To remain viable, even the music business must create profits by balancing revenues and expenses. But with sales of physical product evaporating faster than anyone thought possible and digital downloads fading, the bottom lines for companies big and small are all under duress. The 360 deals of the past few years helped labels stem the red ink, but aren’t delivering enough relief.
In fact all sectors of the music industry are trying to find additional revenues. For publishers it’s developing singer/songwriters and then wanting to share in more than just publishing royalties after they get signed to a label. For the Nashville record business, that rebalancing is starting to appear as a new breed of 50/50 artist/label deals that are still evolving. These deals basically embrace the logic that successful artist careers benefit greatly from many revenue streams and those careers are owed to the efforts and massive expenses incurred by the label. Therefore the label wants to share in everything across the entire career.
“The only thing worse than no deal at all is a bad deal economically,” says attorney Mike Milom of Milom Horsnell Crow Rose Kelley. “Artist brand, or ancillary revenue participation, have become the most important terms in negotiating a record agreement. We spend a lot of time negotiating that side of the deal. Some of the completed 360 deals are now maturing and the successful artists are paying the record company as much or more than the record company is paying them in record royalties.”
According to Milom, he’s done several 50/50 type deals mostly involving indie labels. “The most common one I’ve seen,” he says, “is based upon net receipts. The label says we are going to put up the money for your album and do X,Y and Z and then share 50% of net receipts with the artist instead of a royalty after all expenses are recouped. That’s not an unreasonable deal. With new artists sometimes the deal starts out with the artist getting about a third of net receipts and then increases over three albums to 50%. Net receipts deals usually include the label’s right to participate in the artist’s non-record revenue streams, but the percentage of the label’s participation in those streams is not the same as its record revenue participation. Of course, in any net receipts deal, negotiating the formula for calculating “net receipts” is very important. From the artist perspective this deal acknowledges that records are a vehicle for developing live performance and other revenue streams.”
When did the music industry economics change? Let’s look at some brief history. In the ’80s and ’90s record labels had total control of music distribution and pricing. CDs were $16.95 and if one or two out of every ten artist launches were successful, the economics worked beautifully. Speak to someone active in the industry during those times and they’ll tell you, “labels were rolling in money.” As the century ended however, Napster and the MP3 file began unravelling the industry’s grip on distribution, pricing—and profits.
Fast forward a dozen years and we find unit sales are off almost 60%, prices are down and margins have shrunk on the business that remains. Unfortunately, expenses for country radio promotion and marketing have increased, further pressuring label P&L reports. In view of the diminishing returns, it should be no surprise that in Nashville last week we saw Bigger Picture Records close it’s doors, leaving artists on the charts; Zac Brown’s Southern Ground company begin a reorganization and downsizing of its label activities; and Warner Music report it lost $60 million in fiscal Q2. So what is a label to do?
“What majors really want, although they’ve waited too late, is to be the management company—a Ken Levitan or Clarence Spaulding,” says attorney Jim Zumwalt of Shackelford, Zumwalt & Hayes. “The money is in headlining tours and the only other money in the business is hit singles and the performance income that comes through publishing. Those are the only two serious income streams left in the music business and everybody is gravitating in that direction. It’s a sad reality.”
“Labels are hoping that with legislative help the amount of revenue generated through streams increases and they can generate enough from ancillary rights to make up the difference,” continues Zumwalt. “But they know they will have to sign fewer artists and pay less for records and marketing costs. They’ll have to operate with a much lower overhead. It will be smaller rosters and likely resemble the film business where the major labels are mostly just distributors. Majors will act like the major film studios, only dealing in superstars and only taking risk in the rare cases they sense they can blow up a hit and an artist really fast based upon disposable pop culture and something becoming faddish quickly.”
Looking ahead, this fiscal environment might drive artists into two camps. “Every one of our major artist clients when they approach renegotiation or a discussion with the label is looking at the possible benefits of having their own label and doing a separate distribution deal whether it’s hiring someone like Kobalt Label Services [as Martina McBride did on her recent album] or something else of that nature,” notes Milom. “But most decide to remain with the major label simply because radio is still king and most of the top promotion people are at majors. For many years we’ve painted labels as the greedy bad guys. It may still be true in some instances, but now the labels have as many problems as the artists in terms of their economic models. Negotiations these days are much more about how we can each get what we need out of the agreement and hedge our bets economically rather than a competitive ‘I need to beat you up’ spirit. As long as radio remains the primary source of promoting records it will be hard to change the country model.”
“But some superstars like the Eagles, for example, aren’t interested in signing with a label,” says Zumwalt. “Why would they be? They are mainly in the business of touring. They can make a record, but they don’t need a major label to market it and probably aren’t even trying to get on the radio in a significant way. They are mainly using the record as an income tool to sell at live performance and online. A lot of those heritage superstars would not elect to be in the major label model.”
It may help to view label/artist deals as the real-time attempt to rebalance business model changes caused by forces such as technology and consumer preferences. However, even as this article is being written events are at work reshaping the fundamentals of this industry. For example, Apple’s just announced $3.2 billion deal to acquire Beats Electronics and its streaming service. Then consider these three items: According to Gartner Research, in five years 70-80% of all new vehicles will include high speed wireless service options; IHS Interactive posits that by 2016 revenue from connected car apps and services will overtake broadcast revenue; and thirdly, streaming music is the most desired technological feature in new cars today. What it all means for artists, labels and the deals they craft together is likely impossible to predict, but don’t expect the rate of change to slow down anytime soon.