Sweetening The 360 Deal - TXK

Allison Schwarz Allison Schwarz If you are a new artist today and you are offered a deal by a major label, you are almost guaranteed to be presented with what is commonly referred to in the music industry today as a "360" deal. With the tremendous decline in the sale of recorded music, which currently represents only about ten percent of income in connection with the artist's career, record companies are now demanding participation in ancillary streams of income such as merchandising, touring and music publishing. Due to the reality of the current music market, many independent labels have also moved to some variation of a 360 deal. While many artist representatives and artists are doubtful that the 360 model will prove beneficial to the artist, these deals leave much room for creativity in the negotiating process. Following are some tips to keep in mind when negotiating a 360 deal for yourself or an artist you represent. Find Out What In-house Services the Label Is Offering for Each Ancillary Stream of Income. In order to compete in ancillary areas such as touring and merchandising, many labels have created new divisions with the necessary expertise to provide quality services to the artist in those areas. For example, your record company may have a top-notch retail and online merchandising division. By entering into a deal with the record company which includes merchandising on terms similar to or better than those offered by a third party merchandising company, you may actually create more value for your artist while providing the record company with greater incentive and opportunities for synergy in order to advance the artist's career. Make Sure the Label Accounts Separately for Each Stream of Income. Some labels will handle each stream of income and service through individual companies and provide you with a separate agreement relating to each ancillary right (i.e. a recording agreement, a music publishing agreement, a merchandising agreement, and a touring or development agreement). Other labels will throw all of the ancillary rights into the main recording agreement. In both instances, you need to make sure the label maintains separate non-crossed accounts for each stream of income. Thus, if the label spends a million dollars making your album and record sales are slow, the label cannot use the income from merchandising and publishing to recoup those outstanding recording costs. Always Ask for a Separate Advance for Each Area of Income. If the label is insisting on obtaining a piece of the artist’s income outside of record sales, the artist should be compensating for giving up those rights. In addition to the advances an artist typically receives in connection with each album recorded under the deal, the label should be required to pay advances for exercising options for music publishing, merchandising and any other ancillary rights. As mentioned previously, those advances should only be recouped from their applicable stream of income. Try to Limit the Scope of Ancillary Streams of Income. Although your label may be insisting on participation in all of the major ancillary areas of income, you may have some wiggle room within each area. For example, if your label insists on participating in music publishing, you may be able to have them agree to an administration deal rather than a co-publishing deal where you share in ownership of the copyrights. Publishing could also be limited only to musical compositions embodied on albums released by the label with the artist retaining publishing rights to all “outside” compositions. Similarly, in the area of merchandising, you may be able to limit the label’s rights to perhaps two or three exclusive designs per album, restricted only to online and retail sales with no live venue sales for the label. The Label Should Stand Behind the Artist’s Costs. One of the most highly negotiated areas of the 360 deal is whether the label’s percentage is based on gross or net income. Of course, the label will push for a share of gross income as it will not want to worry about monitoring costs and accountings, or conducting audits. However, it is much better for the artist to deduct out of pocket costs and third party commissions off the top before calculating the label’s share of income. For example, in the area of touring the artist may have travel, accommodation, and per diem costs of $2,000 for a live performance where the artist is only paid $2,250. In this instance, if the label’s share is 10% of gross, the label will receive $225 (leaving the artist with $25), but if the label’s share is 10% of net, the label will receive only $25 (leaving the artist with $225). Keep in mind that commissions paid to the manager, business manager, booking agent, and attorney could amount to between 25 and 40 percent of gross, net, or some combination thereof, leaving the artist with an even smaller profit margin if the label refuses to stand behind those commissions. Exclude Areas of Income Where the Artist Is Already Established. The label will likely believe that it should share in all areas of ancillary income since it is investing in the development of the artist’s brand which extends beyond recorded music. However, the artist may already have achieved a certain level of success in an area which should not be shared with the label. For example, if your artist is already a well-known club or radio DJ, you have a strong argument for excluding any monies earned for those services from the label’s share of ancillary income. Limit Ancillary Participation to Music-related Streams of Income. The agreement you receive from the record company will usually contain a very long and extremely broad definition of ancillary rights which will include everything under the sun. It is very important that you narrow down those rights and limit them to income earned by the artist for music-related activities only. If you can help it, you do not want to give the label a share of income having nothing to do with music, such as non-musical acting, modeling, and book publishing, to name a few. Stay Away From Label Approval Rights. It is common for the record company to want a seat at the table when dealing with ancillary rights. However, while labels are experts when it comes to recorded music, they do not necessarily have the same level of expertise or knowledge in other areas such as touring, sponsorship opportunities and endorsement deals. Consequently, it may not be in the artist’s best interest to give the label approval over those outside deals. The artist should be free to make decisions regarding his or her career in these areas without unnecessary meddling by the label. Make Sure the Label’s Share Ends with the Record Deal. A new trend I have seen is record label participation in post-term ancillary income. This means that when your record deal ends you will still be paying the label a portion of ancillary income. Obviously, it is in the artist’s best interest to have no such obligation to the label once the record deal is over. Take Back Your Ancillary Rights if the Label is not Performing. If you are granting the label exclusive control over any ancillary rights, the label should be performing consistent and quality service to maintain those rights. For example, if the label insists on running your online official fan site and sharing in income generated from that site (i.e. membership fees, VIP ticketing, special promotions, etc.), there should be a mechanism for those rights to revert to you if the label fails to perform.