As physical music sales drop across, it has become increasingly common for music distributors to try and have the artists and bands they sign enter into more extensive contracts. Here we look at how these contracts are structured and who they benefit.
Part 1 of 2
Guest post by Justin M. Jacobson, Esq. of the TuneCore Blog
[Editors Note: This is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research.]
With physical music sales evaporating and an overall decline in total earnings across the entire music business throughout the last decade; many music distributors have begun entering into more extensive arrangements with the talent they sign. There has been a shift from traditional record distributors “signing” artists solely to a recording agreement to now signing artists to much more elaborate contracts. These new agreements are commonly referred to as “multiple rights deals” and are also known as “360 degree deals.” We will examine some of the pros and cons of entering into a “multiple rights” agreement as well as look at some clauses utilized in these agreements that are rarely seen elsewhere within the music industry.
This new breed of music distribution deal provided by many labels is characterized as a “multiple rights” deal. They are also referred to as a “360° deal”, a “270° deal” or a “180°deal”, depending on which rights are contracted for. For example, a typical “360° deal” entitles the label to receive a set percentage from four of the artist’s revenues streams. These would include a portion of the artist’s record sales, touring and personal appearance income, as well as publishing income, and the merchandise revenues. A “270°” or a “180°” multiple-rights deal may only cover two or three streams of an artist’s income, such as the label solely receiving a percentage from the musician’s record sales and publishing monies (180°) or a percentage from the artist’s record sales, publishing and touring incomes (270°).
Additionally, some agreements include “catch-all” clauses, which entitle the label to a portion of the musician’s “collateral” or “ancillary” entertainment activities. Essentially, this means the label is entitled to a percentage of income generated from anything related to the musician’s entertainment career that does not fit into one of the above categories (touring, publishing, record sales, merchandise, etc.). Thus, the record company will not only be entitled to their traditional stream of revenue from recorded music (CDs, MP3s, Vinyl); but, they will also be entitled to percentages of all of the artist’s entertainment related revenues. This could include portions of the artist’s merchandise sales, endorsement and sponsorship fees, motion picture and television appearance fees, digital sales and music streaming royalties, tour and live performance revenues, songwriting and publishing revenues, ringtone and ring-back sales in addition to fan clubs. In a nutshell, the label receives a portion of anything and everything related to the signed talent’s entertainment career.
Generally, in these situations, an artist enters into a few separate agreements with separate contractual “advances” that encompass the entire “360°” arrangement. Similar to the recording agreements we looked at in a prior installment, all of these agreements are usually cross-collateralized with each other. This means that any income earned from the different revenue streams (i.e. recording, publishing, touring, etc.) can be used to recoup any advance provided by the label to the artist as opposed to the label solely utilizing the publishing revenues to recoup the publishing agreement advance and so on. It is advisable for an artist to attempt to negotiate that the different streams are not cross-collateralized. However, this is a hard sell, as most labels will not accept such an accommodation, as they want ample opportunity to recoup their full investment from as many income sources as possible.
Another important negotiation consideration is whether the company has an “active” or “passive” interest. A “passive” interest exists when a label merely earns their set percentage under the agreement without having any control over the rights involved. This means that the artist is free to enter into any deal, such as a publishing or merchandising agreement that they desire as long as they ensure the record label receives their compensation.
Conversely, an “active” interest is one where the company has rights over the work, which permits the label to insist that an artist signs with their publishing or merchandise company. In these instances, a musician should try to negotiate a smaller percentage for the particular stream of income that the label is “active” in. For example, if an artist is obligated to sign with a label’s publishing company, the artist should try to reduce the percentage the label receives under the “360°” deal from publishing revenues as the label would essentially be getting paid twice (once as a publisher of the song and once through the label’s “multiple rights” deal) for the same material.
While there are many benefits as well as drawbacks to these extensive “multiple rights” deals, it has become the norm for many major labels and entertainment companies. Since there have been many more unsuccessful artists than commercially successful ones throughout history, the labels started seeking new ways to attempt to best recoup the funds they expend. Robbie Williams is an example of one of the first artists to sign a “multiple rights” deal. Additionally, in recent years, top artists such as Jay-Z and Madonna have signed similar “multiple rights” deal with the “tour company” Live Nation. These entities justify the new agreements and the increased ability to earn from the artist’s non- recording revenues in a variety of ways. For instance, the record label feels that they take all the risks with minimal chances of recouping their investment.
This is true as a label generally issues a non-refundable advance of the recording costs to the artist. The artist does not need to pay back the advance(s) to the record distributor, even if the musician’s work fails to generate any income for them. The company would then end up losing all of the funds advanced to the artist without any recourse against them. The label typically supplies all of the upfront recording costs necessary to create the music through the recording costs “advance.” These advanced funds are then utilized by the artist to pay for studio time, production, mixing and mastering costs, which the artist typically would otherwise not be able to afford on their own.
Furthermore, the label may also provide “tour support” to an artist to cover any deficient touring costs to ensure that the talent can adequately perform as they envision. The label also expends substantial funds to market, promote and manage the artist’s released music, including on radio promotion and press. Since the label invests so much upfront money and the potential return from the traditional record sales has bottomed-out; they justify these new more extensive agreements as a way to recoup the expenses they invested in the artists they sign. In these instances, the label may envision functioning as a pseudo-manager by looking after and assisting in building the artist’s entire career rather than only focusing on selling records.
We have already discussed the recording agreement and we will explore publishing agreements in latter articles; so, we will now examine the additional agreements and clauses included in some of these new “multiple rights” agreements.
One common agreement included in the “multiple rights” deal provided by most traditional record labels covers the formation and operation of an artist’s official “fan club.” Standard language, such as that listed below, discusses the label’s right to run a fan club on behalf of a signed artist.
Fan Club – Label shall have the exclusive right throughout the Territory to establish, register, maintain, control, administer, promote, and monetize the Fan Club, including the right to create, update and manage website(s) related to the Fan Club and to sell, advertise and promote the Fan Club and products and services offered for sale by the Fan Club on behalf of the Artist. A “Fan Club” shall mean any Artist-based subscription or registration-based subscription services.
Artist shall have prior approval over the so-called “look and feel” of the Fan Club. The parties contemplate that the Fan Club shall include but not be limited to a home page, message board, early ticket purchasing opportunities, exclusive merchandise, contests, unreleased recordings, interviews and VIP Fan Experience packages.
This paragraph means that the label has the right to create and monetize an artist’s official fan club; however, the artist shall have prior approval over the “look and feel” of the club. Therefore, the artist will have some creative input over the marketing and promotional materials created to advertise the club as well as the designs of any websites or other publicly distributed materials bearing the artist’s name. In addition, the clause mentions some of the fan club offerings such as exclusive merchandise, contests and early ticket purchasing opportunities.
Fan Club Obligations – Artist shall provide Label with timely information regarding Artist’s entertainment-related activities (including public appearances, endorsements, advertisements sponsorship, and performances). Artist shall provide Label with materials as Label reasonably requests for use in connection with the Fan Club, including but not limited to Artist Identification Assets, Special Greetings, audio and audio-visual messages. Artist shall also make itself reasonably available for a reasonable number of Fan Club interviews and to make personal appearances and participate in “Meet and greets” in connection with the Fan Club. Artist shall be responsible for answering fan mail; however, all reasonable out-of-pocket costs (e.g. cost of Fan Club stationary, postage, photos of Artist) shall be reimbursed pursuant to a mutually agreed budget.
As indicated above, the label imposes a variety of obligations on the artist. One such obligation is to inform the company of any upcoming appearances or tours, in order that the label can create contests or other “fan club” exclusive promotions tailored to those appearances. It is advisable to limit the number of appearances and “meet and greets” in connection with the fan club’s promotion. In addition, similar to the reimbursement of the artist’s “out-of-pocket” expenses in responding to fan mail; an artist should try to request some sort of budget to cover or mitigate some of their expenses in complying with the label’s other requests such as creating an audio-visual greeting or attending a fan “meet and greet.”
In addition to the artist’s obligations to the fan club, the artist and label typically have an equal 50/50 split on any income earned from the operation of the club. In these instances, it might be advisable for an artist to attempt to negotiate a larger percentage of the revenues earned due to all the obligations the artist has undertaken. Conversely, since the label normally advances most of the costs to run the fan club, it may be a hard sell to increase the artist’s percentage.
In our next installment, we will continue our discussion on additional agreements included in a “multiple rights” deal.
This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling.