The New Deal: Every Piece of the Pie

It was only a little more than a year ago when Madonna and Live Nation announced an unprecedented new partnership. This new type of record deal, usually referred to as a "360 deal," allows for record labels to make money off of every aspect of an artist's career, not solely the record sales. The 360 deal, named for the number of degrees it encompasses, has been accepted by many musical behemoths, including Jay-Z (right), Nickelback, Shakira, and U2. When these deals first began to materialize, they were seen as outliers to the industry, however they have completely changed the way that major labels are doing business in a very short time. At last week's Web 2.0 summit in San Francisco, Edgar Bronfman, the CEO of Warner Music Group announced that from this point on, all record deals signed with WMG would be 360 deals. A response to the continual falling of record sales, this move will allow Warner to grab a piece of the money brought in not only by record sales, but by concert ticket sales, merchandise, websites, and endorsements as well. While taking money from more places may help to move major labels back towards the black in the short term, it stifles creativity, discourages small artists, and will hurt the labels in the long run.

The basic structure of a record deal has remained the same for as long as there have been major record labels. When an artist is signed, they are required to create a certain amount of albums for the label. The label advances the artist an agreed-upon amount of money to be used for the production of each album. Any advanced money not used in the production process can be kept by the artist, upon delivery of the album. Once the album is released, the royalty money that would be given to the artist is kept track of and kept by the label until every penny of the advance is repaid. This system is called recoupment. Only once the label is recouped will the artist see any money for their album. If the album doesn't sell enough to cover the cost of production, they will never make any money from record sales, but they are also not responsible for paying back the money that the record label gave them. The effect of this system is that many artists of all sizes today make most of their money from touring, merchandise, and however else they can monetize their fame, because the record labels do not have any claim in those areas. With the growing prominence of the 360 record deal, labels can take a piece of, and control, every income stream an artist has. This may not affect huge figureheads of the system like Madonna, or Jay-Z much, but it's a different story for small and medium sized artists who may never completely recoup, and require touring money to live.

In the case of Warner Music Group, and whichever labels go to exclusively 360 deals, the situation is viewed as a problem with return on investment. As Edgar Bronfman explained at the Web 2.0 summit: "it doesn’t make sense for labels to pour money into artist development when CD sales, their primary source of revenue, continue to decline. Without other ways to make money from an artist, they wouldn’t continue to promote artists." Music is becoming more and more easily and freely accessible, and labels don't want to get to a point where their product becomes free, and they have no other income streams. 360 deals, however, can't be a complete and long-term answer for major labels, as the money made from merchandising and ticket sales do not come close to the income from record sales. Labels must change their business structure and spending habits. It is understandable for the labels to want to prevent the loss of their income streams during the paradigm shift caused by new technology, but it creates an environment where musicians don't have much say in their career choices. Although they still currently have many options other than WMG, 360 deals seem to be the way that the industry is headed. The problem for the major labels in the long term is that these poor deals for artists will push musicians towards smaller independent labels who don't have the same requirements, ultimately digging the major labels into a deeper hole.

Do It Yourself: Modern Music Distribution

On October 10, 2007, legendary rock-and-roll band Radiohead released their latest album, In Rainbows, with an innovative new business model. They sold the album on their website via mp3 download, and fans could pay whatever price they chose, whether it be $0 or $50. This event was widely covered by the media, and proved to be quite profitable for the band. However, some argue that the success was brought by the media. Sarah Lewitinn, co-founder of Stolen Transmissions Records told the New York Times that "for one thing, only established acts with an extremely dedicated fan base could prosper that way. For another, the novelty would wear off quickly." Whether or not Radiohead started the trend, or was merely the most public example, many models of digital music distribution circumventing music labels are beginning to gain popularity. The most successful of these are CD Baby and TuneCore (at right), the latter of which was financed $7 million by Opus Capital on October 27, 2008. These companies distribute music through Amazon MP3, iTunes, Napster, Rhapsody, and more, with no need to be signed to any record label. Artists also retain ownership of the master recordings, and 100% of the royalties. While businesses like these do not help the major labels recover from their already faltering album sales, I think that they are ultimately good for the music industry, because it puts power in the hands of artists, and allows for young artists to grow.

CD Baby's business model works as a percentage cut of income received from the purchase of an artist's work. They keep 9%, and pay the artist 91% of the money made on digital downloads, they also will sell artist's physical CD on their site, of which they keep $4. This is a great way for small bands to have a national distribution for nothing more than the one-time $35 start-up fee. Part of the mission statement for CD Baby reads: "We only sell music that comes directly from the musicians. No distributors... In a regular record deal or distribution deal, musicians only make $1-$2 per album, if they ever get paid by their label. When selling through CD Baby, musicians make $6-$12 per album, and get paid weekly." TuneCore delivers a similar service with a slightly different method of setting up accounts. With TuneCore's setup, the artist pays a $19.98 annual fee per album for maintenance and storage, $0.99 per song, and $0.99 per online store, per album. Once these fees are paid, the artist receives 100% of the income received from purchases of their music, regardless of how popular they are. Cnet writer Matt Rosoff calculated in his blog, Digital Noise, that TuneCore will always be the better deal in the first year, because of the start up fees, but after that, an artist must sell around 370 downloads a year to do better with TuneCore than they would with CD Baby. For large acts, 370 downloads would be no problem at all, and a few established bands have already taken advantage of this, Nine Inch Nails probably being the most notable.

Around the same time as Radiohead ditched their label and tried alternative distribution channels, Nine Inch Nails front-man, Trent Reznor, announced that they too would be self-distributing their album Ghosts I-IV. Their sales system would include a 9-track free sampler, and a 36-track album for $5 available only on AmazonMP3 through TuneCore. In his blog Music Business and Trend-Mongering, Berklee Music professor Mike King does the math and shows that Trent Reznor only had to pay $56.61 to list his 36-track album on AmazonMP3. A TuneCore spokesman who commented on the blog verified this fact: "He did! He paid the same as everyone else, no special deals. I suspect Mr. Reznor can afford it. :)." After being listed, that album went on to make $1.6 million dollars in the first week. This is an extreme example, but makes the point that services like TuneCore and CD Baby have the ability to make an artist's income from record sales directly linked to their success, which is not always the case in the major label system.

Radiohead's system requires that the band be already established, and just making music available is not enough to make it popular or successful, no matter what the distribution channel. Major labels can promote musicians in unrivaled ways, and that is why artists still sign with them, and in doing so, forfeit most of the money made in their name. That's why do-it-yourself distribution is good for the artist. Although it is harder to gain attention as a new band, if any notoriety is reached, there is much more to be gained. More importantly, the success will be based on musical merit rather than marketing dollars. In his blog, Future of Music, Dave Kusek writes: "There is a lot of discussion these days about free music and the decline of the power and influence of the major record labels. However, I would argue that music has always been free in one form or another, throughout history and that the relationship between the artists and their fans - the artists and their patrons is what really matters." In my eyes, distribution companies like CD Baby and ToneCore do more than ever to directly, and globally, connect musicians and fans, and in doing so help pioneer the future of the music industry.