The 360 Deal: The “Boogey” Man

As the hottest artist in the game right now, you got record labels beating down your door ready to sign you to a recording contact and pay you a nice fat advance – but your manager doesn’t want you to even consider any of these record contracts because they’re “360 Deals!”  Understandably perplexed, you call your entertainment attorney to find out what the hell a 360 Deal is and why your artist manager is tripping!

So what is a 360 Deal?

A 360 Deal is a recording contract in which the record label receives a percentage of your “non-record related” or “ancillary” income.  “Non-record related” or “ancillary” means income that is not directly related to sales of your recordings (i.e., digital downloads and CDs) but income that you earn from live performances and touring, brand endorsements/sponsorships, merchandising and even movie/television appearances.

Why do record labels want a piece of my non-record related income?

Traditionally, record labels made money (and lots of it) solely from sales of CDs and back catalogs.  However, with the rise of peer-to-peer websites like Napster and LimeWire which facilitated rampant online piracy, record labels experienced a drastic decline of CD sales and income and decided that the best way to make up for that loss of income was to share in the artist’s non-record related revenue.  Their rationale is that since they spend millions creating the artist’s “brand” thereby creating a demand for the artist’s services, why shouldn’t they also share in the profit generated by the artist’s live performances, endorsements, sponsorships, etc?  In other words, if not for the record label’s marketing and promotion, who would be interested in buying, for example, Lady Gaga’s perfume line or Diddy’s “Sean John” apparel?

What percentage of my ancillary income are they asking for?

Record labels are asking (no demanding!) anywhere from 10% – 25% of an artist’s ancillary income (“Ancillary Percentage”).  When you add your manager’s commission (which can range from 10% – 20% of your gross income) and an agent’s commission (which is typically 10% of your gross income), you can see how also paying the record label can seriously affect your bottom-line – especially if you’re in a band and not a solo artist!  If you’re in a band, prepare to spend a lot of time performing on the road to get your cash up!

How can my entertainment attorney help negotiate the 360 Deal?

If you’re a new artist with little or no “buzz,” there’s very little that your entertainment attorney can do in terms of negotiating the 360 provision of the recording contract because he won’t have as much leverage.  Nonetheless, he can often get the record label to agree to reduce the Ancillary Percentage from 20% – 25% to 10% – 15% of your gross ancillary income.  He may also be able to get the record label to agree to first deduct the manager’s and agent’s commission from the gross ancillary income you receive prior to calculating the Ancillary Percentage.

However, since your single is on heavy rotation at the biggest radio station in the country, you might be the subject of a “bidding war” with various record labels trying to sign you.  In that case, your entertainment attorney would have more leverage and could definitely negotiate a reduction of the Ancillary Percentage as well as negotiate the payment to you of an additional advance for each ancillary right the record label wants a percentage of.  For example, if the record label wants to share in your live performance income, they should pay an advance of $100,000, which such advance would be recouped solely from you live performance income (i.e., not from your record royalties, etc.).  Also, your entertainment attorney might be able to get specific language added in the record contract specifying what the record label will do (and spend) from a marketing and promotion perspective to further exploit the ancillary rights they want a percentage of.

In either instance, 360 Deals are the new reality in the music business and are here to stay!  So tell your artist manager to stop tripping and together with your entertainment attorney, negotiate the best possible 360 Deal they can for you!