Rockonomics
Page 18
These seemingly opposing views are easily reconciled: a superstar band like the Beatles or Rolling Stones is better off with a small advance and a more generous royalty rate. Most artists who sign a record contract with a major label, however, will not cover their advance and expenses, and therefore never collect a dime in royalties. They are better off with a larger advance and lower royalty rate.
Record labels are increasingly trying to expand their net over artists’ sources of income. For example, a standard contract offered to new recording artists by a major label often retains a slice of touring income, merchandise sales, and even fan club rights for the record company, in what’s called a “collateral entertainment agreement.” A handful of superstars have signed 360-degree contracts for recording and touring, sometimes with promoters instead of labels. Madonna, for example, signed a ten-year, 360-degree deal for $120 million with Live Nation in 2007.4 These arrangements, which remain the exception rather than the rule, can make economic sense given complementarities among activities—promoting recordings also boosts concert and merchandise sales. But a real concern is that new artists can be exploited by such deals, since they have little bargaining power and may be overly eager to sign with a major music company. Given that most artists make most of their income from live performances, any musician should be wary about signing over rights to income from live performances without a full understanding of the consequences.5
Contracts in Practice
In an important respect, the business model for the three major record labels (Universal, Sony, and Warner) is akin to oil prospecting or venture capital businesses: a lot of investments do not pay off, so the occasional winner must generate a large enough profit to compensate for the losses from the dry holes. Only one or two of every ten records produced by a major label ends up covering its advance and expenses.6 Thus, recording artists face long odds of ever receiving royalties. For the handful of artists who become superstars, it seems like an unfair arrangement, and they can harbor resentment toward their label. But this business model allows the labels to take chances on new artists in the first place, and to spend substantial sums of money promoting and producing their work.
Unsuccessful artists often complain about their record label as well. A top entertainment lawyer told me that musicians frequently complain that their label failed to vigorously promote their work. One record executive, he told me, responded by saying, “We managed to get your record on the air and in all of the stores. What else would you like us to do? We can’t force people to buy your records.”
While corruption and deception have been significant problems in the music industry, the main cause of musicians’ discontentment with record labels probably stems from the ex post redistributive nature of the business model and the randomness of success, rather than bad faith. Even well-educated, business-savvy musicians who hire experienced legal advisers face long odds of success and unfavorable terms from record contracts, with the record label receiving most of the revenue from sales and streaming.
The business model is different for most independent labels. There are thousands of independent labels that produce and sell music created by tens of thousands of musicians. But as a group, the independents account for only about one-third of all revenue generated from recorded music.7 Small independent labels cannot afford to have too many artists who fail to cover their costs. As a result, they tend to give artists smaller advances and pay higher royalty rates, and they often invest less in promotion. However, artists who strike it big with an independent label stand to make a lot of money because of the higher royalty rate.
A recent example of a huge indie success story is the folk band the Lumineers. The Denver-based trio signed a one-record deal with Nashville’s Dualtone Records in 2011. With only five employees, Dualtone aimed for album sales of around 30,000 and offered a generous split of revenue. Lumineers frontman Wesley Schultz said that the band chose Dualtone because it offered “the best, most fair deal.”8 The Lumineers’ self-titled debut album, released in 2012, sold 2.4 million copies worldwide and spent forty-three weeks on the Billboard 200 chart. The group was nominated for two Grammy Awards in 2013 and appeared on Saturday Night Live. Although details are not public, their royalties likely ran to several million dollars.
After the remarkable success of their first album, the Lumineers could have signed with a major label for a large advance, or with an independent label for a multi-album deal. Instead, they opted to re-sign with little Dualtone for another one-album deal. Their second studio album, Cleopatra, was released in 2016 and debuted at number one on the Billboard chart. Their drummer, Jeremiah Fraites, said, “We’d rather bet on ourselves and not start on some weird footing where we owe someone money.”9 That bet paid off handsomely.
Competition
Once a recording artist breaks through to become a superstar, there is a strong incentive to renegotiate the terms of the contract. But recording artists are usually locked into multi-album deals lasting several years, so they have to wait until the contract expires to seek a better deal. Few artists have the luxury of being able to negotiate the terms of their contract after each album, like the Lumineers.
In his memoir, Bruce Springsteen describes the anguish he felt renegotiating his contract with his producer, Mike Appel, in 1975, after the success of the album Born to Run. Springsteen’s main objective was to receive what he thought was a fairer share of the money earned from the records he had already produced under his first contract over the previous five years. Appel held out a new deal as the price for retroactively redressing the terms of the earlier agreement. Springsteen concluded, “Five more years of my life against a fair shake of the five previous years of work was not an equation I’d picked up the guitar, built a life and forged a future, no matter how insignificant, to make.”10 Springsteen and Appel parted ways, and they reached an out-of-court settlement in 1977.
In economics jargon, the terms of the first contract are a sunk cost, which should have no bearing on future decision-making. Sunk costs are like water under the bridge—there is nothing you can do about them because the decisions were already made and the agreements signed. But sunk costs often matter more to individuals than economists like to acknowledge, because people care about being treated fairly. Psychologically, we often treat sunk costs as recurring costs that continually gnaw at us. As a consequence, we like to fix the past before moving forward.
But contracts are hard to break or amend. For this reason, John Eastman said he counsels musicians that there is “one term in the contract that you have to be concerned about—the term of the contract.” Managers often push artists to be shortsighted and take a big advance in exchange for a longer term, he said, in part because the manager gets a cut of the advance.
Occasionally artists do find grounds to invalidate or renegotiate a contract. In the heyday of rock and roll in the 1960s, Allen Klein, who managed Sam Cooke, the Rolling Stones, the Beatles, and many others, was legendary for bullying labels to renegotiate unfavorable contracts.
More recently, after the success of his 2017 hit single “Gucci Gang,” the Miami rapper Gazzy Garcia, whose professional name is Lil Pump, was able to void his contract with Warner Brothers Records in early 2018 because he was underage (only sixteen) when he signed the deal in June 2017.11 A bidding war then ensued for the rapper among the three major labels and several independent labels, including DJ Khaled’s We the Best Music Group. Taking advantage of his elevated status, Lil Pump re-signed with Warner for a much higher advance, said to be $8 million. This is an enormous improvement over the $350,000 advance he reportedly received in his initial contract, and is indicative of the kind of payment that artists face under their first record contract (although the duration and other terms of the contract may have changed as well).12*2
The improved financial situation of record labels, due largely to the growth of subscription stream
ing services, has intensified competition for potential superstars. The bidding war for new talent has also been fueled by the availability of public information from YouTube and other streaming services. Multiple labels can spot unsigned artists whose music is going viral. This is especially the case for hip-hop stars, whose music is disproportionately popular on streaming services.
In the view of Tom Corson, chairman of Warner Brothers, “Anything that shows promise is being snatched up. We’re definitely in the middle of a very competitive and expensive moment here with hip-hop acts.”13 Billboard reported that in early 2018 Juice WRLD was signed by Interscope for $3 million, SahBabii was signed by Warner Brothers for about $2 million, and 03 Greedo was signed by Alamo/Interscope for $1.7 million. In addition, Lil Xan (Columbia), City Morgue duo ZillaKami and SosMula (Republic), and Shoreline Mafia (Atlantic) were all reportedly signed to seven-figure deals. Although exactly what these figures include (advance, recording costs, promotional spending, etc.) is unclear—and one should always be a tad skeptical given the penchant of managers, lawyers, and publicists to exaggerate their clients’ deals—the improved economic position of record labels, after a decade of distress, has undoubtedly intensified competition.
I asked Tom Corson whether the availability of statistical information on new artists from social media and streaming services—along with efforts by record labels to apply Moneyball techniques to predict future stars—has improved the odds of success (recall that historically only one or two of every ten artists signed cover their costs). On reflection, he said that perhaps the odds have increased to 2.5 in 10.14 But then he pointed out that costs were rising given the bidding war. Thus, the fundamental business model—where winners are needed to compensate for losers, and success is difficult to predict—will likely continue to prevail. Many of today’s signings will ex post turn out to look like folly.
Contracts Among Band Members
An often overlooked and sometimes unwritten contract involves relationships and obligations among band members. For example, the Beatles had a legal agreement to split all income evenly, including income that each of the four earned individually, outside of the Beatles.15 After the band broke up, a divisive lawsuit by Paul McCartney was initiated to dissolve the legal partnership among the band members, as John, George, and Ringo had outvoted Paul. The contract could have spelled out terms once the band broke up, for continuing to split income earned individually after the breakup would have created a severe free rider problem. Why would Paul McCartney undertake the effort and trouble of touring if three-quarters of his earnings would go to John, George, and Ringo? And the same question applied to each of the others.
Jason Van Dyke, who performed with the two founding members of the Lumineers before they moved from New Jersey to Denver in 2009, has said, “I know one of the things that we didn’t really do a good job of is writing up an agreement and coming up with that in a really clear manner.”16 Once the band struck it big with “Ho Hey,” Van Dyke sued the Lumineers in 2014 for denying him equal partnership, copyright, and co-authorship of songs. The lawsuit eventually resulted in a confidential settlement.
Although his band Le Loup was not nearly as commercially successful as the Lumineers, Dan Ryan similarly said that a clear contract among band members would have been helpful. Some members did not participate in all of the band’s songs.17 Who is eligible for royalties if a song is sold for a television commercial—the whole group, or just those who performed the music? Not all contingencies can be anticipated, but relationships among the parties are smoother if their rights and obligations are transparent, and if the contract covers as many contingencies as possible.
Many bands, such as the Rolling Stones, Beatles, Metallica, and Destiny’s Child, are formed when the members are just teenagers. In most contexts we would think it unusual if a person acquired business partners in youth and kept them for life. But that is the case for many bands. And because creating and understanding a contract is not something one would normally expect of teenagers, it’s not surprising that business relations among band members are often fraught. In addition, relations among band members can become tense over decades, as teenage friends grow apart.
Financial Chicanery
Donald Passman, one of the top entertainment lawyers in the business, advises musicians, “No one ever takes as good care of your business as you do.”18
Tom Petty’s struggle with his record label illustrates the importance of understanding the music business and paying close attention to the details. Tom Petty and the Heartbreakers had already released two gold albums with Shelter Records, and they were working on a third (with Jimmy Iovine, brought in to co-produce) in 1978, when Shelter’s parent company, ABC Records, sold the label to MCA. In Petty’s words:
I felt like they just sold us like we were groceries or frozen pork or something. We had a clause that said if our contract is sold to anyone else, you have to have our consent. So we went to them and said, “You’re going to have to let us go.” And we were pretty much told, “You just have to forget about that, and that we weren’t in any financial position to fight a large corporation.” This made me really mad.19
But Tom Petty did not back down. A key issue in the ensuing legal dispute involved the long-term agreement with Skyhill Music for the publishing rights to Petty’s songs. Petty argued that he had been coerced into signing away the rights to his songs because he was told he would not be signed to a record deal otherwise. Thinking that publishing rights referred to sheet-music songbooks, Petty signed over the rights for a meager $10,000 advance. “I had no idea I’d never make money if I did that,” he said in 1980.20 Reflecting back years later, he said, “So my songs had really been taken away from me when I didn’t even know what publishing was.”
To pay for their legal bills, Tom Petty and the Heartbreakers went on what they called a “Lawsuit Tour.” After Petty filed for bankruptcy protection, which could enable him to abrogate contractual obligations, the parties eventually reached a settlement. As part of the settlement, Tom Petty and the Heartbreakers worked with Backstreet Records, an artist-friendly label in the MCA family, and received a $3 million guarantee. And the publishing rights to Petty’s songs were returned to him.
The music business has had more than its share of unethical people who take advantage of musicians.
In 1989, Billy Joel sued his manager, Frank Weber, for $90 million. Joel alleged that Weber, who is also the brother of his first wife, Elizabeth, and godfather of his daughter Alexa Ray, had (1) taken $2.5 million in loans without Joel’s knowledge or authorization, and invested the money in various horse-breeding and real estate ventures that Weber controlled; (2) lost more than $10 million of Joel’s money in highly speculative investments, many in companies that Weber owned; (3) double-billed Joel for his music videos; (4) mortgaged Joel’s copyrights for $15 million without proper disclosure; and (5) misled Joel about the state of his financial affairs. After a series of judgments, appeals, and countersuits, Billy Joel eventually collected $8 million. In a useful lesson on financial literacy, Billy Joel has said that he stayed away from the business side of his career because he was sensitive to the criticism that he “was a hitmaker-meister just grinding it out for the money.” But he recognizes that “I shoulda looked out for the money.”21 The Piano Man’s recommendation to budding musicians is to take an accounting course—and “it doesn’t hurt to know a little law, either.”
Evidently a forgiving soul, Billy Joel subsequently reconciled with his former brother-in-law to the point of giving him free tickets to a show in Florida, an act that Christie Brinkley, his second ex-wife, called “mind boggling.”22
The mellifluous pop singer Sting, a former English teacher, is another superstar who would have done well to heed Donald Passman’s advice to closely tend to his business dealings. Sting’s financial adviser for fifteen years, Keith Moore, embezzled nearly $10 million from him
in the 1980s and early 1990s. Moore transferred funds from Sting’s bank account without the star’s knowledge or consent and made a series of wacky investments, including a plan to produce an ecologically friendly gearbox and create a chain of Indian restaurants in Australia.23 Keith Moore was not as lucky as Frank Weber: he was sentenced to six years in prison for embezzlement.
Some of Sting’s other financial decisions appear less than prudent as well. The Daily Mail reported that in 2016 Sting accepted a pair of high-priced gigs to sing at weddings because he was in need of money due to a combination of a bad investment in a company called Steerpike Limited and excessive spending habits. As Moore recalled, “My recollection of Sting is that his ‘meeting tolerance’ level was near nil. He was easily bored and was quite content to leave the business side of things to others.”24
In March 1970, Lenny Hart, the original money manager of the Grateful Dead and father of one of the band’s percussionists, Mickey Hart, disappeared—along with the group’s money, approximately $155,000. After being found in San Diego a year later, Hart was convicted of embezzlement and sentenced to six months in jail. Although Mickey never spoke to his father again, the band denounced their former manager in their 1972 song “He’s Gone,” with the grisly line “steal your face right off your head.”
It’s not just superstars who are easy prey for financial scams, unknown musicians can be too. The BBC ran an exposé in 2018 on a London-based firm called Band Management Universal (BMU), which promised musicians studio sessions, gigs, help securing a record contract, and other enticements, for a fee of up to £4,000. Their services were rarely delivered, however. Dutch singer Jasper Roelofsen, for example, said a representative of BMU promised him that his band Counting Wolves would have a chance to work with well-known artists. The band shelled out £3,840, but the opportunity never materialized. “We could have used that money to do something useful for our careers, but instead we burned it,” Roelofsen said.25 The BBC interviewed more than twenty artists who complained about BMU’s practices. Horace Trubridge, head of the Musicians’ Union, described BMU as “the worst example of music fraud he had seen in the past 20 years.”