BUSINESS

Music industry redesigned: Major labels & 360 deals

Aug 10, 2020 · 20 min read

Article 1

The first record labels were established out of necessity and opportunity. They provided artists with essential services in return for a binding contract, which granted a significant portion of their generated income to go directly to the label.

The services that were provided included manufacturing, distribution, publishing, marketing, legal services, etc. They also conducted talent scouting through their A&R division (artists and repertoire) to find, sign, and develop new talent.

Origination

These major labels began, and are still operated, under the control of a corporate umbrella organization called a “music group.” 

A music group is often owned by a “holding company” (a company created to buy and possess other companies’ shares, which it then controls), and also consists of music publishing companies, record (sound recording) manufacturers, record distributors, and record labels.

The first major music groups were established between 1929-1958, and throughout the years, have merged to capture global market share in upwards of 65-70%, according to AIM (Associate of Independent Music).

From 1988-1999, in conjunction with company mergers, the emergence of the six largest music groups was established in the music industry, known as the Big Six:

  1. Warner Music Group
  2. EMI (Electric and Music Industries)
  3. Sony Music Entertainment
  4. BMG (Berteismann Music Group)
  5. Universal Music Group
  6. PolyGram

Modernization

Throughout the preceding century, leading into the new millennium, the drawbacks of signing to a major label began to outweigh the benefits.

The birth of the internet has been the key contributor to the turning of tides within the music industry.

It provides artists with access and control of their music in a way that’s unprecedented. This became increasingly evident as the music ecosystem evolved into the streaming conglomerate that it is today.

Companies that have contributed to the industry’s evolution include; Apple Music, Spotify, Tidal, and numerous more. The streaming industry in 2019 is projected to bring in over 11 Billion dollars in revenue globally, yes Billion with a “B.”

By 2023, it is expected to be over 13 Billion in revenue globally (according to Statista).

These streaming services have replaced the revenue that artists received from physical units sold (CDs) by providing a certain amount of income per song streamed.

These streams compound into a larger payout for artists and yield a more significant profit/percentage if they choose to release their music independently, in conjunction with a music distribution company.

These companies include TuneCore, CD Baby, United Masters, and the emerging Empire, to name a few who help artists distribute their music digitally amongst the streaming titans.

They also can double as a publishing partner for independent artists, which we’ll discuss in a follow-up piece delving into independent creatives in the music industry.

Artists also have P2P (peer-to-peer) access to their fanbase through social companies like Instagram, Facebook, Twitter, TikTok, etc.

The internet provides access to resources and information, which gives artists control over their narrative and business acclimate.

This provides a compass to navigate the industry’s prevalent exploitation and manipulation of artists through record contracts in the past and present.

It also gives artists a choice to develop their music careers independently or under the guidance and control of a major label.

Education

Innovation in the music biz has provided pressure on major labels to adapt in an era of low sales and high overhead.

Currently, there are various deals by major record labels, including; the standard recording deal, the single agreement, joint venture deal/profit split, and 360 deal (Music marketing strategist Tyler Allen breaks down the differences here).

Today we’re going to cover the popular 360 deal that labels offer to new artists, which has stirred up controversy within the industry.

The 360 deal was created to develop and promote artists in all aspects of their careers, including digital sales, touring, merchandise, endorsements, appearances, etc.

Record companies can strategically recoup their investments from their talent by receiving a large percentage of the artist’s various streams of income, instead of solely relying on their record sales.

However, artists have felt that labels are taking advantage of the lack of involvement in day-to-day operations and overall promotion within the marketplace.

For example, a label would receive a cut from merchandising that an artist sells on tour but would have zero presence in the production and distribution of said product.

An uneducated artist may be enticed to sign a 360 deal because of an “advance,” but little do they know, this check robs Peter to pay Paul.

In other words, this is money that they will have to pay back to the label once cash flows in from their various streams of income.

The Big Six music groups that we discussed previously had undergone mergers throughout the 20th century into the early 2000s, and became what we know today as the Big Three:

  1. Universal Music Group
  2. Sony Music Entertainment
  3. Warner Music Group

We understand that every situation is different, and contracts are offered based upon specific needs of the artist and label.

However, below we provide you with the advantages and disadvantages of signing a standard 360 deal provided by these record labels.

We go through specific KPI’s (key performance indicators) that we look for in a record contract: Ownership, Marketing, Publishing, Distribution, Creative Control, and Artist Development.

KPI’s

We rated a 360 deal below from Universal based on our KPI’s and provide you with our Creative Ones score.

We hope our research provides vital information to determine if signing with a major label is the right decision for you, or if pursuing a career as an independent artist is best based upon your specific needs.

Here’s the 360 deal from UMG that we’re dissecting today, courtesy of Rap Rehab. We provide great info in the ownership KPI since this is one of the essential parts of the contract, how you get paid.

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are only for general informational purposes.

Ownership

The label is offering a five-album contract in return for full rights to all master recordings. This means that the label has full rights to do whatever they please with the artist’s music to bring in as much revenue as possible.

Royalties

The artist will then receive 17% royalties in the initial period for the first master LP (album 1) and LP 1 (album 2), the first album in the option period. The artist will then receive 18% royalties on LP’s 2-4 (albums 3-5).

This means that the artist will receive 17-18% of all gross (total revenue before taxes) revenues from their recorded music before taxes and fees.

The artist can increase their royalties by 1/2 point (a point is 1%) if they sell 500,000 units, and then the next tier for an additional 1/2 point is 1,000,000 units.

However, these points are prospective, meaning that you only receive the extra percentage for the units sold after 500,000.

Unit 500,001 and up would receive the extra 1/2 point percentage, and the same goes for the additional point for units sold above the 1,000,000 threshold.

A better deal is to receive additional points retroactively, which means that once you hit 500K units sold and then 1 Million units sold, you’ll receive the higher percentage of royalties as backpay for all previous units sold.

International Royalties

International royalty rates differ from those in the United States, given that these regions pay a percentage of the US’s going rate.

The rates are as follows: Canada 90%, UK 85%, Remaining major EU Territories: 75%, Rest of World: 50%.

The Advance

The “big check” that artists believe comes with signing a record deal to a major label. The “advance” that comes with signing the contract is from the recording fund.

This fund is provided to cover recording costs, promotional and marketing costs, tour costs, music video production costs, and other expenses.

This recording fund is recouped (reimbursed or compensated for money spent or lost) using the artist’s royalties. During this period, the artist doesn’t receive any royalty checks until the fund is paid in full.

In this 360 deal, the label provides a $15,000 recording fund for the first LP, in which 50% is paid upon signing, and then the remaining 50% is paid once the LP is delivered.

The label can withhold the remaining 50% based upon their acceptance of the work.

For the following 4 LP’s the recording funds vary with a minimum of 75K for album two, 100K for album three, 125K for album 4, and 150K for album 5.

They also have a maximum range where the succeeding LP’s would receive 66-2/3% of the previous LP’s “all in” (i.e., inclusive of producer and artist royalties) USNRC (United States Normal Retail Channels) net royalties earned with a cap on the maximum amount offered.

Here that amount is 200K for album three, 150K for album 4, and 300K for album 5, and album 2 doesn’t receive the same treatment because it’s the first LP in the option period with no previous LP.

Mechanical Royalties

Now, mechanical royalties were easier to understand in the past due to the absence of streaming.

This is because an MR was paid based upon the sale of a physical unit (cd or vinyl record), however now with streams and downloads, lines are crossed between mechanical royalties and performance royalties (fees music users pay when music is performed publicly).

This 360 contract specifies that the label will pay 75% of the statutory rate, which is the going rate for each unit sold or streamed, whether it’s a cd, vinyl record, or digital product (download/stream).

For an oversimplification due to the length of this article, every sale’s basic statutory rate is approximately 9.1 cents for every dollar earned. This means that the contract offers 75% of the 9.1 cents per every dollar earned in a sale.

Ancillary Rights

Definition: An agreement between a music production company and a musical artist in which the artist agrees to pay the company a share of income from activities other than recording, to be used in conjunction with a recording (production) agreement.

The ancillary activities covered in this contract are stated, “(including, but not limited to touring, endorsements, acting, publishing, sponsorships) in the Territory provided, however, that touring income would be subject to a floor of 10% of gross (“Ancillary Share”).

The contract also states that Universal would be entitled to 20% of net receipts for these ancillary activities so that the label would profit off more than just the artist’s recordings, given the name “360 deal”. This covers all revenue streams from the artist.

However, what comes with this deal is an advance for touring costs and other ancillary costs, which is recouped again from the artist’s royalties.

Merchandise and Tickets

Labels offer a merchandising agreement where the artist can choose two options, a percentage deal or a deal split.

Thebalancecareers.com explains the difference in further detail here. This contract offers a percentage deal where UMG would take a 20% share of all net receipts (after taxes, fees, and costs).

In regards to tickets, this contract grants the label rights to “exclusive ticketing” (tickets giving the consumer an additional benefit, e.g., back-stage passes, meet and greets).

The contract states, “Artist will procure for UMG the right to allocation and/or to acquire in advance of the on-sale date to the general public, up to 20% of the total tickets available for sale for each of Artist’s live concert.”

This means that the label can acquire these tickets to up-sell them for a higher profit. Like scalping tickets before a show, however, this contract makes it possible for the label to do so.

Marketing

Labels can provide a plethora of resources to market their artists, including access to their partners in television, radio, and print outdoor media.

Labels are also focused on promoting their talent on digital social platforms. The marketing budgets are included in the Recording fund and will be 100% recouped with royalty revenue.

In this contract, the label requires from the artist, “20 pieces of significant multimedia content (i.e., fan engaging material including, for example, notable artist benchmarks, all in a multimedia format) for commercial exploitation by UMG in various social media platforms (collectively, the “Social Media Content”).”

This means that the artist is obligated to provide the label with marketable content that they can use to distribute on their social platforms and through their partner’s social platforms.

Marketing with a label is beneficial given their existing relationships in the industry and financial motivation to break an artist within the market.

Publishing

In this contract, the label requires the artist to grant the label a “first negotiation and a matching right (for the benefit of UMG or its affiliate Universal Music Publishing Group) for an exclusive co-publishing agreement with the Artist.”

This means that the artist does not have to sign a publishing contract with the label they have a recording contract with; however, they have to entertain the label’s publishing contract offer and then allow them (or their affiliates) to match a competitor’s offer.

According to royaltyexchange.com, a co-publishing agreement (AKA a co-pub deal) is “where the songwriter owns half the song copyright and the publisher the other half.

This means the writer receives 75% of income rather than the usual 50%.”

They explain the breakdown by stating, “The songwriter receives the common writer share (50%) as outlined, and half of the publisher share (25%); however, mechanical royalties are often reduced for artist/songwriters who sign a traditional record label deal.

A common record contract provision that reduces the amount of mechanical royalties paid to the artist/songwriter is referred to as the Controlled Composition Clause.”

The controlled composition clause in this contract is the 75% minimum statutory rate, subject to an 11x “cap” for LPs and a 5x cap for the EP. This again means that the contract offers 75% of the 9 cents per every dollar earned in a sale. (cd/vinyl sold and digital download/stream).

This only applies if the artist who signed the recording contract is also the “Songwriter,” ” which means that the artist would receive a higher return because they’re taking part in both contract’s royalties.

The difference between a “Recording Artist” and a “Songwriter” is that the songwriter is responsible for the composition, which is the words and melody.

The recording artist is responsible for the performance and recording. Royalty Exchange breaks down the differences in more detail here.

Distribution

Labels have existing distribution channels that they have worked with in the past; however, with this new era of streaming, distribution has become more accessible than ever to artists.

Creative Control

This contract states, “Artist and UMG would all have mutual creative approval (including in respect of artwork and remixes), provided that in the event of a dispute, UMG’s decision would control.”

This is self-explanatory and ultimately means that the label has the final say in all creative decisions.

The Verdict

Based upon our KPI’s, we rated this deal a 2.8 out of 5——here’s why. The 360 agreement provides a benefit to artists who are hands-off in the business aspect of their careers.

Major labels take all of the upfront risks by investing their time and money to break the artist in the marketplace.

They provide an existing infrastructure with a track record of success and can take an artist to the next level, given the proper use of their resources.

However, the low rating we issued is rooted in the lack of ownership, which only hurts artists in the long run.

Leave a Reply