and/or invented in the future including, but not limited to traditional phonograph records, analog or digital tapes, CDs, DVDs, digital downloads, etc., etc." ... Sorry, sometimes I just can't help myself!).

 

Some record companies also sought in the past to acquire music publishing or co-publishing rights from their recording artists; other companies also participated in non-record merchandising, e.g., T-shirts, stickers, buttons and other "novelties" (which, by the way,  is legalese for "chotchkies") embodying the artist's name, photograph and/or other image.  But the record companies rarely – if ever – participated in any other revenue streams related to the artist's professional career. Until relatively recently, most of these other ancillary areas - particularly, the artist's "live" performances - were considered to be strictly "off-limits" to the record companies. In fact, even though many record companies provided substantial amounts of money to their acts as deficit "tour support" (e.g., monies to underwrite touring expenses), the record companies rarely, if ever, "took a piece" of the artists' "live" performing income.  The record companies knew that it was absolutely essential to their business for the bands to be able to go out on tour and promote their recordings and thus, even though they did not directly participate in the tour revenue, they felt it was nevertheless well worth their investment.

 

But since the record companies have not been recently making nearly as much money from the sale of records - for many reasons, but due in large part to unauthorized downloading and other forms of digital piracy – many believed that they had no choice but to expand into these other areas of ancillary revenue in order to remain viable and thus maintain the wherewithal to continue to support and promote their artists, not only for their own benefit, but also for the benefit of the artists.

 

Thus, over the last few years, the major labels and major "indies" have basically required that their new artists – and even some of their older more "established" artists - grant what has come to be referred to as 360° rights and these 360° agreements contain provisions where the labels participate in basically all of the artist's professional activities – not only records, publishing and merchandising -  but also the artist's "live" engagements, fan club activities, record-related and non-record product placements, endorsements and sponsorships, as well as the artist's musical and non-musical television, film and theatrical performances. In the 360° world, some of the record companies want a significant percentage – sometimes they ask for up to 30% - of the artist's "ancillary" income.  The actual percentages vary depending on the particular company as well, of course, upon the negotiating skills of the attorneys involved.

 

What makes this often difficult for the artist is that the artist must pay additional commissions on all of these ancillary activities to its management, to its booking agent, (sometimes) to its business managers, and (sometimes) to its attorneys as well as other expenses such as tour expenses (e.g., transportation and lodging) and, of course, taxes. With management commissions hovering around 20%, agents commissions between 10% and 15%, business agents (and some attorneys) taking 5%, etc., when you add in whatever the additional percentage is to the record company, it's possible that some artists may, in some cases, have to pay more than half of their income over to all of these folks. That's quite a "hit" for the artists (and not the "good" kind of "hit"!) – but, so are the "hits" which the record companies' financial statements have been taking over the last few years!

 

Besides this broader financial involvement with the artists, the record companies also often include provisions in these 360° agreements where they have approval over not only who will be the artist's managers and booking agents, but also approval over the amount of commissions and/or other compensation that the artist is allowed to pay not only to their managers and agents, but also to the artist's business managers and (yikes!) even to their attorneys.

 

Further, many record companies have changed the basic way they pay artists royalties and other amounts – even for records – and this is often also reflected in these 360° agreements. In the "Old Days"  - e.g., a year or so ago -  nearly all record companies paid artists record royalties in the form of  "points" – expressed as a percentage of a "suggested" retail, wholesale or "uplifted wholesale" price (minus many deductions) - after first recouping from the artist's royalties only production and recording costs, and only some video, promotion and marketing costs. However, in the new 360° world, more often than not, the record companies pay the artists a percentage of "net receipts"– sometimes it's a 50/50 split after all costs (e.g., production, recording, manufacturing, shipping, insurance, advertising, promotion, marketing, third party commissions, distribution fees, etc.) are recouped "off-the-top" from gross receipts – in fact, some companies will deduct an additional internal distribution fee, as well as an additional internal administration fee, before paying the artist a smaller portion (which sometimes can be substantially less than 50%) of the company's "net receipts".  Some companies use a "hybrid" or "bifurcated" method – for instance, for the U.S., royalties may be calculated on a "net receipts" basis, whereas for the rest of the world, royalties are calculated the "traditional" way. Other companies may use the "net receipts" method throughout the world during the exclusivity term of the agreement and for a certain time period thereafter, following which they may switch back to using the "point" structure for all worldwide sales.

 

Is all of this "fair"? Here's my extremely lawyer-like answer:  "It Depends".

 

Suffice it to say that artists often lose sight over how risky this Biz really is for the record companies…and how much money the record companies spend – and often lose – on their artists, while really trying to help the artists to get "Out There" in a big way. And some record execs sometimes forget – or never really understand in the first place – just how hard it is to actually make a living as a professional musician.

 

And it's just not about which side gets more (and of which) money. There's also a big control issue lurking not-so-subtly here: which side gets how much say as to how things will operate. The bands don't want the record companies approving their managers and agents and the terms of their management and agent deals. However, the record companies often worry that some bands are not good business people and will make bad decisions.

 

There are many other critical and complex issues – financial and otherwise - raised directly as a result of this new 360° world. For example – how should the "traditional rules" regarding cross-collateralization change, e.g., whether, and to what extent, are the companies able to cross-collateralize and cross-recoup certain charges over these new areas of participation? Further, since the labels may have to "staff up" to properly deal with their new areas of responsibility and oversight, how do they determine the new financial "tipping points"  due to increased employee-related costs, etc.? It can even impact such (relatively) mundane – but essential -  questions like: "Do we need a bigger office?"

 

Like a lot of things in life these days, these issues are complex and there are certainly legitimate arguments to be made by either side of the bargaining table.

 

At the end of the day, as they say, if the record companies can't make money and stay in operation and promote and market their acts, it becomes exponentially harder for artists to make a living. On the other hand, if artists have to pay out so much of their income to third parties, how can they literally afford to work, and if they quit their gigs, exactly who and what are the record companies going to record?

 

Since I represent record companies as well as artists, I'm not going to go into an extended debate on the "merits" of what's happening…or take "sides".....it'd be like me getting into politics: no matter what I say, I'm going to piss off somebody. I will opine, however that, in my experience, most credible companies – the majors and the major "indies" – will either pay separate cash advances, or provide some other non-monetary, but nevertheless substantial, "quid pro quo" to the artist in order to obtain these ancillary rights which, in turn, makes all of this more palatable to the artists.

 

The relationship between labels and artists has always been symbiotic – the record company execs can't sing – and the bands don't have the money to pay for big-time marketing and promotion – so everybody needs each other - and when people need each other, hopefully they are willing to address the legitimate concerns of "the other side" and make reasonable compromises so that both "sides" can achieve a "win / win" result.

 

These new types of 360° record contracts are becoming the norm, so my advice is – whatever your perspective – whether you own a record label, run an independent production company, or are in a band -  whether you're thinking of getting into this business for the first time, or if you're already in it and your profit margins have been "Melting, Melting, Melting..." (with further apologies to the Wicked Witch of the East... or West... or wherever!) – I think it's also an understatement to say that it's probably a pretty good idea to understand these 360° arrangements and factor them into your thinking – not only into your deal- and decision- making processes, but also in structuring your business model and overall strategic planning.

 

-        Paul B. Ungar, Esq.

 


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