Legal Affairs

What the “New Model” of Record Deals Means to You. Part Two.

In the March 2008 issue of EQ, we talked about the new 360 Deals (also known as “All In” contracts). To briefly recap: These deals allow record labels to take a cut not just from record sales, but also from every other aspect of an artist’s career, including revenue from touring, licensing, publishing, and merchandising. The labels claim they are offering higher splits than what is found in traditional deals, and thus such deals are ultimately good for artists.

Is this true, or are these so-called 360 Deals just new methods of artist exploitation?

Moreover, with mega music execs such as Jimmy Iodine of Interscope demanding every new contract signed be in line with the 360 model, the question remains: Will these deals be the magic elixirs needed by majors to stay relevant, or will they be their final undoing?

In the March EQ, we explored alternative scenarios, such as the now-famous “Radiohead experiment,” which tested one-to-one sales directly to the fan base as a viable substitute for what labels offer. The good news was that this experiment resulted in approximately 100,000 downloads, with the average customer paying $9. The bad news was that many fans didn’t pay a dime for the album. Still, Radiohead’s strategy—as well as the Eagles/Wal-Mart and Madonna/Live Nation deals—shows us that superstars do have other options.

But what about new artists? What about acts without millions of devoted fans impatiently awaiting their next release?

I’ve run some numbers, and, personally, I think what we have in these 360 Deals is a typical “rich-get-richer” scenario. For artists who have crossed the platinum threshold, this kind of deal is a sweetheart. Instead of making the standard $1.50 per record, they will now average around $3.50 per unit sold. Even though it means giving up a piece of publishing revenues, this will probably net out to a good deal for those few who can count on going platinum.

However, if you aren’t a part of that upper one-percent, a 360 Deal probably won’t benefit you. Sure, you’ll stand to make that same $3.50 per record, but you’re not likely to sell enough to recoup on your advances—which means you’ll get zero from record sales. Meanwhile the label will get big pieces of your publishing and merchandising streams—revenue streams that, at one point, were considered untouchable.

Artists who don’t meet the tipping point, and, instead, end up in recoupment hell will be left wondering, “How the hell do I get out of this trap?” To find an answer to this question, I bounced some relevant legal theories off a few lawyer friends by work-shopping the topic at the Los Angeles Bar Association. What I found out was incredibly interesting. The general consensus was that artists may find themselves in the situation where they can exploit some alarming weaknesses in these 360 Deals, and leave the labels wondering how they painted themselves into a corner.

For example, if a legal-savvy artist sued the label because said label didn’t exploit all the new “rights” they are assuming under a 360 Deal, he or she might just open the labels up to several very undesirable judicial rulings. The main hypothetical ruling is that, now that the label has total participation, they may also have a fiduciary responsibility to the artist. In laymen’s terms, this means the label is legally responsible for helping the artist make decisions that are in the artist’s best interest—which might mean not signing the deal. Ironic? Sure. Bizarre? Definitely. But very possible, and this is why being a fiduciary is something labels have been trying to avoid for decades—to the point of spending gobs of lobbying dollars.

Another area to explore is “conflict of interest.” All of the revenue streams the label now participates in seem to qualify them as a “manager.” However, by law, you cannot be both a manager and a label to the same party. In many such cases, judges have severed—and sometimes completely dissolved—contracts because of such conflicts of interest.

Case three: If the label uses 360 Deals as an opportunity to start booking acts (and they will), and the label is based in California (as most of them are), they will bump up against California’s famous Talent Agencies Act that prohibits anyone other than a registered agent from booking gigs. And if the label doesn’t secure their legal status to book gigs to sidestep this law, the artist could then claim that the label has abandoned some of their rights, and, therefore, the judge may give them back to the artist.

The labels’ first defense will be pretty obvious. They will claim they are not really mangers, or agents, or fiduciaries. They are simply enjoying revenue from these sources without actually contributing to their value. This will lead to the artist claiming “unjust enrichment”—an almost indefensible position under these circumstances.

Now, it’s possible the labels have thought all this out, and are ready to tackle such claims. After all, it’s not as if big business entities are short on legal counsel. But, historically, labels have been short on long-term thinking. Given that, I doubt they are ready for any massive artist backlash. In addition, if they are as unprepared as I’m guessing, there will be some very intriguing sparks in the years to come. Instead of threatening to audit their label, if an artist became unsatisfied, they will simply threaten one of the actions above.

No label wants to go to court over a contract dispute. History has shown that judges look shamefully down at them, and these issues have even greater legal teeth than the old ones of simple “breach of contract.” I predict labels will do nearly anything—up to and including giving back some of these new “rights”—rather than debate the integrity of their new 360 Model in front of the courts.

I mean, imagine investing millions in an act only to have a judge say the deal is off. Then, imagine every artist using this ruling to get out of their record deals—years after they have taken large advances. As the old Chinese proverb goes, “May you live in interesting times.” 

Click here Read Part One of this article.