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THE BIG BET, PART 2
Streaming Is Fueling a Metamorphosis of the Music Business

CONTRACTUAL STICKING POINTS

“It’s still next to impossible to break on a mainstream level without a major label,” says attorney and onetime label head Peter Paterno of King, Holmes, Paterno & Soriano [right]. And when a hit single has the power to drive ancillary benefits in a way that has not been seen before, there’s one simple business conclusion. “All the labels are doubling down on 360 rights by hiring dedicated staffs to pursue their participation,” Paterno notes.

“Three of the five largest music markets in the world are still predominantly physical, and all five of those markets have very different consumption patterns,” says one major-label group executive. “It requires a customized marketing/promo mix in each territory that can truly break an artist worldwide. Only a major can provide global marketing support.”

As veteran music attorney Eric Greenspan of Myman Greenspan [below left] explains, “Ten years ago—when we were in recession and the business was struggling more—the deals were tougher and more conservative. So labels came up with 360 deals to make up the difference. Now, it’s moved back a bit towards artists—but only if they have the buzz. You can find a band with great music but without huge streaming numbers and another band whose music might not be as great but has huge streaming numbers. Labels will tend to favor the band with the bigger following, while bands that don’t have that big buzz are still getting conservative deals with 360 rights as part of those deals.”

For perspective’s sake, Greenspan suggests assuming there are 1,000 acts looking for record deals. Say 50 of them have all the correct analytics; those people, he says, are getting the great deals. Those 50 who’ve generated the buzz and have built confidence as a result don’t need the majors’ money—Chance the Rapper being the quintessential example. For these DIY achievers, new alternatives exist to signing with a major.

“In the past,” says Greenspan, “an artist needed access to the pipes, which isn’t necessarily the case now unless you’re a pop band; then a major label is still the best option. If you’re looking for talent and you’re lucky enough to come across one of those 50, rather than the other 950, then you evaluate it differently. The problem is that the majors, over the past 10 years, have decided they want a piece of touring and a piece of this and that. The label’s point: ‘Hey, if it wasn’t for us, you wouldn’t be able to tour, make endorsement deals or publishing deals. So we should have a taste of all that ancillary income.’ That’s what 360 deals are, and they stem from the labels’ belief that they are the ones that drive a career forward. But that straight line no longer exists. There are many ways that artists, who can record so much on their own now, can move their careers forward—so they believe they don’t need the pipes as much. And frankly, if the labels keep losing enough of those top acts in that space, they’re gonna have to change their business model.”

PLAYING CATCH-UP

In terms of genres, country (#5 in total consumption YTD behind hip-hop, pop, R&B and Latin, according to BuzzAngle) and rock/alt/indie (#6-8) have been relatively slow to embrace streaming, but some majors in these areas have started to borrow from the lessons that U.S. pop/R&B/hip-hop execs have learned. The Nashville labels in particular are starting to see real progress as country fans grow more accustomed to this new way of listening.

But because fewer dollars come in from streaming in the country business as downloading and physical sales are declining, the 360 deal is still commonplace in Music City. Sony Nashville Chairman and CEO Randy Goodman [right] says his company looks to participate in touring and merchandise, provided they bring in sponsorship. He hired John Zarling from Big Machine Label Group earlier this year to spearhead those efforts as EVP of Marketing & New Business.

“The declining revenues create greater pressure on overhead and promotion costs,” Goodman explains. By aligning with partners, “we’re going to be able to bring to the Brad Paisley campaign marketing dollars we wouldn’t normally have. Part of this change is how we continue to bring our manager partners along and let them know about this new paradigm. I want to be really honest with them about the pressures we face, and why it’s important that we go find dollars from somewhere else to drive their brand.”

“From the contract-negotiating standpoint, 360 deals are a hot point,” says lawyer Jess Rosen of Greenberg Traurig. “Labels have slim margins and are looking for supplementary income streams. Superstars aren’t getting to the point where they have to incentivize the record company; it’s the acts that are trying to get to that superstar level—they’re the ones who need to get the label’s attention. It’s not as big a financial impact on the pop acts, but labels know with country, all these acts do is work. So it’s a significant amount of money. It’s not about the cash advance; that’s short-sighted. When the label asks for 360, it’s a percentage of touring, merch, endorsements and sponsorships, which adds up. The idea is to know what leverage you’ve got and use it to your advantage.”

But there are issues with these 360 deals in practice, according to one high-level exec: “Before, you could pretty much ignore the 360-payment obligations, but the labels are very persistent in their collection efforts and intimidate inexperienced or weak managers into fearing that the label won’t support the next release or otherwise threaten to withhold support.”

Because the Nashville labels haven’t yet seen the streaming bubble explode, country acts don’t yet have the same leverage as their hip-hop/pop/R&B counterparts. As for country music’s transition to the new model, some are predicting that a breakthrough could occur if Amazon were able to successfully target country fans with its music service; the belief is that Amazon Prime customers—now 85m strong—already fit the mold of the average country consumer.

THE SEESAW TIPS

What’s really happening is that democratization of the overall business through streaming and social networking is enabling those who can move the needle in a meaningful way to not have to give up any ancillary rights because of the competitive nature of the deals from the labels.

Atlantic is rumored to have paid $4m for boy band Why Don’t We for the first two albums and received no ancillary rights whatsoever. Did Blackbear, who just signed to Alamo/Interscope in a deal competitive labels claim was north of $3m, retain all his ancillary rights as well? One top label executive said he was willing to buy a small percentage of 360 rights from top artists for substantial money. The example he gave was $1m for a 5% piece. Bottom line, if you’re a new act that doesn’t move the needle, and/or have an inexperienced manager and lawyer and want a major-label deal, the label will get those 360 rights from you.

As for how these deals may shift—and they’re already starting to—the album model is becoming increasingly outdated and unrealistic in this singles-focused streaming era. “The classic model of one-plus-three albums no longer reflects reality,” Greenspan asserts. “Who wants to wait two years to get an album out when you can put out single after single? Now, we’re trying to do deals that say, ‘We’ll give you 12 songs—it’s the equivalent of an album. You don’t have to put out an album—fuck that. Who cares?’ But those 12 songs have to count.”

Another point of contention is the traditional contractual royalty split. “If they give you a 20-point royalty rate, you’re getting 20% of streaming,” Greenspan points out. “An act can argue, ‘No, we should get 50% of streaming.’” This sticking point is leading to an increase in profit-based deals. “If the label gets 80% of streaming income, the artists will really begin to consider putting their projects out on their own, say through TuneCore, and get 100% of streaming income. But on the flip side, there are hundreds of thousands of records released on TuneCore, and a label can argue that you still need them for promotion and marketing. And they’re right—for some artists. So those top 50 artists who’ve already accomplished that don’t need to give up 80% of their streaming income.”

In any case, things are changing quickly across the music business—so much so that there’s no telling what the landscape will look like by the end of 2017, let alone five years down the road. But it now appears that the ceiling is moving ever higher. •

Read The Big Bet, Part 1

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