Facing The Music: The Recording Industry's Power Struggle
Despite the red carpet glitz and glamor of the Grammy Awards last month, the truth is that the music industry is in a near-death spiral. According to Forrester Research, U.S. music sales and licensing revenues plummeted from $14.6 billion in 1999 to less than half that figure - just $6.3 billion - a decade later. In fact, the Recording Industry Association of America (RIAA) reports that album sales have fallen, on average, 8% each year over the past 10 years. (The glitz and glam of Hollywood could help put some more glitz in your pocket. Find out how in Analyzing Show Biz Stocks.) With the advent of digital downloading in the late '90s, the industry has scrambled to figure out how to monetize a product that many people are increasingly unwilling to pay for. In 1999, Napster made headlines through its file-sharing service, leaving traditional music distribution channels in the dust.
With far fewer people willing to buy albums, record labels and music companies are faced with the challenge of finding new ways to generate revenue. Enter the 360 degree deal.
What It Is
The 360 degree deal – also known as the "multi-rights deal" - is an all-encompassing contract between a company and recording artist. Just prior to the digital revolution, record companies focused on signing artists that could quickly produce chart-topping hits in order to justify advanced money paid to bands.
While companies focused on album sales, artists knew their paydays would come from everything else: merchandise, sponsorships, touring, publishing etc. However, thanks to the internet, instead of needing to be "discovered" by a label to produce an album, artists can virtually bypass record companies to market themselves, build a fan base and distribute their music.
A 360 degree deal promises that a firm will not only produce a band's album, but will also build the artists' overall brands. Companies search for and sign singers or bands to a deal that encompasses virtually everything related to their careers, including merchandise, tours, publishing, fan-club revenues and ticketing. However there is no "standard" 360 degree deal – companies create packages of all types depending on their in-house competencies and the potential revenue a star represents. (Find out what to do when your kid is ready for higher education, but you aren't, in Last-Minute Strategies To Help Pay For College.)
Who's Doing It
In 2002 British singer Robbie Williams was one of the first to sign a 360 degree deal with EMI Music, and the concept has quickly picked up steam.
Live Nation Inc. is recognized as the industry leader in this emerging business model. The global live entertainment company that consists of Live Nation, Ticketmaster and Front Line Management Group, bills itself as a virtual "one-stop-shop" for artists and fans alike, and has signed a 360 degree deal with stars and recording acts such as U2, Madonna, Shakira and Jay-Z.
Live Nation's not the only game in town, though. Interscope Records signed The Pussycat Dolls for the bands' albums, touring and a Vegas-themed nightclub. Snoop Dogg signed a multi-rights deal with MTV that includes support for his latest album production and release, as well as inclusion in the next "Rock Band" video game and a new variety show, "Dogg After Dark."
Because companies see a wider potential revenue stream, there's (theoretically) less pressure for an artist to go platinum out of the starting blocks. In addition, firms are increasingly willing to expand the idea of what types of acts to sign. Bands like Phish, that aren't Top-40 chart toppers but have enormous loyal fan bases, may be of more interest because they have strong revenue producing potential outside of album sales.
The major benefit for the artist is that the label/company may be more aggressive in promoting the artist's entire brand because it's got a vested (i.e. financial) interest in more than just record sales. The benefit for the company is purely financial. Instead of limiting revenue generation to just album sales they can get a nice little - or not so little - cut of every aspect of the artist's business. (Do the characters in these classic films reflect what it's like to work on Wall Street? Find out in Financial Careers According To Hollywood.)
Multi-rights deals involve firms shelling out big money up front to artists, and shareholders can get nervous about the potential return on investment (ROI). In fact after Live Nation signed the Material Girl, the firm's share price dropped.
However there's only one Madonna, and most acts that are offered 360 degree deals won't get such generous offers and their contracts are likely to have a significantly larger percentage of profits going to the company. In addition, not all firms have the breadth and reach of a Live Nation, which owns venues, ticketing agencies and merchandising companies. Acts may sign contracts that limit their ability to work with other companies, which would cause them to lose out on fans, business opportunities and, ultimately, revenue.
iTunes was a good start for companies looking to harness the power of the internet and boost digital download sales, but it may have been too little too late. Multi-rights, 360 degree deals are one way that the music industry is looking to survive. Only time will tell if record companies have what it takes to deliver on their promises, or if they too will go the way of vinyl, eight-tracks and cassette tapes.