While we here at Artists House firmly believe that the best type of record deal is the one you make not because you have to, but because you want to—that is, you should only enter into a deal with a label when you’re creating a partnership based on your success of building a solid foundation on your own—it is still important to understand the general trends of the music business. Specifically, in order to determine at the point you are getting more than you give up when you sign to a label, you need to understand how labels are currently operating. In this article I will present you with a brief overview of the historic method of operation labels have employed, and then discuss the more current practices, with a particular focus on the much-discussed 360 model.

Historically, labels would trade their services for ownership. That is, a label would provide an artist with an advance for his record and the promise of marketing and distribution for the record in exchange for ownership of the version of the songs the artist recorded for the label, and the exclusive right to have the artist make future records for the company (i.e. exclusive option rights). One important point to note is that the labels didn’t (and largely still don’t) take ownership of the actual copyright of the songs an artist writes, but rather they take ownership only of the specific version of the song the artist records for the label. As an example, if an artist signs to a label and records a cover of Spoon’s “The Underdog,” the label doesn’t own the copyright to the song—Britt Daniel, the author of the song does. The label only owns this particular version (i.e. this recording) of the song. The label, in fact, has to pay Mr. Daniel a royalty (a mechanical royalty, to be specific) for the right to use this song on their album. This is not just true of covers. If you are a songwriter, and you sign to a label and record a song called “My Great Song,” and this song is released by the label on your album/download, you still own the copyright to the song, and the label has historically owned the version. The label must pay you a mechanical royalty for the right to use your copyrighted version of “My Great Song” on their album/download. That aside, moving back to the deal, the label, after providing an advance to pay for the recording of the songs, then goes out and tries to make people aware of the existence of the album/download. They do this by trying to get press to write about the music and the artist; getting radio to play the music; getting bloggers to blog about it; buying ads in magazines/websites; and—often—by providing funds in the form of tour support so the artist can play in as many markets as possible to help people become aware of the album. The labels then work with distributors to make sure the music is available in both traditional and digital retail outlets.

Labels, pretty much, try in whatever way they can think of, to get people to know about and buy the album/download. In return for this effort, the labels keep the lion’s share of the revenue generated. A typical label deal will pay the artist signed to a label a percentage of the revenue somewhere along the lines of 12 to 15 percent of the retail price (this payment is referred to as a record/artist royalty, royalty points, or just “points”). So, in theory, if a label sells your album via iTunes for $10, and you have a 15-point deal, you will get $1.50 per album downloaded (there are myriad deductions that labels take to ensure you get nowhere near this amount, but this is beyond the scope of this article). These royalties are in addition to the mechanical royalties you will also get if you are the writer of the song (the mechanical royalty is currently $.091 for songs under five minutes in length as mandated by statute). Of course labels will only pay you this 15 percent of the list price if you’ve recouped (that is, paid back) certain money that the label advanced you; typically what is recoupable is any money the label advanced you. This would include money to record the album, any money the label advanced you to tour (i.e. tour support), a percentage of the money spent to create a video, and either all or a portion of the money (it’s negotiable depending on your stature as an artist) spent to hire people promote the record to radio (and sometimes press). Until this money is recouped, you receive no record royalties. You do, however—from record one sold—receive your mechanical royalties if you're the writer of the song—the two are not cross-collateralized. The reality has been that very, very few artists ever recoup the money the label spent on their behalf, and thus never receive any artist royalties. While this is certainly a bad reality, bear in mind that the labels often don’t make their money back either, and they must pay the mechanical royalties whether they make their money back or not. In other words, labels aren’t doing much better than artists under this system.

Until recently, as bad as this system has been, it’s been the system. You don’t like it as an artist? Too bad. And even as the labels imposed this non-working system on artists, they resisted changing it themselves. Fear will do that to you. At a certain point, however, labels realized that they were not simply promoting the songs on the albums they owned. Far from it. Instead, they started to think that they were actually the engine that promoted the artist. That is, because of the label’s efforts, the artist was able to generate revenue from touring, from having their music used in movies/commercials, and from selling T-shirts and other merchandise. The labels saw nothing from these revenue streams that the artists enjoyed, and the labels felt (rightly or wrongly) responsible for playing a large role in creating (of course, the labels did and do get a piece of the so-called master license fee when a song they released gets used in movie, ad or TV show).

Beginning several years ago with the British artist Robbie Williams the labels said, “no mas!” They would continue to happily go ahead and attempt to build the artist’s profile, but now they wanted a piece of all the revenue streams outlined above: i.e. revenue from: touring, merchandise, and publishing. The first couple early adopters of these all-inclusive deals were the previously mentioned Mr. Williams and the band Korn. Both of these artists were willing to give these deals a shot because they received massive advances from the labels to give up a piece of all of their revenue streams. These artists were basically made offers they couldn’t refuse. The problem is that in taking these deals, they set a precedent for the labels. The labels, from this point on, could say, “Hey, we do these all-inclusive deals all the time. If you want to work with us, this is the deal.” The difference being, of course, that the advances paid to the artists currently being pushed into these deals are now pretty much what they had been for non-all-inclusive deals. As these deals began to become more and more common, a snappier name than “all-inclusive” was needed, and the “360” deal was spawned.

            We’ve recently seen Madonna enter into one of these 360 deals with Live Nation (who is not a label in the traditional sense, but rather a concert promoter). We’ll see more and more of them.

The strange thing is that these deals have been around forever, it’s just that they’ve been called something different: management deals. Managers have always taken a percentage of all of the revenue streams an artist generates. There are some important distinctions, however. A manager typically never owns anything; not the songs or the sound recordings. Additionally, the manager has a deal with an artist that is set to a fixed length of time (the “term”). It is only during this term that a manager is entitled to a percentage of the artist’s earnings (there is, of course, a contractual clause, frequently referred to as a “Sunset Clause,” that allows the manager to participate in the artist’s earnings, in a gradually-decreasing manner, for some set time after the term is up). Once the term ends, the manager and artist are no longer tethered to one another, and each are free to walk away with all of their respective assets intact.

            In contrast to these finite management deals, the 360 deals that the labels are offering operate more like perpetual liens. That is, the artist is creating a fractional ownership percentage in all of their revenue streams for the labels. This revenue stream that the labels enjoy is tied to the advance that the artist received. So if an artist is unrecouped, the label will continue to collect from all of the artist’s revenue streams until recoupment occurs (if ever). Even after the artist has recouped, unless the term is clearly stipulated, the artist will forever be dividing their income—from all revenue streams—with the label. As noted above, very few artists ever recoup, so—like I said—the labels have a lien on all future income that the artist generates —wherever it might come from. Of course, the artist is also paying a percentage of all of their earning to their manager as well.

            To be honest, this turn of events scares the bejeezus out of me. It’s not that I don’t understand the label’s rationale; they are in fact providing a service that (sometimes) does raise the artist’s profile, and allows for the artist to generate multiple streams of revenue. However, let’s not forget that the labels have always had the biggest piece of the revenue streams: the earnings from the sound recording. It’s no coincidence that it wasn’t until sales of recorded music took their precipitous plummet that labels began looking to change their deal structure. Again, while a bit too-little-too-late, I still get the rationale for the process. Instead, what worries me is that historically there was a direct connection between an area of expertise and a revenue stream (e.g. a label knew how to market and distribute a sound recording, so they should be compensated for that expertise). Now…not so much. Record labels are not in the touring, merchandising, or (typically) publishing business. They’re in the promotion in distribution business. By creating these 360 deals the labels are, in essence, demanding payment for something they have no expertise in. It’d be like me not only insisting that a student of mine pay me via her tuition dollars, but also give me a percentage of her salary once they go out and get a job. My rationale: “Hey, they never would have gotten that job had they not taken my class. I raised their mental profile!” Now, if in addition to being a professor, I decided to start a head-hunting/job placement firm, and I took my best and brightest students and actively worked to help them get a job, well, then I could see taking a piece of their salary—for a limited time, like a month—like placement people do!

            In essence, returning to my original premise, it used to be that artists traded something they had for something they needed: the rights to the specific sound recordings for money to record them and expertise/money to promote and distribute them. Under these 360 deals they’re trading all of their revenue streams, and for what in return? What are the labels doing differently now for their massively increased stake than they were only a few years ago?

            To sum up, as an artist you have a bundle of rights and revenue streams. Holding on to these too dearly can make it difficult to get any traction. For instance, it can greatly benefit you to give up a percentage of your live performance revenue in exchange for having a qualified booking agent helping you get more and better-paying gigs. Additionally it can be the right thing to give up a piece of your publishing (preferably for a limited time, rather than in perpetuity) to a publisher who will go out and get your songs used in movies and TV, and thus not only raise your profile (there’s that pesky profile-raising analogy again—how long before publishers want 360 deals?), but also generate you more revenue than you would have made by trying to do this yourself. What’s not alright, and what you must not do, is give up any of your rights or revenue stream to people or organizations who have no ability to maximize these rights/revenue streams at a much higher level than you can on your own.