Perfect Sound Forever

360 Deal or No Deal


Madge, Michael Rapino, Jay-Z

by Lisa Marie Valletutti
(June 2009)


"I can give you my personal opinion: Love the music, hate the business. It's a screwball business and there are a lot of players who will straight-up lie to you." – Justin Timberlake


Names like Michael Jackson, The Beatles, Elvis Presley, The Rolling Stones, Madonna, and Aerosmith all seem to be household names recognized by the young and old, regardless of generation. When I think about music exclusive to "my generation," however, I come up with a list that seemingly lacks this similar aspect of longevity. Perhaps Kelly Clarkson or Natasha Beddingfield make the "longevity list" for the 2000's or maybe Green Day has that stellar quality. But will anyone really care about them in 30 or 40 years from now, in the same way that we have thirteen-year-olds today who sing along when a Journey song plays on the radio? Probably not. Chances are that neither "Since You've Been Gone" nor "Pocket Full of Sunshine" will be on a "Classic Pop" album in the year 2050. Madonna's "Material Girl" or Michael Jackson's "Beat It" have a better shot at getting on that album before most any pop hit of the 2000's.

But with record sales dwindling, these compilations might not even stand a chance of being created, let alone released. If major labels want to continue to enjoy whatever remnants of record-sale success that are left, and avoid a seemingly inevitable demise, they must look beyond simply artist development to bring in success, sales, and most importantly, longevity, to their artists. And there exists a relatively new and very promising practice to (hopefully) do just that: The 360 Deal.


I. The 360 Deal and the Creation of 360 Deal Media Conglomerates

A 360 Deal is one that "involves the record company or in many instances, another company not traditionally in the record business such as a concert promoter, merchandising company or other entity, in all the income streams that might flow to the artist. The company would pay the artist an advance, commensurately large depending on the status of the artist, against the income that would flow from the rights being made the subject to the deal."1

One multimedia conglomerate that has taken full advantage of these 360 Deals is The Disney Company and they have proven that this could be just the remedy that the industry needs. Through 360 Deals, a company is able to handle all aspects of an artist's career from the music, to video, to apparel and even toys, resulting in not only a boost in success but also increased career longevity for these artists.

Our current era of digital media calls for an improved model for artist development as well as a restructuring of record deals because the fact of the matter is that digital sales are just not making up for the decrease in mechanical record sales. Unless the industry "changes with the times," the Big Four2 and many other traditional labels do not stand a chance of eventually going under.3 A collapse of the Big Four would inescapably change the concept of in-house counsel as we know it and traditionally negotiated record deals would virtually vanish – hence creating a major legal problem in the music industry. A universal, industry-wide shift from the traditional record deal to the 360 Deal may become a step in the right direction.

According to Matt Fitz-Henry, Director of New Media at Walt Disney Records, that company has grown 40 percent from last year, while the Big Four continue to experience fewer and fewer sales because they have not efficiently conformed to the digital age.4 Moreover, Fitz-Henry also stated that the 360 Deal, while only recently becoming more popular, has been a practice that Disney actually has been engaging in for the past 50 years.5 With this in mind, we can now analyze why the Disney model has worked so well in this digital era.

It's no surprise that targeting the "tween" demographic in the way that Disney does is the best way to generate income in the music industry from CD sales. "Tweens" are the largest consumers of music because they have their parents to purchase their music for them. In fact, in its first week, Miley Cyrus's two-disc Hannah Montana 2/Meet Miley Cyrus album sold 326,000 CD's and debuted at the top of Billboard album charts.6 In actuality, a rather large group of today's successful pop stars have come to fruition with the help of The Disney Company. Artists such as Christina Aguilera, Britney Spears, and the boy-band *N Sync have made fortunes with the help of Disney (or rather, Disney has made fortunes off of them). And so began the rise of today's contemporary pop.

With the new wave of recent contemporary pop (artists like Hilary Duff, Miley Cyrus and the Jonas Brothers), Disney has created a sustainable "machine" – a generation of 360 Deals where the "branding" of artists and creation of other products (in addition to CD's) drives profits. Just the other day, my sister bought a Miley Cyrus toothbrush that plays her latest single. Think about how much more income could be generated if other popular artists were branded to that extent. Whether Disney intended to do so or not, they have arguably transformed into one of the largest and most successful record labels in the world.

However, the 360 Deal may not be advantageous for every single artist in every circumstance. Financially, artists that already have a tremendous following and generate say, one million dollars or more per year in touring revenues before they even sign a record deal would not want to be "signed" to a label that would put a 360 Deal on the table. And this makes perfect sense. Why would an artist generating this magnitude of profit want to volunteer an average of 30% of this profit to the "almighty" record label without the promise that the artist's net proceeds will exceed, or at the very least, meet the profits they were already making on their own before signing with the label.

For this reason, many record companies have begun writing this concept into new artist signings. From my own experience at the Business & Legal Affairs at one of the "Big Four," the way to remedy this is by stipulating in a recording agreement that an artist can keep the one million dollars per year that they were generating on their own without the label, but any profits made through tour revenues, merchandise, etc. is subject to a 30% cut in profits to be forked over to the record company because they "made" you more profitable. Or at least that's the concept behind it.

Even still, some bands are totally averse to embracing the 360 Deal concept, even if it means turning down a big label offer for a smaller label deal so they have more leverage in striking tour support, merchandising and distribution deals on their own terms. However, it should be noted that many of these smaller labels are taking an even larger chunk of touring-related revenues because they believe that as a small label they give artists more individualized attention and promotion – this is probably true, but it begs the question "why?" and "why now and not for the 100,000 artists signed before me?" The answer is that with record sales dwindling continuously every day, record companies are struggling to keep afloat and this is an area that they have been able to exploit simply because every artist wants a record deal.


II. Potential Conflicts with Universal Adoption of 360 Deals

While there are foreseeable conflicts that may arise as a result of the universal adoption of 360 Deals, many companies were engaging in 360 Deals before the words '360 Deal' were ever coined. For example, a recording artist that has had some success was traditionally able to purchase songs from little-known songwriters while also getting a share of the publishing of that song. Record labels can do this with those artists they have signed 360 Deals with.

The general scenario is as follows: an unknown songwriter goes to a music publisher and negotiates a publishing deal with him where the songwriter gets 25% of the publishing royalty on that song. Then, the publisher gets a big-wig like Whitney Houston or Mariah Carey to sing that songwriter's song, which is great for the publisher, but Whitney will not sing it for any less than 100% of the recording share and 20% of the publishing. That 20% will come out of the songwriter's publishing, leaving the brains behind the music a mere 5% for all of his hard work and dedication to the song. When negotiating 360 Deals, the record label may take a "piece of the pie" in the same way that in the above example Whitney Houston might take 20% of the publishing. The idea behind the 360 Deal is to create a brand – to promote the artist as well as the music – not merely to "rob" the songwriter of potential revenue streams. Essentially, the "taking" by the record label from the artist's pie is done to benefit the artist, not to steal from his/her success or lack thereof.

Branding of artists opens up revenue streams that would have been entirely unattainable by artists before entering into a 360 Deal. For example, touring and t-shirt sale revenues which were once untouchable by the labels are now exposed to a percentage that is lost to the record label. However, the notion is that this practice will eventually create greater revenue streams for the artist and will not be "robbing" the artist as many suggest. In the end, this kind of deal would probably help the "little guy." As an example, take the Jonas Brothers. They were first signed to Columbia Records in 2005 before they were "branded" by Disney. They released their first album under Columbia Records selling only 50,000 copies, which lead to their eventual drop from that label. However, after they were signed in February 2007 by Disney's Hollywood Records and "branded" by Disney's "machine," their second album peaked at #4 on the Billboard Hot 2007 and their popularity is gaining more strength every day – opening avenues for the group's members to become movie, television and radio stars.


III. Potential Legal Pitfalls with Universal Adoption of 360 Deals

The creation of companies that secure 360 Deals for their artists will not lead to a music industry without lawyers. While it may seem that there are no obvious legal pitfalls to the universal adoption of 360 Deals, there are a couple that should be mentioned. First and foremost, if the traditional record label is dissolved and the new wave of record labels is created in the guise of multimedia conglomerates like Disney, many in-house legal jobs will be virtually eliminated. This is a legal pitfall because the power of negotiating these deals will be essentially monopolized – the power of the creation of 360 Deals will be centralized in the hands of a few select attorneys at these large multimedia conglomerates. If nothing else, this will eliminate jobs and put too much power in the hands of a few savvy attorneys working at these conglomerates.

Second, the universal adoption of 360 Deals may open the doors to greater levels of piracy. While piracy has always been a problem with regard to the actual music that is being sold, the universal adoption of 360 Deals may lead to greater losses for the record labels due to the creation of bootleg t-shirts and other merchandise that the label would have traditionally stood to profit from. While the creation of bootleg items has always existed, it was never directly "felt" by the labels because they were not directly invested in that revenue stream.

Lastly, another noteworthy legal pitfall that could occur as a result of the universal adoption of 360 Deals is in the securing of all of the rights to every single product that is being encompassed by the 360 Deal. More precisely, in order to garner the rights to produce these products such as toothbrushes and t-shirts, video games and movies, the record label will be forced to invest a lot of time and money into this practice in order to profit from their efforts.


IV. The Benefits of Branding

While some labels today are focusing their energies on the one or two artists are generating revenue, Disney is cashing in on each and every one of their artists. Whether it's a Jonas Brothers tour or publicizing Demi Lovato's new singing career, Disney is knee-deep not only in artist development, but product development, while traditional record labels are still trying (unsuccessfully) to invent new ways to create revenue. The answer is right under their noses.

In December 2008, Warner Music's Atlantic Records reported an 8.9% increase in track-equivalent album sales (where the sale of 10 digital singles equals one album) compared to the industry's 10.4% decrease in track-equivalent album sales.8 However, instead of focusing their energies on their entire artist roster, Atlantic Records has found that the only way to increase revenues in this media-hungry world is by "reducing the artist roster and get[ting] the best bang out of their marketing and promotion dollar."9 Although the concept of promoting artist development in order to increase revenue streams exists in the minds of major record label executives, they should extend their efforts beyond the "artist" and into the "product." Warner's U.S. Recorded Music Chief Lyon Cohen stated that their "primary goal was to spend more time developing artists and improve the quality. It took a great amount of courage because what we had wasn't what we thought." But perhaps if all record labels embraced the concept of the 360 Deal wholeheartedly, there would be no need for a reduction in their artist rosters.

Disney can handle the development of dozens of teen pop stars by embracing the idea of the 360 Deal which has lead to an enormous amount of artist development for the future of (at least) the pop music industry. In 2008, compact disc sales had fallen about twenty percent from 2007.11 But despite fewer mechanical sales, Disney has hardly felt that crunch; they are making up or it in other ways. Last year alone, Disney's ring tone sales were up 722%, while digital album and digital track sales were up 52% and 122%, respectively.12


V. Live Nation / Ticketmaster Merger and the Creation of Live Nation Entertainment

And so finally, entertainment companies are taking a step in the right direction towards preserving the music industry. Or are they? This February, Ticketmaster Entertainment and Live Nation announced a definitive merger agreement between the two, thus creating Live Nation Entertainment.

The all-stock merger of these two companies (the largest concert promotion firm with the largest ticketing company) will reportedly save the companies a combined $40 million and according to Michael Rapino, current CEO of Live Nation, will simplify the ticketing process, build a better artist-to-fan direct network, and ultimately increase attendance at concerts across the board.13

A merger of this magnitude would lead to the creation of a company that controls more than 70% of the concert industry.14 Barry Dilley, Chairman of Ticketmaster Entertainment strongly supported the deal stating that "[b]eing able to put Live Nation and Ticketmaster into an equal partnership will allow the companies to get through this difficult period and be able to expand live entertainment options to audiences throughout the world."15

Billboard reporter Ray Waddell remarked that this deal will definitely not occur smoothly or without some kind of pushback. According to Waddell, unfair competition or anti-trust issues could possibly postpone the closure of this deal. But are the companies actually engaging in anti-trust violations? The two companies compete in the realm of ticketing, but neither engages in exactly the same practices that the other does. "Ticketmaster is not a promoter, Live Nation is not a manager"16 even though they have engaged in the creation of long-term "360 Deals" with some of music's largest artists of today, including, without limitation, Madonna, Jay-Z, and Robbie Williams.17

As can be expected, there is already "pushback" from this merger proposal. Some individuals believe that the stocks of Ticketmaster Entertainment were sold too low and that investors were able to "steal" some money from the purchasers of the company.18 Others believe that this will create a "monopoly" on ticket prices and that with the merger of these two companies, Live Nation Entertainment will have the power to make ticket prices as high as they want and control the supply and demand in the economics of ticket sales without being required to disclose their activities.19 Joe Cohen, CEO and founder of the UK company Seatwave stated that "[s]uch an entity [as Live Nation Entertainment] could easily control prices and supply in the market, crowd out other promoters and stifle innovation in a sector that sits in the centre of the UK culture. This deal will most certainly mean that we will see increased prices on tickets and job cuts in both companies."20 It is yet to be shown whether any of these issues will actually arise and if anti-trust or other legal inquiries will be created.


VI. How Live Nation Deals Have Faired "So Far"

But even though Disney has been very successful in marketing their 360 Deals to the "tween" audience, it is unclear whether or not 360 giants like Live Nation have actually "cashed in" on their investments in 360 Deals as much as they anticipated that they would. Live Nation has signed 360 Deals with individuals who are arguably some of the biggest names in the industry today, including, Madonna, U2, Jay-Z, and Shakira, among others. Live Nation's model provides a tremendous upfront advance for the artists that choose to sign with them (which means Live Nation has the added job of luring artists away from their current record contract to engage in lucrative 360 Deals with them).

According to The Independent, Madonna negotiated a $120 million deal for 10 years with Live Nation, while Jay-Z's deal pays him $150 million upfront for a similar 10 year commitment.21 Live Nation has also engaged in deals with their artists that give them a "share" in the corporation. For example, according to Digital Media Wire, U2 received 1.56 million shares of Live Nation as part of their 12 year deal with the company and recently that investment proved to cost Live Nation $19 million.22 Reuters reported that Live Nation decided in December of 2008 to buyback those nearly 1.6 million shares of the company from U2. At the time of this deal, Live Nation's stock was valued at $3.91 per share (December 2008), which according to The Independent, was a colossal decrease from the company's peak price of $24.95 per share in 2007.23

In fact, in June 2008 it was reported by idolator.com that even Chief Executive of Live Nation Michael Rapino "want[ed] to hold off on signing away any more money before someone figures out whether or not these deals are a good idea in the face of a possibly slowing economy.24 While for some artists these 360 Deals may increase revenues they would have received if they engaged in traditional record deals, artists like Madonna and Jay-Z have proven that in fact, perhaps a "down payment" for each and every area of concerts and touring may not be as beneficial to record companies or companies like Live Nation as they may have first expected.


VII. Conclusion

The advent of the digital era coupled with ever-dwindling record sales is forcing record labels to make some major adjustments to what used to be a good model for the music industry. Multimedia conglomerates like Disney have mastered the 360 Deal and have been able to create brands out of their artists. If labels, especially the Big Four, are interested in achieving an economic turnaround, they must adopt new practices. Disney has proven this. Universal adoption of these 360 Deals by major and independent labels alike could lead not only to greater artist development and branding, but could increase the number of available revenue streams for these companies, thus thwarting their inevitable demise.




FOOTNOTES


1 Ivan Hoffman, B.A., J.D., The All Around, 360 Deal

2. These record labels that are coined the Big Four are Sony/BMG, Universal, Warner (WMG), and EMI Group. These four companies encompass the majority of revenues in the music industry.

3. See generally, Justin Bachman, The Big Record Labels’ Not-So-Big Future, BUSINESS WEEK (Oct. 10, 2007).

4. See Greg Sandoval, Music Industry Woes Not Felt by Disney Records, CNET (June 10, 2008).

5. Ibid

6. See ENTERTAINMENT – A Cinderella Story for Disney Music Group, LOS ANGELES TIMES (July 9, 2007).

7. Jonas Brothers article, HARTFORD COURANT (Dec. 27, 2008).

8. See Peter Lauria, Atlantic Avenue: Label finds pathway to growth in a down market, NEW YORK POST 27 (Dec. 28, 2008).

9. Ibid

10. Peter Lauria, Atlantic Avenue: Label finds pathway to growth in a down market, NEW YORK POST 27 (Dec. 28, 2008).

11. Ibid.

12. See Stefanie Olsen, Disney bucks music industry downturn, CNET (July 15, 2008).

13. See Ray Waddell, Live Nation, Ticketmaster Merger Confirmed, BILLBOARD MAGAZINE (Feb. 10, 2009).

14. Alfred Branch Jr., Live Nation and Ticketmaster Entertainment agree to unprecedented merger, TICKETNEWS.COM (Feb. 10, 2009).

15. Ray Waddell, Live Nation, Ticketmaster Merger Confirmed, BILLBOARD MAGAZINE (Feb. 10, 2009).

16. See Alfred Branch Jr., Ticketmaster/Live Nation merger: Ticketmaster shareholders sue to block the proposed deal, TICKETNEWS.COM (Feb. 17, 2009).

17. Ibid.

18. See Alfred Branch Jr., Ticketmaster/Live Nation merger: Ticketmaster shareholders sue to block the proposed deal, TICKETNEWS.COM (Feb. 17, 2009).

19. See Alfred Branch Jr., Live Nation and Ticketmaster Entertainment agree to unprecedented merger, TICKETNEWS.COM (Feb. 10, 2009).

20. Ibid.

21. See Ian Burrell, Live Nation: Music’s next big act, THE INDEPENDENT (Feb. 5, 2009).

22. See Mark Heffinger, U2, Madonna, Jay-Z Got Live Nation Equity Stakes in “360” Deals, DIGITAL MEDIA WIRE (Oct. 20, 2008).

23. See Ajay Kamalakaran and Jon Loades-Carter, UPDATE 1-Live Nation takes $19 mln hit on U2 buyback deal, REUTERS UK (Dec. 18, 2008), http://uk.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUKBNG16028420081218.

24. See Live Nation’s 360 Deals Are Making Some Higher-Ups A Bit Dizzy, IDOLATOR.COM (Jun. 6, 2008).


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