THE ALL AROUND 360 DEAL
IVAN HOFFMAN, B.A., J.D.
The Internet and downloadable media especially music has changed the entertainment industry forever. One of the areas in which this change most manifests itself is the advent of the all around deal, sometimes known as the “360 deal.”
In years, in decades past, when a recording artist made a recording deal, the artist gave the rights to the recordings to the record company and the record company’s job was to manufacture, distribute and hopefully sell those recordings. The artist was given a royalty, generally an advance against that royalty, and the costs of producing the records were generally paid for by the company but recoupable from the royalties that might come due to the artist. The costs of manufacturing and distribution and sale were paid for by the company and were primarily non-recoupable against the artist’s royalty. In some instances, companies might provide “tour support” when the artist toured and, depending upon the negotiations, some or all of that “tour support” might be recoupable. But otherwise, the record company generally did not participate in other income streams that might flow to the artist.
As sales of records in the form of hard goods have declined and the income from downloads and other digital uses has not yet risen sufficiently to replace that loss, labels and artists have sought ways to transition the deal to accommodate the transition in the business.
Enter the 360 deal. In short form, the deal 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 of the deal.
Let me then break down, in simple form, the issues that should be addressed in such a deal.
1. The Nature of The Rights. For recording artists, the rights include but are not limited to:
A sub-issue when it comes to any discussion of rights is which party owns the underlying rights to the particular form of income. For example, in years, decades past, the record company owned the rights to the recordings and the artist only had a contract right to receive the negotiated income. Some artists were able to negotiate deals whereby they owned the rights to the recordings. If an artist is not affiliated with a record company, the rights issues are up for negotiation. But here too, there is a sub-, sub-issue when it comes to rights to recordings recorded by groups. I will not belabor this issue here except to say that all groups are deemed to be partnerships unless there is specific agreement to the contrary. Read “Recording Artists Rights to Group Names” and “Rights to Recording Groups Names-Further Issues.”a. Recording rights;
b. Music publishing rights; (music publishing and recording rights are very different rights, though related. Read “The Use of Music on a Multimedia Web Site.”
c. Merchandising and commercial endorsement income which involve the use of the name and likeness of the artist and possibly use of recordings and music as well;
d. Rights to Internet-based businesses including fan clubs, online e-commerce and other Internet activities; and
e. Concert performance income.
A further issue that has to be resolved in the agreement is when the acquiring party (in this instance, I will leave that party as a record company but, as indicated, it can be another company in the entertainment field) acquires those rights or acquires those interests in those rights. Is this all on signing or do the various forms of rights only arise when certain performance thresholds have been met? In other words, if the record company sells $x.00 in records, do they then participate in concert money or merchandising money etc?
2. Division of Income and definition of income. Since money is the key to the deal, how “income” or “revenue” is defined is very important. Often when there are only “royalties” being paid, if those royalties are defined as a percentage of the suggested retail list price of a record, the definition of “income” may not be as important as in a deal where the parties split “income.” Clearly there are significant direct expenses that come off of any gross such as recording expenses, distribution expenses, concert expenses as but a few examples as well as indirect expenses such as overhead items that have to be factored in to the definition. One clause that is not always considered by the parties though it seems to me is essential is the clause that deals with income derived by or expenses incurred by companies owned, controlled or related to one or both of the parties to the agreement. Read “Owned and Controlled Licenses.”
Once the definition is arrived at, the splits between the parties is up for discussion as well. There is nothing inherent in this type of deal that requires everything to be split 50/50 or any other fixed split. Each category of rights exploitation can have its own division of income.
A key issue when it comes to any agreement involving advances and costs is the issue of cross-collateralization. Read “Cross-Collateralization in Publishing Contracts.” Although written for authors and publishing companies, the issues are the same for recording artists and record companies. In short, this issue presents itself in this fashion: Record company gives artist an advance against artist’s share (see above) of income and the issue is from what revenue stream or streams may the record company recoup that advance. Here as well, there is nothing inherent in the deal that requires one solution such as “from all sources.” The parties may agree that certain percentages of the advance can be recouped from certain sources but that there is otherwise no cross-collateralization.
3. Term. This deal arises because of the nature of the media sea-change now occurring. But it is the very nature of this sea-change such that it can again change and in dramatic ways. Thus the traditional “term” of recording contracts has to be examined. Often these contracts were based on options given to the record company to extend the term. The artist would negotiate for higher royalties, larger advances, greater “commitments” from the label as the deal progressed. Sometimes, more established artists got firm, multi-year, multi-album commitments. But all this is changing as a result of the media disruption so the issue will become: what is the term? In other words, what is the commitment of the label to the artist and visa versa?
It is a bit early to know if this new kind of deal will be the exemplar that everyone will follow. The possibilities for change are just too pregnant to believe that anything, any ideas or anything else, that exists today will exist 5 years down the road.
But the formula for determining an advance, abbreviated “W.Y.C.G.” (whatever you can get), seems relevant here. Both sides to the transaction need to get as much as they can as quickly as they can and see where it all goes.
Copyright © 2008 Ivan Hoffman. All Rights Reserved.