Due to the onslaught of the digital age and internet piracy, the traditional economic structures of the music industry have changed dramatically. As a result, CD sales have been plummeting for several years and major record companies such as Universal, Sony/BMG, Warner Music and EMI have been forced to create new business models in order to increase financial profits.
Prior to internet piracy cutting into their profits, major record companies generally made most of their money by selling CDs. The formula was typically the following: the record company paid a cash advance to sign an artist and then the company would make sure that their expenses were first recouped before they paid the artist a relatively small percentage (approximately a 15% royalty) of the record sales. The record companies kept the larger share and made out very handsomely. Since the record sales accounted for most of the profits, the record companies structured deals allowing the artist to keep monies in the once less profitable ancillary income streams of touring, merchandising, endorsements, etc.
Over the last seven years the music industry’s paradigm has shifted tremendously. The major record companies are now realizing that the huge amounts of money invested in the marketing and promotion of CDs no longer results in hefty CD sales. They finally figured out that instead of increasing CD sales; and consequently more profits for the record companies, their investment actually is generating more money for the artist in the ancillary income streams. Music artists, rather than record companies, are making more money than ever from the ancillary markets. Accordingly, the record companies are structuring new deals to cash in on the profits in the emerging ancillary markets.
New Approach: The 360 deals
To address these new lucrative markets, the record companies have created a new business model called “The 360 Deal” (also known as “multiple rights” and “unified rights” deal). According to record companies, in general, they will provide the artist with greater artist development in exchange for the company sharing in both the traditional CD sales and in the new appreciating ancillary markets of touring, merchandise and endorsements, etc.
The record companies claim that “The 360 Deal” is a win-win situation for both parties since the record companies will provide: the financial strength for marketing and promotion; the relationships with third party entities for endorsements, merchandising, television and radio exposure, etc., and effective means for mass distribution.
Under this new business model, the record company still pays a cash advance to sign the artist. The artist still receives a royalty after expenses are recouped. However, under the new deal, some time after the first advance, the record company has the option to pay an additional cash advance in exchange for a percentage (around 30 percent or more) of the artist’s net income from all touring, merchandising and endorsements, etc.
Although it is too early to determine all the possible ramifications of this new business model, it is clear that under the 360 deal, the record company has a new vested interest in all of the artist’s ancillary markets. Consequently, the company has a tremendous incentive to generate larger profits for the artist in all the income streams. However, the artist must be aware that this also means the company will attempt to control not only the recording process, but also every aspect of the artist’s career: the artwork on the t-shirts, the brands of clothes the artist wears, the touring schedule, the type of products endorsed, etc. Such a trade-off of potentially larger profits for less creative control may not be right for some artists. The terms of the contract must be carefully considered before signing a 360 deal.