It is common knowledge that a music artist will have difficulty breaking into the market and making it big without first signing a “record deal,” but it is less commonly known that such deals come in many different forms. A “record deal” is often thought of as record companies entering into an exclusive recording contract with an artist to share income from selling the artist’s recorded music. It is becoming increasingly common, however, for record companies to also seek shares of the artist’s other income streams, such as acting, touring, live performance, publishing, merchandise, endorsements, and public appearances (to name some examples). These types of comprehensive income-sharing deals are called “360 deals” in the recording industry, and are increasingly becoming the industry standard. For that reason, recording artists should understand and fully appreciate how these types of deals can affect an artist’s career.
Sales of recorded music have rapidly declined over the past two decades—hence, record companies have an interest in trying to recoup their investment in an artist through as many revenue streams as possible. The 360 deal also is usually seen as a reward for the record company “making” the music artist—the idea being that the artist would not have broken into the entertainment market in the first place without the record company’s work in developing and promoting the artist (i.e., the artist would not have been offered the paid speaking engagement had the record company not promoted the artist’s talent in the first place). Although many artists are looking for their “big break,” these types of deals can prey on the eager and take advantage of what rightfully belongs to the artist. 360 deals should thus be negotiated with caution, and artists will be well served by first engaging an experienced music and entertainment law attorney.
Being able to spot a 360 deal is critical, as many record companies simply call their proposed 360 deals “recording agreements” or “engagement agreements” without any reference to the number. Record companies aren’t necessarily trying to “hide the ball,” but a 360 deal can usually be identified deep within a recording contract—usually in the “Grant of Rights,” “Ancillary Rights,” or similar sections. These sections typically require the artist to pay the record company a share of revenue derived from (1) sales of the artist’s recorded music, (2) touring and personal appearances, (3) merchandise sales, and (4) publishing income. These deals often also contain catch-all language that gives the record company a right to share in all of the artist’s broadly-defined “entertainment-related income.” Obviously, these numbers can add up fast, and an artist eager for his or her big break can easily miss (or fail to properly consider) this language. In fact, because many record companies demand 360 terms, the emerging artist usually is left with very little choice—either to sign or to forget it.
Although the 360 deal may be initially unfavorable to artists (particularly artists who are new to the game, and therefore more of a “gamble” for the record company), a 360 deal can be beneficial to both parties and give way to a financially-symbiotic relationship if properly negotiated. Understanding the terms that an artist or an artist’s lawyer should recognize and negotiate is of utmost importance:
1. Remove mention of miscellaneous entertainment-related income: It is generally best to limit the deal’s boundaries to only include recording-related income. There is no telling where the artist’s career will lead, and having to keep track of miscellaneous entertainment-related accounting will dig deep into the artist’s pockets and keep the artist guessing about which gigs will be subject to accounting. If this is not possible, it is better to carve out specific areas to which the artist should have exclusive royalty rights (e.g., merchandise sales or publishing), or limit the artist’s duty to account to the record company when the artist is paid under a certain amount. The more boundaries that can be put into these grants of rights, the better off the artist will be in the long run.
2. Ensure advances are actually paid: The next important point is to ensure that any advances to be paid to the artist under the agreement are not recouped by the record company prior to the artist’s receipt of such advances. This sounds like an obvious point to keep in mind, but many 360 deals will not even mention language to this effect. The logic behind these recoupment clauses is that the record company may have spent a lot on an artist upfront, and wants to recover some of its spend before paying the artist the remaining portion of the advance. Don’t let this happen. Advances should be paid in full, and the record company should only be able to recoup its spend from income it generates beyond the advance—this will incentivize the record company to work hard in promoting the artist and prevent the artist from being taken advantage of.
3. Avoid cross-collateralization of royalties: It is always best to ensure that an artist’s revenue streams are kept separate and that the record company is not able to cross-collateralize each revenue stream—this means that the record company should not have the authority to recoup the negative balance of one revenue stream from the positive balance of another. For example, a record company sharing in an artist’s merchandise sales should not be able to apply merchandise revenue to its unrecouped recording costs. Rather, it is in the artist’s best interest to ensure sales and income from a single revenue stream stay within that particular revenue stream. This keeps money flowing to the artist in the event the record company makes some risky financial moves.
4. Royalties should be based on “net” rather than “gross” income: Many record companies try and base their share of the royalty payments from an artist’s gross income. Not only does this restrain the artist from realizing a fair payment from rendering his or her talents, but it unjustly enriches the record company. For example, if an artist earned $100,000 from a successful tour (with expenses totaling $50,000), but the artist had to pay the record company 25% of gross, the record company would take $25,000 and pay the artist $25,000. If the artist’s contract contemplated 25% of net, however, the record company would take $12,500 and pay the artist $37,500.
Although many 360 deals skew heavily in favor of the record company, a music or entertainment attorney familiar with negotiating these deals should be able to help balance the scales. Artists are taken advantage of all too often, but careful and informed negotiations may go a long way towards helping the arts and entertainment communities thrive.
For more information on this article and this topic, contact Charles Wallace.