What They'll Never Tell You About the Music Business

by Peter M Thall

  One practical way to stop the nightmare before it starts is to provide that in no event will the obligation to continue to provide heads last beyond the commencement of the recording of the album following the one that is the subject of the tour that failed to fulfill the merchandise contract’s promises. Even if the artist ends up owing money to compensate the merchandiser, money is a finite thing, and a promise to pay money is always open to later compromise. For example, if a merchandise deal ended up unrecouped by, say, $100,000, the artist might pay the money back when he or she was able to pay, pay it off over the course of time, or work out a compromise when the artist’s next tour was about to commence whereby a new deal with the original merchandise company would be negotiated, part of whose terms would be a reduction or forgiving of the old debt.

  Territory

  While in the United States, the United Kingdom, Australia, and Canada, it is customary to specify the number of heads that must be delivered, in the rest of the world, the preferred route, even for headliners, is to impute heads according to a predetermined formula (see above, this page).

  As with all agreements that go beyond one’s own country’s borders and that apply to a territory that is less than “the world,” the contract must be clear as to what exactly the territory covered by the deal is. It is important to list each country and even each portion of certain countries (for example, French-speaking vs. German-speaking Switzerland) separately. “Europe” may or may not include the United Kingdom. The “European Community” will not include Switzerland unless specifically added. It is a good habit and a money-saving (and face-saving) step for the attorney or manager who is negotiating the contract to take the time and trouble to look at a map and list the countries making up the “territory” for which the artist is seeking to grant merchandising rights—or, for that matter, any rights.

  Hall Charges

  As noted in chapter 10, the venue itself customarily charges a significant percentage—up to 30% or 40%—of the gross sales in return for which it allows the artist the space within which to sell merchandise to the concertgoers. Outside of the United States, however, many venues have not yet caught up with the sophistication of the American halls, and considerable savings can be had there. For many venues, getting the act in the first place is the primary consideration—particularly in situations where the act can just as well ignore a particular city or country in its world tour. Sometimes the hall charges are less than what is anticipated (or predicted by the merchandiser); the artist’s contract with the merchandiser can specify that when this occurs, the artist will share any such savings with the merchandiser.

  Partial Advances

  Some merchandise companies (particularly the more established ones, which have learned from bitter experience) will spread the advance (that is, the amount of which is “guaranteed”) over the course of the tour, paying in installments so that they can protect themselves in the event that things go awry and the artist fails to deliver the requisite number of heads. Doing this makes the “advance” more of a “guarantee.” The problem for the artist is, of course, that installment “advances” are not really advances at all. The “guaranteed” money, while still money, is of a different nature than advance money. First of all, the artist will be more tightly held to the head-delivery promises that have been made. In this scenario, the merchandise contract will break down the number of heads into segments of the tour—usually weeks or a number of shows, frequently eight. The head-delivery requirement will be proportioned to those segments. Thus, the number of guaranteed heads will be parsed into so many heads per week. If the weekly number is not met, the now-weekly advance will not have been recouped and the next “advance” payment will not be paid. Thus, if the number of heads guaranteed is 450,000 (as in the example above), 45,000 heads per week might be the number that has to be achieved before an “advance” is deemed recouped so that the next “advance” payment will be paid. As soon as delivery promises are not kept, the money flow will stop. Second, the amount available to the artist as seed money to set up and begin the tour before the initial flow of money from ticket sales is in hand will necessarily be significantly less than what would be available if the entire amount were advanced.

  The ramifications of this dependence on installment advances can be enormous. One potential problem—the inability of the merchandise company to fulfill its promises to deliver the money when due—can be covered if the merchandiser’s bank agrees to issue a letter of credit stipulating that if the merchandiser does not pay the promised sums when due, the bank will remit the promised sums on the merchandiser’s behalf. Another, which involves the cash flow that is the currency of any well-planned tour, is not so easily solved. If a hunk of money is taken out of a tour precisely when the attendance levels of a particular leg of the tour drop, the effect on the remainder of the tour—a remainder that may include the biggest dates—can be catastrophic. After all, the costs of the entire tour—the trucks, buses, sound, lights, personnel, travel, etc.—are all prorated across the entire tour, not in equal segments per leg of the tour. These are very significant concerns to the business manager and personal manager, who are trying to plan the tour efficiently. In this case, the tail—the merchandise agreement—may indeed wag the dog. Among the consequences of having to halt a tour due to lack of funds are, of course, the claims that will arise from promoters and venues with respect to the canceled dates and the mess that the record company will be in for having incurred promotion expenses in cities in which the artist fails to appear.

  Some Practical Considerations

  Music lawyers are not used to multiple agreement transactions. The record deal, the publishing deal, and the producer agreement are made one at a time, have little to do with one another, and are addressed on a per-artist basis very irregularly and over a course of years. When an artist decides to embark on a major tour—in particular a world tour—there are dozens of major agreements to be entered into over a very short period of time. Some law firms, management firms, and business management firms are not staffed to cover all the bases in such circumstances.

  I can attest to the fact that when a major artist decides to mount a major tour, the lawyer’s world changes very quickly. But just because the merchandise agreement is only one of a dozen major agreements to be entered into does not mean that it deserves less attention to detail. This attention can take time and cost the client money, and the lawyer must weigh relative benefits of spending time and the client’s money against the practicalities of just how much total time and money are available. Nevertheless, if the following issues are not specifically dealt with, the agreement that is eventually signed may bear no resemblance to what the parties desire or expect out of the relationship:

  • Whose personnel will be used?

  • What is the itinerary of the tour and how are revisions to be dealt with?

  • Who transports the merchandise and at whose cost?

  • Will the merchandise be offered for sale in display cases provided by the artist?

  • Are the display cases provided by the merchandiser? And who transports the display cases and at whose cost?

  • If there are not display cases, should they be built? At whose cost? Who will own them after the tour is over?

  • What kinds of controls will ensure sufficient supplies for the expected demand?

  • Is the insurance adequate to cover the possible loss of merchandise?

  • Is the product liability insurance adequate?

  • Who is responsible for protecting the venue and the tour city against pirated merchandise?

  Advertising

  Imagine an artist who has made a commitment to avoid commercial advertising and the stigmas that go with it. (Note that such resistance is much less widespread in the United States than it used to be—undermined, perhaps, when icon Bob Dylan opted to participate in a Victoria’s Secret commercial.) The artist is backstage preparing to go onstage for a performance before 20,000
people to whom he or she will be representing the values of an “outsider”—a unique spokesperson for the “not ever to sell out” class—and that artist picks up a copy of the souvenir program for the tour and discovers pages of advertising by liquor and tobacco companies proclaiming the qualities of their products and identifying with the values of the great artist who is about to perform. The job of an attorney is not just to review the written word in a contract submitted by the merchandiser; he or she must also “imagine” the things that are not there. This is one example. The attorney should insist on a provision that prohibits the inclusion of advertising material on, near, or in association with the artist’s merchandise (for example, on concert tickets) unless the artist or the artist’s representatives have given their approval in writing, in advance.

  Even if the artist does not care about the products he or she is associated with, or has approved the inclusion of advertising in connection with his or her merchandise, one must be careful to ensure that the money derived from the advertising is included among net receipts of the merchandiser (or the venue itself) and therefore shared with the artist. Tour merchandise royalty structures do not usually take into account this kind of income, and the issue should be dealt with directly and clearly during the initial negotiation.

  Exclusivity

  While the artist may be exclusive with the merchandiser, is the merchandiser exclusive with the artist? One would think it would be very disturbing—emotionally and financially—were the artist to find, among the merchandise being sold at the merchandise booth, merchandise of other acts that had performed at the venue over the past season or even merchandise featuring the logos of the venue itself (for example, Madison Square Garden or Radio City Music Hall). The sale of this merchandise will naturally reduce the net sales of the artist’s merchandise and should be prohibited if possible. This is an example of why it is useful to work with an experienced merchandiser who knows what can and cannot be done at various venues; the issues will be on the table from the beginning—to be resolved, if possible, in plenty of time before the date is played.

  RETAIL MERCHANDISING/WEB MERCHANDISING

  Most tour merchandising agreements have a retail component as well. The Internet is having a revolutionary effect on retail sales, as opposed to tour-oriented sales. Although this is not yet having a significant effect on the royalty rate structure, eventually it will have an effect because there will no longer be any intermediary vendors to justify the kinds of commissions retained by merchandisers. In the meantime, in negotiating a retail agreement, care must be taken to address the difference between customary store distribution and Internet distribution. Certainly, the artist will want to reserve the right to sell uniquely designed merchandise on his or her website, in addition to merchandise manufactured and designed for touring or ordinary retail sale. For example, T-shirts, program books, and CDs are customarily offered at all concert venues; umbrellas, shot glasses, tour jackets, and other products with custom logos are offered at some concert venues and via the website. Expensive specialty items like sweaters and crystal are usually offered only via the website (1) because they are too costly or too fragile to carry as inventory on tours and (2) because they can be manufactured on demand. Today artists’ online stores are their major source of merchandise income.

  In traditional retail deals, the term of rights is longer than for those limited to touring. The latter are based approximately on the length of an album release period (about nine months to one year). With retail deals, three years is not unusual.

  Even though the immediate concern of parties negotiating a tour-merchandising contract involves the tour aspects of the relationship, the retail portion should be very carefully negotiated to protect the artist’s rights. It should not be treated as an afterthought.

  Some other issues that arise with regard to retail sales include the following.

  Cross-Collateralization

  If an artist decides to place retail rights under the control of the tour merchandiser, two specific financial distinctions should be made: first, there should be separate royalty terms pertaining to the two areas because the services to be rendered are totally different; and second, there should be no right on the part of the tour merchandiser to apply success from one realm against failure from another. In other words, the income from one realm should be separated from the debt from the other. Whether or not this distinction is achievable may depend both on the artist’s leverage and on the amount of money at risk. As noted previously, as more money is advanced or guaranteed, fewer rights can be reserved and deal terms benefiting the licensing party (the artist) will suffer.

  Exclusivity

  Does the artist wish to reserve the nonexclusive rights to issue certain licenses directly or through another agent, or must the artist give exclusive retail rights to the tour merchandiser? There may be opportunities brought to the artist’s attention that involve areas in which the merchandiser is not actually involved or has no relationships; the contract can permit the artist to license those areas even if the deal with the tour merchandiser is otherwise substantially exclusive in nature. A problem may arise if the artist wishes to make available for retail sale through another vendor or agent some of the same merchandise that has been created by the tour merchandiser who has been eliminated from the retail side of things. This possibility must be dealt with as well. Artists’ control of the trademark and ownership of all designs created on their behalf will give them appropriate leverage in this area.

  Even when the retail rights extend beyond the term of the tour merchandise license, the artist may want to restrict the tour merchandiser from licensing the use of the tour logo, which has been designed for use with a specific tour. The first tour—and term of agreement with the tour merchandiser—may be long ended at the same time that the retail rights continue and a second or even third tour, each with its own logo, may have commenced. The artist may want to control these separately, particularly if the artist grants tour merchandising rights for tours two and three to a competitor of the first tour merchandiser.

  Sample Approval

  The need for the artist to have the right to approve samples of the merchandise is obvious; how to deal with the issue of the time it may take to provide those approvals is not. If the artist is responsible for approving designs and samples—as he or she should be—and the merchandiser must move so fast in manufacturing the products that the rights are not cleared properly, the merchandising company will jeopardize both itself and the artist. At the same time, if the merchandiser does not move quickly (and to the merchandiser, that is the name of the game), sales opportunities may be lost that will never arise again. As with a Broadway show or an airplane flight, once the curtain goes up, or the plane takes off, the empty seat—a commodity that had real value five minutes before—is worthless. Systems should be established early on to facilitate, insofar as possible, prompt submission of materials for approval and response by the artist or his or her designated representatives.

  Trademarks

  The laws and cases regarding trademark protection are complex. Trademarks are not like copyrights; once you acquire or create a copyright, it stays with you practically forever, no matter what you do (or do not do). In contrast, you can lose—through misuse or even nonuse—a trademark. Music business lawyers usually refer trademark legal work to others who live and breathe it daily and who read up on the latest changes regularly. Large law firms, including large entertainment law firms, have trademark specialists. There is a body of law in the area of trademark that establishes that a trademark owner must maintain almost absolute control of the reproduction of the owner’s marks; failure to do this may result in losing the federal, and possibly state, protection that has been acquired through years of use and official trademark registrations.

  This issue becomes concrete when an artist sublicenses his or her name, likeness, logos, trade names, and trademarks either directly or, through a merchandise “guru,” to a var
iety of third parties. Mere approval by the trademark owner of these licensees is not enough to establish the kind of control that the law requires. The artist, either directly or through an agent, must have total control over the manner in which the trademark is reproduced, the quality of the reproduction, and the manner in which the trademark is used.

  Once a licensee misuses an artist’s trademark, if the artist does not take significant steps to cause the error to be corrected, the artist’s trademark may be in real jeopardy. If the artist has been careless in monitoring the use of the trademark, or if he or she, or a licensee, uses it in a manner that, under trademark law, can divest the artist of his or her rights, it may not be possible to stop a third, unauthorized, party from using the trademark, and this party will raise the defense that the artist has abandoned the trademark. The culprit will claim that he or she can continue selling the product and will be exempt from infringement claims and all of the attendant liabilities that infringers can suffer. An example might be when an unrelated, and unauthorized, third party manufacturers and distributes a coffee mug with a Rolling Stones “tongue” or a Prince “no name” symbol. As with other clauses in entertainment-related contracts, merely identifying the issue and requiring control over the use of one’s trademarks is not enough. Someone must be put in charge of, and be held responsible for, ensuring that those steps that are necessary to protect the marks be taken, and taken consistently over the course of the term of the merchandising agreement.