Entrepreneurship and 360 Deals in the Music Business
By: Larry Wacholtz, PhD
How has the growth of digital media impacted the financial workings of the music industry? Only four world music corporations remain where there were six just a few years ago. They are EMI (English), Universal Music Group (French), Warner Music (American) and Sony Music (Japanese) and the corresponding labels they own worldwide. Their business model is still the same—to generate profits from the creation, manufacturing, distribution, promotion, publicity and marketing of recorded musical products. However, consumers’ continuous use of P2P (“peer to peer” computer systems connected on the Internet, allowing direct file sharing without a central server) has reduced their economies of scale to the point where they are struggling to survive, even with reduced budgets and limited artist rosters.
In the end, if consumers pay for downloads, albums and subscriptions for satellite radio and cable TV, everyone is paid for their creative efforts. However, when consumers acquire their music from illegal P2P (and do not pay for the music) then the labels, songwriters, artists and others are not paid. Sadly, this trend toward free music without royalties reduces the value and equity of entertainment-based companies.
The creative destruction of the traditional industry business models is now providing opportunities to the business-minded creative entrepreneurs and the established labels if everyone (songwriters, publishers, labels, artists, managers) can accept the realities of the digital revolution. Labels are still required, and 360 deals, which allow them to take some of the artists’ tour and merchandise revenue, keep them financially in the game. Everyone profits when labels succeed.
What role do record labels play in today’s music industry? As always, record labels are the banks of the industry, providing hundreds of thousands of dollars to recording artists to pay for advances, producers, musicians, audio engineers, BGVs (background singers) and studio rental time required to complete major album projects. Labels provide additional money to market the recordings to various types of consumers through promotion, publicity and distribution to retail outlets.
Labels still need to find and sign artists to their labels and songs to their publishing companies. Songs are the foundation of the music business, yet their success is tied to the record label’s ability to find and sign talent, create sellable recordings and then exploit those recordings (and the artist’s image) through publicity, promotion and distribution. This business model brings the songwriters, producers, musicians, artists and the business world together with potential consumers. Once a song is written, it must be published, placed with an artist and recorded or performed publicly to make money. Businesses that use recordings or live performances of a song are usually required to pay for the use of the song through a performance license.
Record labels pay mechanical license fees for the use of songs on their recordings. Visual production companies, including film and TV shows, are required to pay for the use of a song in the production of the work by acquiring a sync license. However, it is the label’s marriage of a great song to a sellable artist through the recording and marketing that creates profits for everyone.
A label’s promotional success in the mass media is based on the number of impressions (the single appearance of an ad) tied to the success of and amount of product(s) sold (recordings, concert tickets, merchandise and corporate sponsorships). However, fewer people are listening to non-talk radio, and it appears that most of generation Y (18 to 25 year olds) just plug into their iPods and iPhones. Click media consists of interactive use of the Internet, cell phones and PDAs and other devices that are used to download specific entertainment free/promotional samples, purchased and stolen products. The mass media are dependent on free recordings from the labels to draw an audience. However, a distribution revolution is currently in progress as the beforehand “passive” mass media are now competing with the interactive digital entertainment product sites such as iTunes, Google, Netflix, the iPhone, digital streaming product suppliers and illegal P2P sites.
So how does a creative person, artist or businessperson break into the business at this crazy time? Figure out what you want to do and what you’re good at and then become successful locally. If you can’t make it in a small puddle, try a different boat. Entrepreneurship has always been a key to success in the industry. Entrepreneurs often write the songs, finance the demo recordings, manage the images and careers of artists, promote, publicize and market the products and acts that consumers love. Relying on their own creative and business decisions, young entrepreneurs often discover the new talents, products and distribution methods that generate performance, merchandise, unit sales and profits.
“The Economic Impact of the Music Industry in the Nashville-Davidson-Murfreesboro MSA” Study indicates that the current music business industry model is to a local economy. The study found that the Nashville music industry created 19,437 jobs directly related to music production and a corresponding $722 million dollars in labor income in 2006. Direct spending by music industry firms in Nashville was $2.64 billion, and the combined direct and secondary impact of the music industry was tallied at $3.96 billion. The addition of tourism to the secondary impact of music industry spending in the Nashville MSA increased the total to $6.38 billion.1
What should an artist/entrepreneur do after developing local support? First, artists should secure a label deal or find or create an indie label with worldwide distribution (such as Sony’s RED). Without a doubt, the creative systems of songwriters, publishers, musicians and others still need the front money, promotion, publicity and distribution offered by major record labels. Unknown acts and established artists still need labels to invest in their creativity and expose their image and sellable products to consumers. Once you have proven your success locally, a label may be able to increase your image and sound nationally or internationally. Don’t be afraid of a reasonable 360 deal where the label may gain a percentage of the merchandise profit, as it is the label’s front-end investment that provides the much-needed national exposure repeatedly through the mass and click media.
The artist should then build a business team consisting of a respected manager, an American Federation of Musicians booking agent, a business manager, touring musicians and vocalists, a sound engineer and roadies. Artists generally make the greatest share of their annual income from concert appearances, corporate endorsements, sponsorships and merchandise. Hence, paid live appearances usually provide the cash flow and events most artists need to sustain their financial careers. Personal managers are responsible for the management of the artist’s career. They set up management teams and act as gatekeepers, selecting only the deals, concert appearances and staff members that can best enhance the success of the artist’s long-term financial and personal goals. Talent agents/booking agents establish contacts with individual promoters and promotion companies who create concert tours for acts. Without a label’s front-end funding, promotion, distribution and publicity, touring careers take much longer to establish or have to be developed by management sometimes through new corporate sponsorships.
How can entrepreneurs further capitalize on successful recording contracts? In effect, superstar artists or their management teams often use the branding and star image exploitation generated from the label’s promotion and publicity budgets to structure their own labels, tours and businesses. Examples include Paul McCartney, who signed a new label deal with Starbucks and a distribution deal with Wal-Mart; Madonna, who signed a label deal with the concert promotion company Live Nation; Garth Brooks, who years ago established the free-agent concept while still under contract to Capitol Records, leasing his masters in a distribution deal and then later repackaging hits exclusively distributed through Wal-Mart retail outlets; and The Eagles, who on their own label sold 700,000 plus units through a distribution deal with Wal-Mart. Some established artists have given their recordings away and recouped the expenses from other revenue streams such as concert promotion, merchandise sales and corporate sponsorship. Radiohead released a digital version of their new album by asking fans for donations. Aside from the enormous publicity, the move generated several million dollars from the consumers. According to an Associated Press article, 38 percent of all downloaders paid an average of $6 per unit, providing the band with royalties about 300 percent above the per-unit points royalties on a typical major label deal. Prince also gave away his latest album with a newspaper in England to promote his upcoming European concert tour. ✪
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