360 Deal Defined
A 360 contract, also known as a multiple rights agreement, is an approach from the record companies that encompasses more of an artist’s output than the recorded music. Using this approach, record companies are able to participate in “non-recorded rights” such as the artist’s tours and merchandising. These non-recorded rights are also referred to commonly as ancillary rights. Under traditional record agreements, music labels were not entitled to profits from artist ventures not arising out of an artist’s recordings, such as ownership of a restaurant or business.
The amount of money an artist receives from a 360 contract depends on whether it is a “passive interest” deal or an “active interest” deal. Under a passive interest deal, the record label and artist agree to split only the income generated from the recording rights. The record label has no ownership in additional rights, such as merchandising. Therefore, under this type of deal, the artist is free to contract with third parties for additional rights. An active interest deal is one where the record label acquires the recorded rights and has ultimate control over those non-recorded rights. These rights include merchandising and can even extend to touring (e.g., rights to approve tour schedules, packaging, and promotion).
360 Contracts Gain Popularity
In 2000, compact disc (“CD”) sales topped an all time high of 785 million. Sales, however, dropped in 2008 to 535 million albums. With the increase of peer-to-peer networks sweeping the nation, major labels started adopting a new method to making money. Sara Karubian explains:
British pop star Robbie William’s 2002 contract with EMI was an early 360 deal. The trend continued when Warner included merchandizing in its contract with the band My Chemical Romance in 2003 on the thought that the merchandising’s venture, “might be a nice little addition to the pot.” In 2005, EMI and KoRn signed a more publicized 360 deal, leading Rolling Stone to report that “[s]o far, few labels have been as bold as EMI, but some have been testing the waters.” The model gained a significant celebrity boost when Live Nation signed a highly publicized “$120 million dollar deal” with superstar Madonna—an artist generally recognized for her business sense. Ironically, Live Nation’s use of the model, which labels began using to expand their power and strengthen their threatened position in the industry, further exacerbates labels’ problems by manipulating the 360 model with the intention of cutting the label out.
In 2008, after a mediocre sale of his record “American Gangster,” rapper/entrepreneur Jay-Z followed suit with Madonna, signing a $150 million dollar deal with Live Nation. This solidified 360 contracts in the music industry.
Ten years after EMI’s first 360 deal with Robbie Williams, 360 deals have become mandatory for artists to sign with major labels. Edgar Bronfman, CEO of Warner Music Group, stated in 2008 that all new acts were required to sign 360 deals. During the same period, Warner Music Group had at least 1/3 of their artists contracted under 360 deals. The effect it has had on the major music labels has been significant. A recent calculation from the United Kingdom has shown that record labels have generated an extra £75 million, or $114.4 million U.S. dollars, in extra revenue due in part to these contracts. In 2011, music sales posted the twelfth consecutive year of loss, down three percent to an overall total of $16.3 billion in music sales. In 2012, however, the music industry saw its first growth in twelve years, up 0.3%, totaling $16.5 billion dollars. Research has credited the growth to a significant decrease in file sharing.
General Terms of a 360 Contract
Once an artist signs with a record label, their rights (recorded rights and in some cases non-recorded rights) are exclusive to the record company during the length of the term of the agreement. Depending on the 360 contract, the artist may be entitled to contract with a third party as a featured artist. If the record company consents to the provision, the record company will share in the royalties from the third party record label. However, if the record company does not consent to the provision, then the artist cannot perform as a featured artist on another artists’ record without their record label’s consent. This provision is the same under traditional contracts.
2. Contract Term: Duration of Contract
The term of the contract dictates the commitment of each of the contracting parties in which the artist is in exclusive contract with the record company. The term of the contract can either be defined in a specific number of years or in terms of the artist’s commitment to record a number of albums. The term portion of the 360 contract mirrors that of the traditional contract. In her rant, Ms. Love objected to the long duration of music deals and refers to them as creating a “slave class.” In 2008, Jay-Z agreed to record three albums with Live Nation, which was expected to take about ten years.
On the other hand, for most new artists, the term of the 360 contract typically will incorporate a one-album commitment, followed by the ability of the record company to exercise an option. Paramore negotiated such a deal. This option gives the record companies sole discretion to make another album with the artist. Each option period will be exercised automatically unless the record company provides the artist with written notice, usually within thirty days. It should be noted that for new artists, there is an incentive to lengthen the term of the contract because the long-term investment of an artist has the potential of creating long-term dividends for the record label.
i. Upfront payments
Upfront Paymentsare a type of advance that is not recoupable by a record company. The upfront payments usually vary depending on the artist. The record company is willing to give the upfront money in anticipation that the artist will be worth more than the upfront payment. Since the record company has a bigger pool of money outside of CD and digital sales, the company has the ability to provide the artist with more money upfront. Even though the upfront payments are not recoupable, it does not mean that the record label is acting reckless in giving this money away. Typically, the equitable amount the record label would pay an artist would be the sum in the amount of the present net value of the company’s additional interest [non-recorded rights] in the artist projected revenue steams, plus a percentage of the anticipated marginal increase in the revenue due to the company’s participation.
For an established artist, record companies feel that the outcome can be predicted based on the artist’s past performance. In the case of Jay-Z, Live Nation gave an upfront payment in the amount of $25 million. For new artists, the record company has essentially no basis of projections for that artist’s success in the future since they have no history. Therefore, a new artist would run the risk of being underpaid by a record company if the artist were to become successful. According to Donald Glista, attorney for Universal Publishing, upfront payments for new artists that “generate a buzz in the music industry would range from about $125,000 to $300,000 depending on the artist.” Paramore received $200,000 in upfront payment when Atlantic exercised their right to purchase the 360 rights. Although Paramore earning power is significantly less than that of Jay-Z, if Paramore generates a little over $1,000,000 from tours music and merchandise, Atlantic would have recouped the $200,000 fee and would have made a significant profit. Paramore’s upfront fee is .008% of Jay-Z $25 million. While Paramore’s earnings are significantly less than that of Jay-Z, a new artist is more prone to bind themselves to unfavorable terms as a result of their bargaining position.
ii. Recording Funds
A recording fund is money given by the record label that is intended to cover the recording costs and compensation to the artist’s album. In 360 contracts, the recording fund is recoupable directly from the artist’s royalties from album sales, as well as touring and merchandising. Unlike traditional contracts, where the royalties from an album only would be recoupable, the likelihood that the recording fund will be recouped is higher because of the cross-collateralization between other facets of the artist revenue streams. Cross-collateralization occurs when the cost of one-album remains un-recouped and the deficit is repaid from the excess earnings of the past or future album.
It was reported that Jay-Z would receive approximately $10 million from Live Nation as a recording fund for each of his albums. The amount of money given to Jay-Z is not typical unless the artist has reached “superstar” level. For new artists, the recording fund is generally under $300,000 per album. Paramore’s recording fund is unreported; however, following the trend for new artists, it is likely that they received no more than $300,000 for each album.
4. Record Royalties
Record royalties differ depending on whether an artist is new or has reached “superstar” status. The difference is that some artists argue for higher royalties in return for a record label’s increased control in the artist’s other revenue streams. While under a traditional recording contract, record companies would try to give a new artist the smallest royalty rate, under a 360 contract new artists could receive upwards of double the percentage because of the other revenue streams that the record label controls. For example, Paramore received 30% of profits from album sales under their 360 contract compared to traditional contracts that typically distribute 13-18% royalties for new artists. While the royalty rate for Jay-Z is undisclosed, superstar artists, such as KoRn, have received upwards of 70% royalties under 360 contracts.
360 contracts have a different effect on established artists than new artists in regards to touring. For more established artists, tours usually do not lose money. Meanwhile, new artists hold the risk of losing money. New artists, by nature, need more promotion for tours than established artists, leading record companies to lobby that their expertise in the touring would dramatically affect an artist’s overall net profit. Typically, new artists are subjected to more participation by the record label, including touring schedule, salaries of employees, and touring length. In Paramore’s contract with Atlantic, the record label was given the participation rights to approve the tour schedule and approve salaries of the employees working on the tour. It has been highly criticized that record labels may be involved in areas of the artist’s revenues streams in which they have no expertise. As music attorney Elliot Groffman stated, “if labels want to be actively involved in touring, that’s problematic because they really don’t understand the touring business.”
Conversely, music labels have essentially no participation in established artists’ touring. Since more established artists do not need the tour support that comes with the need for a fan base, these artists are able to generate a fan base without the help of a record label. Even if a superstar artist’s record is unsuccessful, the artist could still generate a successful tour bringing in hundreds of millions of dollars. Artists have different ways that they bring in revenue from touring. Some artists rely heavily on radio playback and album sales, yet draw smaller crowds. Conversely, other artists release few albums but have little problem drawing large crowds wherever they go. Therefore, each touring provision is structured differently depending on the artist.
Merchandising includes a wide range of categories, such as clothing and accessory sales, perfume, clubs and restaurants, sponsorship and endorsements, and acting. Merchandising agreements are seen as the “big money makers” and are heavily negotiated during contract signings. Depending on how the record label markets and promotes the artist, merchandising right could bring high profits to both the artist and record label. In 2007 when Madonna signed with Live Nation, Live Nation received thirty percent of her merchandising, which was predicted to equate to $6.5 to 7 million per tour. For more established artists, the record label is essentially collecting merchandising money without contributing very much to the artist.
Newer artists naturally have less of a following and therefore require more promoting and marketing by the record label. While newer artist may need more promotion and marketing, they are taking roughly the same percent of merchandising from their contract as established artist. In Paramore’s contract with Atlantic, they contracted to give thirty percent of their merchandising rights to the record label, which is the same percent as Madonna contracted with Live Nation two years later. For new artists, it has been argued that their contract’s merchandising terms have been an advantage. If new bands do not contract these rights, they will have to deal with third party creditors to raise money for their merchandising venture. While this could pay off in a favorable way for the band, if the tour does not do well and their merchandising does not sell, the artist will have third party creditors to answer to.
7. Free Goods
Record companies have been known to use free albums as a way to promote an artist’s new album (“free goods”). While this has been abused in the past by over distributing records, current sales are mostly digitally recorded, reducing this abuse. In an artists’ 360 contract, free goods given receive no royalties. Record companies typically will not eliminate free goods; however, they will contract to only give away a limited amount. Moreover, the percentage of free goods ranges from fifteen to twenty percent of records purchased. In accounting for the cost of free goods, the free albums are considered fifteen percent of the overall purchase price.