Artists, Labels and Contracts

1. Artists, Labels and Contracts Traditional, Indie, 360 Versus DIY

2. Traditional Contract • Artist receives an advance from Label • Label arranges production of an album • Artist receives a royalty of 5-20% on album sales • AFTER production costs and advance are recouped from artist’s royalties • Album sales may top 500,000 before artist receives any royalties from album sales • Songwriters usually receive “mechanical” publishing royalties on all album sales • Label earns gross profit on album sales, but may not earn net profit unless up-front costs are recouped

3. How Do Recordings Make Money?

4. Costs

5. Indie Contract – Profit Sharing • Independent Labels often share profits from album sales 50/50 with artists • Profits are defined as gross receipts less expenses • Gross receipts include album sales as well as licensing income (TV shows, movies, video games ads, etc.) • Expenses include production and distribution costs as well as advertising and promotion • But NOT general overhead expenses of the Label • Other options include sharing of T-shirt profits, publishing royalties, touring and merchandising profits • Note that artists may not receive an advance and only share profits after costs are covered

6. Multiple Rights/Multiple Services or “360” Contracts • “Cross collateralization of all or part of an artist’s non-recording revenue as part of the record deal….The non-recording revenue areas covered could include a share of merchandising, sponsorships, live performance fees, tours, songwriting and music publishing royalties, brand associations, media rights, and book projects, among others. The size of the record company advances, non-recoupable payments, and the revenue split between the artist and the company would be among the factors determining the feasibility or desirability of these types of deals.” • Brabec & Brabec, Music, Money and Success, 5th ed., p. 159

7. Multiple Rights/Multiple Services or “360” Contracts • Madonna’s deal with Live Nation included • General advance of $17.5 million • $50-$60 million advance for 3 record albums • $50 million in cash/stock for tour promotion rights • On tour, major artists typically get 90% of gross receipts • Jay-Z got a $150 million deal with Live Nation • Up-front payment of $25 million and general advance of $25 million • Other payments are provided in exchange for publishing, licensing and other rights • Paramore’s deal with Atlantic/Fueled by Ramen • Larger upfront payment from Label in return for 30% share of net income from touring, merchandising, endorsements and fan club fees • Band receives 30% of album profits, if any, after recoupment • Push for radio play was foregone for websites for exploring new music and touring • Allowed time for band to develop without pressure for album sales • May have rejuvenated label interest in “jam bands” and other artists with loyal fans and good touring revenue, but lacking album sales and radio play

8. The RIAA Says A label’s role is discovering, developing, producing and promoting talent. A music label is a performer’s close partner and collaborator, providing a level of financial and business support in production, marketing and touring that most individual artists would never be able to afford on their own. That investment is usually the difference between giving away songs online to a few devoted friends, and having a Platinum album. The investment associated with developing new talent is substantial. In fact, music companies exceed most industries in investing in the future. Songwriters, recording artists, producers, music publishers, performance rights organizations and many others are among the enormous cast of industry players working behind the scenes to bring music to your ears today. EXAMPLE OF TYPICAL LABEL INVESTMENT IN A NEW POP ACT Advance $200,000 Recording $200,000 3 videos $200,000 Tour support $100,000 Promotion and marketing $300,000 TOTAL $1,000,000

9. Do-It-Yourself • Artist incurs all costs, but keeps all profits • Costs are lower, but so is income • Recording costs • A computer, software, and a few good microphones for as little as $2,000 • Distribution of downloadable files on the Internet is nearly free • Touring costs • Travel expenses plus share of ticket sales with promoter • Marketing and Promotional Expenses • Potentially substantial on a large scale • Can be a substantial barrier to mass market success • Nevertheless, many artists survive on a small scale for years

10. Moral Hazard • All contract types susceptible to moral hazard • Contracts often include audit provisions to prevent labels cheating artists • Other provisions may include penalties if artists do not fulfill their obligations • DIY artists may be more or less susceptible • touring arrangements are more informal • No formal audit opportunities • BUT arrangements are less complex, making cheating more difficult • In all cases, repeated transactions among the same parties tends to foster honesty in order to benefit from repeat business

11. What’s Best for the Artist?

12. What’s Best for the Label?

13. What’s Best for Society? • Which arrangement yields more output? Lower price? Better “quality”? More variety? • Traditional • Indie • 360 • DIY • Some combination of all of the above?