A Guide to 360-degree deals – A label perspective

360-degree deals have represented a paradigm shift for the recorded music business. Here, lawyer Dean Marsh, explains how such deals are now within reach of all labels willing to embrace the new 360-degree world and its values.

In 2002 EMI and Robbie Williams broke the mould with their groundbreaking 360-degree deal. Many years later this deal structure is common but still not yet ubiquitous. Why? It may be as a result of the recording industry’s fear of evolution; it may be because 360 deals are an anathema to artists. It is actually therefore still early days for the 360-degree deal. How should “traditional” labels navigate their way through the 360-degree maze to the right conclusion and so deliver the business benefits of such deals to them and to their artists? Here are some thoughts:

What is a 360-degree deal?

Essentially it involves artists sharing every type of income stream they generate, whether it is from the sale of recordings, songs, live performances, merchandising, sponsorship or endorsements - the lot! This is a departure from what has happened historically, where artists would normally enter into separate agreements with record companies, publishers, live agents and promoters and get paid by each one. The fundamental challenge for labels is the transition from traditional record label to entertainment company. Being an entertainment company requires innovation and new skill sets. It requires a different mentality and contacts; it requires 360-degree thinking.

What are the benefits and advantages of 360-degree deals to labels?

360-degree deals are now recognised as an important business model for the music industry. With declining physical record sales and widespread digital piracy, they provide a potential opportunity for labels to work in conjunction with artists to help maximise income from publishing, merchandising and sponsorship and so provide new revenue streams to keep the business of being an independent record label viable during this difficult transitional period.

How do 360-degree deals work?

360-degree deals can be structured in many different ways. At one end of the spectrum it may be presented as a traditional recording agreement including just an additional paragraph entitling the label to a share of the artist’s non-recorded income. At the other end it could be a joint venture between label and artist. At present there is quite some fluctuation and variation in both structure and commercial terms on offer. Since the creation of the Creative Law & business in 2007, we’ve pioneered the process of delivering straightforward, easy-to-follow models for a broad range of 360-degree deals for many different types of independent labels, both traditional and DIY. Our experience shows that the key issues for labels seeking 360-degree deals include:

Getting the artists onside

It can be a tricky sell to artists. Artists may well not immediately embrace a 360-degree deal, preferring the idea of separate deals with separate parties and separate income streams. They may initially be reluctant to give up rights, particularly if they feel that the label is perceived to be getting them for nothing, or worse a 360-degree deal is only being insisted upon in order to make selling unprofitable recorded music viable. Furthermore, they (justifiably) may not believe their label has the skill sets that justify a broader share of their income as it will not be “adding value”. Our experience is that artists may well go with a 360-degree deal if it’s reasonable, typical and properly presented. That said artists and their advisors are understandably cautious. Some artists may take the view that they do not need a label at all (particularly one looking for 360-degree rights). They may prefer to set up their own independent music business and take the DIY route (maybe with the help of private investment). That model may itself be on a 360-degree basis; but that type of deal structure may be more appealing to artists seeking autonomy. In reality in my experience, most aren’t committed to the DIY ethic and would prefer to concentrate on the music if at all possible.

Therefore, if viable, the best strategy is often to get the support of the artist by presenting them with a choice and then let them elect the path they want to follow, rather than it being a fait accompli. Present them with two alternative deals: one with an advance (or higher advance) and slightly better commercial terms on a 360-degree basis, contrasted with a deal on a 270-degree basis (i.e. recording and publishing only) and then let them choose. The likely first step for a label looking to do 360-degree deals will be to consider setting up an ancillary publishing company and generating income from the artist's available publishing. There are clear commercial benefits for writers, as AP2 labels that release product controlled by a related publisher qualify for a related party exclusion in which they can pay mechanicals directly to the publishing company instead of to the MCPS thereby saving administration costs.

Ensure that the label contributes too

To help artists commit to 360-degree deals it is always best to communicate the benefits that you can, or genuinely intend to bring in relation to the non-recorded activities. For example achievements with other artists in this area such as relationships with sponsors, successful club nights etc. The intention is probably not to replace the artist’s agent or merchandising company, rather to work with them as part of the team but, and in any event, still make a broader contribution. It helps to demonstrate “the price” that the label is paying in order to share, or acquire these ancillary rights and income. For example the label may be effectively managing some of its unmanaged artists (and that relationship can be formalised and commissioned), the provision of tour support (i.e. a live performance agreement), or an agreement not to recoup some otherwise recoupable costs. The notion may be more palatable to artists if the label gets a lower percentage that increases exponentially. For example, 5% for theatre shows, 10% for arena shows and 15% for procured shows. This logic is that the artist only gives up a significant percentage once they begin to make decent money. Also artists don’t seem to mind paying a (higher) percentage to the label for non recorded income (e.g. gigs) the label has directly procured. It acts as an incentive which artists naturally find appealing. A higher percentage (between 20% and 50%) will normally be justified until any tour support paid is recouped.

What is the best type of 360-degree deal for your label?

Realistically the potential share of non-recorded income available to labels ranges from between 1% and 50%! Even majors’ practices differ. The general industry rule-of-thumb is for between 5% and 35% of net. It is normally an entitlement to a share of ancillary “live” income (including merchandising and sponsorship), rather than an actual acquisition of those rights (although in the US that practise tends to differ). Normally the artist will cross account back although direct accounting is better. Of course some labels will look to get a share of gross, rather than net revenue fearing that net profits could, for whatever reason, be zero. That may well be too much for some artists to stomach. That said an entitlement to payment on the gross, rather than the net could be reasonable if the artist is a DJ rather than a band with no effective live costs if travel and accommodation is being paid for by the promoter. Of course there is, in all likelihood, little possibility of the label receiving a share of live income whilst the artist is making a loss. Invariably the artist will look for the share to be at least net of agent’s fees and management commission The label could counter on the basis that live agents themselves customarily get paid on the gross so why shouldn’t the label? Ironically some types of 360-degree deals may in reality be more beneficial to artists than conventional deals with a new philosophy based on partnership lines. There is an emerging trend, in both the independent and major label sphere, of artists and labels (or other backers) operating jointly-owned, fixed-term and album-based 50/50 JVs where all the income, recorded, publishing and live, goes in the same pot and is split down the middle. It’s egalitarian and arguably fair (particularly if the label/backer pays a non recoupable investment -as opposed to an advance- and the deal is relatively short), but it’s also radical and not to the liking of many traditionalists

Do it right

However 360-degree deals are structured, it is essential they are enforceable and clearly drafted. It is worrying how brief, vague and badly thought through many of the crucial “ancillary income" provisions are in some 360 deals. It’s often just a bolt on to a standard old school record deal. Further, some provisions, like, for example a grant of exclusive right for a label to manufacture and exploit an artist’s merchandise, may risk making the whole contract void as an unreasonable restraint of trade if the label is not contractually obliged to produce merchandising and doesn’t. This whole area could be a ticking time bomb and lead to litigation down the line and needs to be addressed by practitioners.

Conclusion

As you can see, it’s a minefield. Therefore it is vitally important for labels to get their negotiating strategy, deal structure and documentation right. Obviously obtaining specialist professional advice is strongly recommended. Frustratingly the independent record industry still seems to be grappling with the whole notion of 360-degree deals with, understandably, an apparent lack of support or empathy from the artist fraternity. This is exacerbated by a lack of a consensus on what is, or isn’t, good accepted practice in putting deals together including royalty rates etc. This is disappointing at such a defining time for the industry. Only time will tell whether record labels are actually able to evolve themselves into entertainment companies and whether artists will broadly support them in this process. Let’s hope so. Dean Marsh Managing Director Creative Law & Business Limited www.creativelaw.eu