Why Artists Should "Do a 180" on "360 Deals"
by Bob Donnelly, Esq.
Lommen Abdo Cole King & Stageberg
Excerpt:
What's Wrong With 360 Deals ?
Let's focus on the terms of 360 deals, and I will explain why I'm so passionately opposed to them. First of all, in many of these 360 deals the record company will demand that their earnings come out of the gross revenues, meaning that, if the cash that the labels actually receive has been reduced by any parties in the middle of the transaction (even if those parties themselves add value, as, for example, many music publishers do), then the label will add those amounts back in before calculating the percentage of revenue they retain. Think about that for a moment. The manager doesn't get paid on gross, and the artist certainly doesn't get paid on gross why then should the record company be paid on gross?
The 360 deals that I've reviewed require the artist to relinquish between 5% and 50% of revenues from sources other than record sales. To illustrate this point, let's use 20% as the percentage that the record company is seeking from an artist's live touring income. If that artist is paying all of the traditional touring costs (e.g. hotels, transportation, etc.) as well as paying her manager a 20% commission, her booking agent a 15% commission, and her lawyer and business manager 5% each, then that could result in a record company receiving half of every net touring dollar which winds up in the artist's pocket. Does that seem fair to you?
And here are a few more things wrong with this model. Record companies love to cross-collateralize. This thirty-one-point Scrabble word refers to the practice of taking an artist's positive earnings from one category (e.g. publishing income) and applying it as a record company expense that affects the artist's unrecouped balance in another category (e.g. the record royalty account). In summary, the labels are postponing, for as long as possible, the day when the artist actually receives a positive cash flow from her end of the pipeline. Yet when it comes to the income which they would like to receive from an artist's 360 income streams, the labels would like to keep one hundred percent of the money to which they are entitled, without applying (i.e. cross-collateralizing) any of it to reduce the artist's debt to the record company. Apparently, what's good for the goose...is only good for the goose.
360 deals are also rife with conflicts of interests. For example, will an artist still be free to accept a sponsorship from a company whose business is in direct competition with one of the record label's non music divisions? Are the labels going to defer their commissions (as managers and artists often do) in one phase of their business (like merchandise) in order to ensure that there will be enough money for a tour to stay on the road? And how will record companies deal with fiduciary obligations to their artists (which they were previously able to avoid?) And why are the record companies acquiring significant interests in merchandise when many of them don't own merchandise divisions? And how do record companies think they are going to get around the booking agency laws in California and other states? And then there is the mother of all conflicts that occurs when an artist's management company is owned by the same entity that owns the artist's record company.