Editor's Note: This article was initially published in "Pennsylvania Musician" Vol. XXVI #303 February 2008

The past five years have seen a significant evolution of the recording contract, most significantly with respect to how the contract dictates the sharing of revenue derived, both directly and indirectly, from the music.  Prior to this evolution, recording contracts would typically provide that the label would be entitled to all of the revenue generated from record sales up to the point at which all of its expenses in producing, distributing and promoting the record, as well as any advances to the artist, were recouped.  After the label recouped its expenses, the artist would then be entitled to about 15% of the revenue derived from future sales, although most artists never sell enough records to recoup the label’s expenses.

Unfortunately for the major record labels, the revenue derived from record sales has steadily decreased over the last decade, while the expenses related to record production, distribution and promotion generally have not.  The reasons for the decrease in sales offered by commentators are varied and subject to much debate; however, a few observations are worth noting. 

Assuming that each consumer has X dollars to spend on entertainment, there is currently more competition than ever for those entertainment dollars (movies, music, sports, and videogames, to name but a few).  Accordingly, the music industry faces fierce competition in its quest to secure as much of X as possible.  Further, it appears that when consumers do decide to spend a portion of X on music-related entertainment, the effect of piracy and consumers’ exercising their option to forego the purchase of a complete record in favor of one or two songs (i.e., iTunes) means that fewer of those dollars that are being spent on music-related entertainment are being spent on records, leaving more money available to be spent on touring and merchandise.  To put it simply, labels are seeing less revenue.

In order to understand the driving force behind this evolution of the recording contract, it is important to keep in mind that labels are typically corporate entities, and those in charge have to answer to their shareholders (or an equivalent constituent group).  Shareholders’ principle concern is in receiving a return on their investment in the label.  Shareholders become unhappy, and the label’s executive officers become nervous, when returns are down.

The decrease in record sales has forced major label execs to rethink their business model in order to replace that lost revenue and keep their shareholders happy.  The new model – 360 deals, otherwise known as “multiple-rights contracts” – have quickly become an industry standard for all major labels and some of the bigger independents.  In simple terms, 360 deals grant labels the right to participate in income streams traditionally reserved for the artist, such as touring, merchandise and licensing.  These deals have received increasing attention by the media, especially since news of Madonna’s $120 million deal with Live Nation broke in The Wall Street Journal.  As reported, in exchange for cash and stock, Madonna gave Live Nation distribution rights to three future albums, as well as the rights to promote live concerts, sell merchandise and license her name and image.

For the new or aspiring artist, it is worth mentioning that, traditionally, the artist made the lion’s share of his or her money in touring and merchandise sales.  From the artist’s perspective, the label offered an essential component of success – accessibility.  The label, through production, distribution and promotion, made the artist accessible to consumers throughout the country by putting their records in stores right in their town.  This allowed the artist to create a fan base, and the artist could then support him- or herself through touring and merchandise sales.  Thanks to the Internet, artists do not have to rely so heavily on labels for access to consumers.  But that does not mean that today’s artist is without need.  Aspiring artists still need financial support to tour, hone their craft and solidify a fan base, and major labels may be happy to provide that support – at a price.

While the overall concept of the typical 360 deal is straightforward and generally non-negotiable from the label’s perspective (i.e., if you want a deal, you’re going to give up some ancillary rights), it is critical that the artist understand precisely what is being given up, and what the label is expected to grant in return.  In the typical 360 deal, the artist is giving up a defined portion of income streams that traditionally were not shared with the label – principally, touring, merchandise and brand licensing revenue.  To provide an example of just how much labels are asking for, it has been reported that Atlantic Records typically requests a 30% interest in all income streams.

Additionally, the artist may also be asked to give up some control over touring, merchandise and licensing matters.  Thus, it is important for the artist to understand the distinction between a label having a passive participation in these income streams, and actually having an active role in making decisions regarding those income streams.  If the label wants an active role, the artist should be comfortable that it has the resources and expertise to effectively fulfill that role.

In exchange for all of these concessions, the label promises to deliver greater record royalties (Atlantic reportedly offers the artist a 30% interest in record sales (up from 15%), post-recoupment of expenses), greater tour support and greater financial security during the development of one’s career.  Unfortunately, the language used in the contract is often not much more specific than that in the preceding sentence, and vague language becomes very difficult to enforce should a dispute arise.  This is especially true when one considers that the label is almost always in a better position to withstand a protracted lawsuit than the artist.  In order to avoid such pitfalls, the contract should provide precisely, in no uncertain terms, what the label is expected to deliver to the artist.

With the foregoing in mind, it is important to note that the recording contract is not the only time the artist should be considering issues of revenue allocation.  In fact, it shouldn’t even be the first time.  By the time the artist is negotiating with the label, he or she should already be intimately familiar with each of the potential sources of revenue, since revenue issues should have been fully considered in drafting the band agreement.

While a complete discussion of the intricacies of band agreements is beyond the scope of this article, one important distinction should be kept in mind: (i) the band signs the recording contract, which sets forth the allocation of revenue between band and label; (ii) the band members sign a written band agreement (hopefully), and the band agreement sets forth the allocation of revenue between band members.  A carefully drafted band agreement can prove invaluable in resolving the inevitable dispute over revenue allocation between former and current members, just as a carefully drafted 360 deal can prove invaluable in resolving a dispute with a label.

This article touches briefly on some of the myriad of issues to be considered when contemplating a record deal.  For more information on 360 deals, band agreements and other music law topics that are essential for your band’s business, visit www.myspace.com/rocklawyers.