Paul B. Ungar, Esq.
Attorney At Law
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Home My Work Clients My Articles Contact (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 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. Home My Work Clients My Articles Contact Page
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