What They'll Never Tell You About the Music Business

by Peter M Thall

  Record labels not only bypassed the traditional sources of income for the artists they developed, but they also have only recently become conscious of “new” distribution networks, many of which were introduced by the Internet. Social networks, apps, American Idol and the dozens of spin-offs—none were created by the record labels. Like the image of the Big Apple that is New York City, record labels have belatedly come to recognize that the worldwide music industry is something that offers many “bites” and that they have traditionally been enjoying only one of them. It was now necessary, appropriate, and timely for them to have a larger meal. The story as to how they did this is both amusing and tragic—and not just for their artists.

  At first, the monster talent/booking agencies that book and promote concerts decided to accumulate rights that ordinarily went to record labels—like the right to record their own artists. Madonna, Jay Z, and others entered into agreements with Live Nation which, in its turn, engaged selling institutions such as Momentum Worldwide to convince the public to buy what their packaged entertainment. “One-stop shopping,” they called it. (Interestingly, the contract for these early beneficiaries of 360 deals was not structured in terms of a traditional record agreement, with additions. It was structured as a joint venture, a mechanism quite commonly used in genuine partnership situations. All of the parties were involved in identifying the financing to be provided as well as how it was to be spent. But as we will see later, even these agreements do not really establish traditional partnerships.) Simultaneously, record companies decided to expand the scope of rights which they would acquire from recording artists into a broad involvement with their entire careers. Immediate return of their investment was paramount and capturing new sources of income became their obsession. The cost? Depending on who you talk to: innovation, creativity, and mission. By 2016, Madonna’s 360 deal had run its course and the appeal of such extraordinarily expensive packages had diminished; touring itself was really all that counted.

  Impact of 360 Deals

  Can an artist today develop organically like Billy Joel or Bruce Springstein did? Or must artists become famous first and then try to respond to the challenge of being as good as promised? For those few who were uniquely talented, there remains too little oxygen in the system in which to breathe new life into their creations as they themselves develop and grow. Beethoven didn’t write his Ninth Symphony until 1824, three years before he died at 56. Verdi didn’t achieve his ultimate greatness until he surprised everyone with Falstaff as he approached his 80th birthday. How many great potential achievements have been killed before they could bloom because the airwaves, publicity machines, etc. were filled with what they—not the public—determined we should be listening to? Or because the companies were so obsessed with the bottom line that they had no patience to wait long enough for the master to appear from the apprentice.

  In his blog, Bob Lefsetz, who many consider to be the conscience of the music business, has often pointed out the lack of memory as to what used to be. Lyor Cohen, head of Warner Music Group, famously identified what he called 360 deals that went back into the earliest days of the modern era of music (1950s–60s). Sure, some of the writer/artists of those days would take a Cadillac over a royalty any day, but the monstrous accumulation of rights sought today by the record labels is no match for the more benign nature of the grasping common in those days.

  In a recent proposal from one of the four majors, even though the artist was already signed to a seventy-plus-page recording artist agreement that cost him a fortune to negotiate, the record label advised his representatives that they would not release his second record until he would agree to convert the existing agreement into a 360 “deal.” What did they want? You wouldn’t believe. Not just a “piece of the action” of other sources of income which, in theory, actually had some justification given the huge investment they were making in the recording career of the artist and the risk that they were accordingly taking, but such a large percentage of his ancillary income as to render virtually impossible the artist’s ability to engage other representatives (who actually knew what they were doing) in the other source areas of income (publishing, management, sponsorship, merchandise). Furthermore, they actually wanted not just to share in the merchandising and sponsorship income, but to acquire all of the artist’s rights in this area.

  Let me give you an example. This particular record label (via its highest business affairs executive—someone who enjoyed more than a decade of important experience at the top—someone who spent hours every day with the CEO of the label and was enormously trusted for his/her advice in all areas of the business) sought to receive for the record company, in addition to its entitlements under the record deal, 15% of the artist’s live performances. Now let’s consider the following: The artist plays Madison Square Garden. He receives a fee of $100,000, out of which he has to pay expenses of his staff, musicians, equipment rentals, sound system, and the cost of getting to and from the venue, his tour accountant, and, of course, his overall manager, business manager, and attorney. Let’s say that a well-run business will incur costs of 50% of gross income and that this particular artist’s business is very well run. His net after paying all of these expenses will be $50,000. Not bad for one night’s performance. What did the record company want to receive from him? $150,000. That’s right. Three times what he was netting. How is that possible? Well, they wanted 15% of his live performances, remember? But they thought that this should be 15% of the gross of the Madison Square Garden event itself. Let’s say that was $1,000,000. The promoter guaranteed the artist $100,000 of this and had to pay the following out of the remainder: the rental cost of the venue; security; the cost of printing tickets; ushers; advertising; maybe even free tickets to colleagues. The record company confused the “gross” of the promoter with the “gross” of the artist. Yet they insisted that they wanted $150,000 out of this scenario. They had no clue. I sent them my book, but I don’t think they read it. They held up the release of the album for more than two years and by then the momentum that the artist had achieved, worldwide, had ceased. Some attorneys in my field have not experienced such ignorance, and some record labels have themselves grown organically out of artist or producer production companies where knowledge of other areas of the music business came more naturally—by personal experience. But the story I have related is true and has been replicated too often to ignore out of hand.

  A more outrageous, and yet more common, result occurs when a tour actually loses money. Let’s say that the artist is invited to open for a major star. He gets paid $10,000 (a lot, believe it or not). Out of this he has to pay his manager, business manager, agent, and lawyer. These fees and commissions regularly will amount to at least 35% of the $10,000. Now, even if the record label acknowledges that it is the artist’s fee, and not the show’s gross that is commissionable, they want $1,500, too. As noted above, that brings the total up to 50%. Out of the remainder, the artist has to pay his band members, tour manager, tour accountant, in-ear monitors, wardrobe, equipment, guitar tuner, transportation, hotel, food, and other expenses. Am I being redundant by saying that there is no more money to share with anyone? Furthermore, in a scenario such as this, certainly the personal manager, and probably the other representatives, will defer all or a portion of their commissions or fees. This is an unwritten policy, but usually followed. Will the record company understand the necessity of this so that they will defer their commission as well? Their experience in touring is so deficient that they probably do not even understand what I am saying. In summation, a record label’s grab for anything has to come out of the 15% remaining after the other professionals are paid, leaving who knows what for the artist. Of the artist’s costs are 50%, nothing will remain. If they are more, well, you figure it out. This scenario, which is all too common in 360 deals, makes no sense. In legal terms, it is unconscionable.

  Of course, when the label is more heavily involved in developing the artist’s career, they may w
ell fund the deficit of a tour. Although this funding will be recoupable, it is not returnable, so there is certainly risk on the record company’s part. The anomaly in this scenario is that if the label has a 360 deal with the artist, they can “recoup” their tour support investment from the very sources of revenue that in the past have kept an artist alive—merchandise sales, publishing, sponsorship. They usually want to control all of this income so they are free to dip into it whenever they want to achieve their “numbers” for their own year-end bonuses. So now how the record company deals with its agreed share of income (much of which it will collect directly before the sharing occurs) depends on whether the artist is touring at the beginning or at the end of the company’s fiscal year. Some partnership!

  Everything that I have just referred to belies the fact that the artist is also contributing something: his or her own services and the creative resources behind them. In another ludicrous scenario which I have observed at a major record label, an artist with a six-piece band was paid $500 per date as an opening act for a big European star. This introduction into the European market could have proved invaluable, and the artist and his representatives grabbed it immediately. There were nineteen dates, generating $9,500 for the artist and his band (which he reduced to three from six—reluctantly because with half the musicians he would not be able to replicate the sound on his record very accurately). The cost for this tour was estimated to be $90,000. Therefore, the artist would require $80,500 from his record label for tour support and would end up with nothing for his considerable efforts and labor. It was at this point that his record company threw a bomb into the relationship and, out of nowhere, insisted on converting his traditional recording agreement into a 360 deal. Their actions belied the fact that they themselves would have reaped substantial benefits from the tour in terms of breaking the act overseas. (And they wanted 15% of the “show gross” besides.) The decision had to be made within twnety-four hours. It wasn’t. The tour fell apart. The label ignored the fact that a successful overseas tour could establish the artist for all time as Europeans particularly are very loyal to the artists who go there to perform; either they didn’t realize the ancillary benefits of helping one of their acts tour overseas, or they did and sabotaged themselves for some “greater” cause.

  Even if they wanted 15% of the artist’s gross, what about the manager’s 15%? They would say that the manager is not investing $1,000,000 in the artist’s recording career (which is true) and shouldn’t complain. Were they capable of providing actually management (labor) services, let along management (career guidance) services to the artist? Of course not. Then they wanted 15% of the sponsorship income. Did they even know the telephone numbers of the potential sponsors (Budweiser beer, CitiBank)? Of course not. Then they wanted 15% of the artist’s music publishing income. Did they have any concept of what music publishing was? Of course not. Besides, if the artist had already signed with a music publisher in order to finance his efforts to obtain a record deal in the first place, that publisher would not be willing to give up either any of its 25% of the composition’s earnings, let alone the ability to recoup its advances from the remaining 75%.

  And what if they “got it” and agreed to a percentage of the artist’s actual income: remember that the artist is already paying 15% (or more) to a manager, 5% to a business manager, 10% to an agent, and legal fees that can approximate another 5% when all is said and done (and in California, the lawyers customarily charge 5% just to acknowledge the reality that all of the time-charge calculations will eventually equal that anyway, so why bother?). Adding to this is deadly for a performing artist.

  Some creative managers and lawyers have considered taking 30% of the artist’s net income and offering it to the entire pool of representatives (including the manager, business manager, attorney, agent, and record label) for them to work out among themselves what they respectively should be paid. The artist is free to go about his business, which is creating, recording, and touring. The representatives will have to earn their piece of the action, and there will have to be negotiated compromises as to how much of the 30% they can reasonably claim. Here is a sample split:

  Management: 9%, except for touring: 7%

  Agent: 8%, except for nontouring: 5%

  Record Company: 6%

  Business Manager: 4%, except for nontouring: 5%

  Attorney: 5%

  All will share in publishing net in the same percentages.

  Interestingly, even if a 360 deal could have been negotiated in a manner consistent with the reality of the music business, the record labels have one card they would refuse to play—a card that eternally would throw out of balance any specter of a partnership. For however you might construct a relationship whereby the artist and the record company were essentially partners in the business of making money from the artist’s talent and the record company’s noble efforts, the company would nevertheless insist on (1) paying a royalty rather than a share of profits,*3 and (2) recouping, out of the artist’s share, the cost of recording (including tour support and at least one-half of video expenses and independent promotional services)—thereby eliminating any chance of creating parity between them.

  To the date of publication of this edition, the jury is still out on the 360 concept—both for the artist and for the label. It only appeared in any concrete form around 2007 and remains relatively untested and novel. While the concept has some rationale, the attempts at execution are dismal at their best and career destroying at their worst.

  Entangling Alliances: The Ethics of Avoiding a Family Feud Entangling alliances got the world into World War I. How do they work in the record business?

  So what to do with the reality of record companies’ obvious contributions to artists’ careers and the difficulties of finding a way to carve out for the companies a piece of their ancillary income? It may be time to consider reconstituting the respective relationships among artists’ representatives. Should the record companies establish a management arm? What about the conflicts of interest? One artist client of mine was signed to a major label and the label said it would not release the record until she had replaced her manager with one who they believed in. Once she entered into a new relationship with a world-famous manager, the label asked for 15% of the artist’s income which, at least in substantial part, and as a matter of practicality, would have had to come out of the manager’s share. When asked how they could do this, they repeated their mantra: “We are the ones who invested a million dollars in the artist. What did the manager invest?”

  The problem with this scenario is that management is, by definition, at odds with the label of their artists. Indeed, their principal function is adversarial to the record companies—all with the hoped-for result of making the company perform better. More often than not, the label wants the manager to beat up on their own staff to make sure the job is done—in industry parlance, to “work the building.” Thus, a management team controlled by the record label is not likely to be effective. As for other sources of income which the record labels seek to share (merchandise, touring, sponsorship, publishing), as I have noted earlier, record labels are historically completely ignorant of these areas and can be of no help whatsoever. So is it not folly for them to insist on achieving hegemony over these very areas?

  It is important to note that many 360 deals are structured so that the record company (excuse me, the music entertainment company) actually controls all of the revenue streams of the artist’s creative life. All money goes to the company for division according to their agreement with the artist.

  The conflicts of interest and the undesirability of putting all of the control of the artist’s financial life in the hands of the one entity whose long-term management of money, rights, and new technologies has proven to be so inept are readily apparent.

  A benefit to the artist from out of left field is the fact that a record company which has become part of the artist’s venture via a 360 relationship may have assumed a lia
bility far beyond that which it ordinarily would bear. Artists who have tried to rescind contracts for failure to pay royalties have usually run up against courts that rule that the record companies may owe them money, but they do not have that extra degree of responsibility toward the artists as would occur were they to be considered “fiduciaries.” Trustees of other people’s money are certainly bound to these special duties. But record companies, in a traditional relationship, are not. An artist who proves that his record company kept monies otherwise due him can only collect money damages if he prevails at trial. But an artist who can prove that his record company had a fiduciary relationship with him via a 360 “partnership” may have many other tools at his disposal to remedy such a situation than in a traditional artist/record company relationship. Control of the artist’s revenue streams would certainly establish this requirement that the record company exercise an especially high degree of care when handling the artist’s money. It may also be the case that the fiduciary duties will inure to a company such as a record company even if it does not actually control the revenue streams, because if it is going to share in those pieces of the artist’s income, its actions insofar as the income it does control (the record income), may create a fiduciary responsibility that had previously not existed.

  Solutions

  Will we see the appearance of conglomerates that provide all services to all artists, or some variation? I don’t know the answer. What I do know is that the current situation is fraught with problems, and it will take a strong personality (management, the artist, the attorney) to resist a 360 deal per se. The result may not be to the artist’s ultimate liking either as the artist may well be without a label at all if he or she is too rigid.