'Hollywood Accounting' Losing In The Courts

If you follow the entertainment business at all, you're probably well aware of "Hollywood accounting," whereby very, very, very few entertainment products are technically "profitable," even as they earn studios millions of dollars. A couple months ago, the Planet Money folks did a great episode explaining how this works in very simple terms. The really, really, really simplified version is that Hollywood sets up a separate corporation for each movie with the intent that this corporation will take on losses. The studio then charges the "film corporation" a huge fee (which creates a large part of the "expense" that leads to the loss). The end result is that the studio still rakes in the cash, but for accounting purposes the film is a money "loser" -- which matters quite a bit for anyone who is supposed to get a cut of any profits.

For example, a bunch of you sent in the example of how Harry Potter and the Order of the Phoenix, under "Hollywood accounting," ended up with a $167 million "loss," despite taking in $938 million in revenue. This isn't new or surprising, but it's getting attention because the income statement for the movie was leaked online, showing just how Warner Bros. pulled off the accounting trick:

In that statement, you'll notice the "distribution fee" of $212 million dollars. That's basically Warner Bros. paying itself to make sure the movie "loses money." There are some other fun tidbits in there as well. The $130 million in "advertising and publicity"? Again, much of that is actually Warner Bros. paying itself (or paying its own "properties"). $57 million in "interest"? Also to itself for "financing" the film. Even if we assume that only half of the "advertising and publicity" money is Warner Bros. paying itself, we're still talking about $350 million that Warner Bros. shifts around, which get taken out of the "bottom line" in the movie accounting. 

Now, that's all fascinating from a general business perspective, but now it appears that Hollywood Accounting is coming under attack in the courtroom... and losing. Not surprisingly, your average juror is having trouble coming to grips with the idea that a movie or television show can bring in hundreds of millions and still "lose" money. This week, the big case involved a TV show, rather than a movie, with the famed gameshow Who Wants To Be A Millionairesuddenly becoming "Who Wants To Hide Millions In Profits." A jury found the whole "Hollywood Accounting" discussion preposterous and awarded Celador $270 million in damages from Disney, after the jury believed that Disney used these kinds of tricks to cook the books and avoid having to pay Celador over the gameshow, as per their agreement. 

On the same day, actor Don Johnson won a similar lawsuit in a battle over profits from the TV show Nash Bridges, and a jury awarded him $23 million from the show's producer. Once again, the jury was not at all impressed by Hollywood Accounting. 

With these lawsuits exposing Hollywood's sneakier accounting tricks, and finding them not very convincing, a number of Hollywood studios may face a glut of upcoming lawsuits over similar deals on properties that "lost" money while making millions. It's why many of the studios arepretty worried about the rulings. Of course, these recent rulings will be appealed, and a jury ruling might not really mean much in the long run. Still, for now, it's a fun glimpse into yet another way that Hollywood lies with numbers to avoid paying people what they owe (while at the same sanctimoniously insisting in the press and to politicians that they're all about getting content creators paid what they're due).

Why Even Major Label Musicians Rarely Make Money From Album Sales

We recently had a fun post about Hollywood accounting, about how the movie industry makes sure even big hit movies "lose money" on paper. So how about the recording industry? Well, they're pretty famous for doing something quite similar. Reader Jay pointed out in the comments an article from The Root that goes through who gets paid what for music sales, and the basic answer is not the musician. That report suggests that for every $1,000 sold, the average musician gets $23.40. Here's the chart that the article shows, though you should read the whole article for all of the details: 

Source: TheRoot.com
Of course, it's actually even more ridiculous than this report makes it out to be. Going back ten years ago, Courtney Love famously laid out the details of recording economics, where the label can make $11 million... and the actual artists make absolutely nothing. It starts off with a band getting a massive $1 million advance, and then you follow the money:

What happens to that million dollars?

They spend half a million to record their album. That leaves the band with $500,000. They pay $100,000 to their manager for 20 percent commission. They pay $25,000 each to their lawyer and business manager.

That leaves $350,000 for the four band members to split. After $170,000 in taxes, there's $180,000 left. That comes out to $45,000 per person.

That's $45,000 to live on for a year until the record gets released.

The record is a big hit and sells a million copies. (How a bidding-war band sells a million copies of its debut record is another rant entirely, but it's based on any basic civics-class knowledge that any of us have about cartels. Put simply, the antitrust laws in this country are basically a joke, protecting us just enough to not have to re-name our park service the Phillip Morris National Park Service.)

So, this band releases two singles and makes two videos. The two videos cost a million dollars to make and 50 percent of the video production costs are recouped out of the band's royalties.

The band gets $200,000 in tour support, which is 100 percent recoupable.

The record company spends $300,000 on independent radio promotion. You have to pay independent promotion to get your song on the radio; independent promotion is a system where the record companies use middlemen so they can pretend not to know that radio stations -- the unified broadcast system -- are getting paid to play their records.

All of those independent promotion costs are charged to the band.

Since the original million-dollar advance is also recoupable, the band owes $2 million to the record company.

If all of the million records are sold at full price with no discounts or record clubs, the band earns $2 million in royalties, since their 20 percent royalty works out to $2 a record.

Two million dollars in royalties minus $2 million in recoupable expenses equals ... zero!

How much does the record company make?

They grossed $11 million.

It costs $500,000 to manufacture the CDs and they advanced the band $1 million. Plus there were $1 million in video costs, $300,000 in radio promotion and $200,000 in tour support.

The company also paid $750,000 in music publishing royalties.

They spent $2.2 million on marketing. That's mostly retail advertising, but marketing also pays for those huge posters of Marilyn Manson in Times Square and the street scouts who drive around in vans handing out black Korn T-shirts and backwards baseball caps. Not to mention trips to Scores and cash for tips for all and sundry.

Add it up and the record company has spent about $4.4 million.

So their profit is $6.6 million; the band may as well be working at a 7-Eleven.

And that explains why huge megastars like Lyle Lovett have pointed out that he sold 4.6 million records and never made a dime from album sales. It's why the band 30 Seconds to Mars went platinum and sold 2 million records and never made a dime from album sales. You hear these stories quite often. 

And note that those are bands that are hugely, massively popular. How about those that just do okay? Remember last year, when Tim Quirk of the band Too Much Joy revealed how Warner Music made a ton of money of of the band's albums, but simply refuses to accurately accountfor royalties owed, because the band is considered unrecoupable. Sometimes the numbers even go in reverse. If you don't understand RIAA accounting, you might think that if a band hasn't "recouped" its advance, it means that the record labels lost money. Not so in many cases. Quirk explained the neat accounting trick in a footnote to his post about his own royalty statement:

A word here about that unrecouped balance, for those uninitiated in the complex mechanics of major label accounting. While our royalty statement shows Too Much Joy in the red with Warner Bros. (now by only $395,214.71 after that $62.47 digital windfall), this doesn't mean Warner "lost" nearly $400,000 on the band. That's how much they spent on us, and we don't see any royalty checks until it's paid back, but it doesn't get paid back out of the full price of every album sold. It gets paid back out of the band's share of every album sold, which is roughly 10% of the retail price. So, using round numbers to make the math as easy as possible to understand, let's say Warner Bros. spent something like $450,000 total on TMJ. If Warner sold 15,000 copies of each of the three TMJ records they released at a wholesale price of $10 each, they would have earned back the $450,000. But if those records were retailing for $15, TMJ would have only paid back $67,500, and our statement would show an unrecouped balance of $382,500.

I do not share this information out of a Steve Albini-esque desire to rail against the major label system (he already wrote the definitive rant, which you can find here if you want even more figures, and enjoy having those figures bracketed with cursing and insults). I'm simply explaining why I'm not embarrassed that I "owe" Warner Bros. almost $400,000. They didn't make a lot of money off of Too Much Joy. But they didn't lose any, either. So whenever you hear some label flak claiming 98% of the bands they sign lose money for the company, substitute the phrase "just don't earn enough" for the word "lose."

So, back to our original example of the average musician only earning $23.40 for every $1,000 sold. That money has to go back towards "recouping" the advance, even though the label is still straight up cashing 63% of every sale, which does not go towards making up the advance. The math here gets ridiculous pretty quickly when you start to think about it. These record label deals are basically out and out scams. In a traditional loan, you invest the money and pay back out of your proceeds. But a record label deal is nothing like that at all. They make you a "loan" and then take the first 63% of any dollar you make, get to automatically increase the size of the "loan" by simply adding in all sorts of crazy expenses (did the exec bring in pizza at the recording session? that gets added on), and then tries to get the loan repaid out of what meager pittance they've left for you. 

Oh, and after all of that, the record label still owns the copyrights. That's one of the most lopsided business deals ever. 

So think of that the next time the RIAA or some major record label exec (or politician) suggests that protecting the record labels is somehow in the musicians' best interests. And then, take a look at the models that some musicians have adopted by going around the major label system. They may not gross as much without the major record label marketing push behind them, but they're netting a whole lot more, and as any business person will tell you (except if that business person is a major label A&R guy trying to sign you to a deal), the net amount is all that matters.

RIAA Accounting: How To Sell 1 Million Albums And Still Owe $500,000

Last year, we read a post on RIAA accounting, detailing how labels screw over many musicians, even some of the best selling ones, such that they never actually make a dime in royalties.

It definitely covers a lot of the same ground (in fact, his advance numbers and sales numbers match up exactly with the numbers we quoted last time from Courtney Love), but it also delves into some of the sneakier aspects of record label contracts with musicians -- things that many musicians simply won't know about or understand when they sign their contract. Using those points, he breaks down how a band might think it's getting royalties on $20 million worth of sales but then find out that, thanks to some of these fun tricks, the basis for calculating the royalty takes that number all the way down to $4.9 million (and then with a 10% royalty, the official take is $490,000 -- but if the advance is $1 million... the band still technically "owes" $500,000). 

And, as we noted in the post last year, don't think that because a band goes "unrecouped" that the label loses money on them. The "recouping" only comes from the 10% royalty rates, which are really much, much lower (in this example, the "real" royalty rate is more like 2.5% due to the clauses in the contract). That leaves 97.5% of the money in play. Obviously, some of that is covering costs and expenses. But there's plenty of cash that makes its way into the label's bank account, when an album sells $20 million. 

As for what kinds of tricks the labels use, well, Frascogna notes "breakage fees" of 20%, which are based on breakage rates for vinyl from half a century ago. That CDs don't break so much and that digital files don't break at all, doesn't matter. The labels still try to get a super high breakage rate that they get to deduct. For them, it's pure profit. Then there are "uncollected account" withholdings, on the basis that some retailers go bankrupt and don't pay for the stock they had. The way it's described here, that's often just a set number, rather than based on any actual, documented cases of uncollected fees. Next up? "Free goods." Now, we talk about the importance of free goods all the time. But here it's used in a different manner. Basically the labels deduct the "cost" of providing reviewers/radio stations/etc. with "free" copies of your album. That money comes straight out of the gross that the royalty is calculated on. The fact that you could just email the mp3 to those folks yourself? Well, pay no attention to that newfangled technology. 

Next up, there are "container charges." That's for things like the jewel cases and inserts for CDs. Again, the fact that digital music doesn't have such expenses is pretty much ignored. Also, the fact that all of these expenses get deducted from the artists' share? That also seems wrong. Even more insane? Apparently the standard "container charge" is an additional 30% off the revenue. Again, in many cases that's just pure profit for the labels. 

Finally, there's the ever lovely and totally amorphous "reserves." As Frascogna notes: "no one really knows what reserves entail." It's basically a blank check for the record labels to claim they have to keep some of the money themselves for "other stuff," which is mostly undefined. In this case, some labels simply set a straight percentage, up to 20% more of the gross that artists never get to see as part of their own royalties. 

Bring all that together, and the 10% royalty looks more like a 2.5% royalty, and that's not enough to even get halfway to recouping even if you sell 1 million albums at the high high price of $20/album. And that doesn't even touch on splitting up any money you get between band members and paying the manager/agent, etc. When you dig in to things like this, you can understand how artists like Lyle Lovett can say they've sold 4.6 million albums and never made a dime in royalties from album sales. 

Now, many of these points can be negotiable if you're knowledgeable about them. But many artists sign such contracts without realizing what that fine print really means -- and that's just what a lot of the labels are counting on.

4 Ways To Negotiate 360 Deals

BY music attorney MFRASCOG

When you hear the word “deal” in today’s industry more than likely it’s a 360 deal. Commonly called “360” you’ll also hear these agreement referred to as multiple rights agreements, all rights deal or bundle agreements. Remarkably, 360 deals are nothing new, especially for record labels as they’ve been in existence for decades. Labels have always wanted artist to sign a recording contract, be in bed with a management firm affiliated with the label and sign merch deals with parent companies. Anyway you spin it these situations have 360 characteristics. What’s unique about the 360 deal today is the fact everyone feels as if they can implement multiple right contracts so somewhere these things tiptoed into the mainstream. While writing this article I’ve got a music publishing contract sitting on my desk demanding multiple rights. Publishing companies demanding 360’s entitling them to merch sales? Not to be outdone, last month I dealt with a booking agency demanding 360 rights with entitlement to record sales. In the music industry bizarre, anybody and everybody insist their expertise rises to the level of 360 status. Absurd? Maybe. Farfetched? Not really. Since much of a musician’s income comes from sources other than recorded music, why should labels be the only ones to implement multiple rights agreements? Be it old school 360 or new age 360 deals, two things have remained consistent: (1) people assume they’re non-negotiable and (2) they involve a substantial commitment by an artist.

360 deals are simply a strong-armed request. Best stated by a fellow attorney “the large print giveth and the small print taketh away.” The offering party is attempting to hedge a bet and trap artists. Multiple right deals require substantial investment so often the “non-negotiable” contract is nothing more than a label swinging for the fences in hopes the bands believe them so they can collect a higher percentage. Sorry to say most of the time this works. Further, don’t be so quick to toss labels under the bus. Most of the time out of the offering parties (i.e. – managers, labels, production companies, agents, etc.) labels bring more to the table (and naturally request more in return). Industry companies have business experience and prey on artist who don’t. If multiple rights deals were non-negotiable, I’m assuming everyone thinks Shakira and Madonna’s attorneys didn’t negotiate with Live Nation? Robbie Williams was faced with a take it or leave it type deal with EMI? I guess the tooth fairy drop these contracts on their doorstep? Let’s come back to reality – non-negotiable 360 deals are negotiated at every conceivable level. The non-negotiable approach is typically a means to get artists signing on the spot as if a label can take away all the sorrows with the quick stroke of a pen. Regardless of who’s offering, and despite the varieties 360’s have 4 consistent (yet broad) concepts that will always serve as a negotiating start point:

1. Call Out The Conflict
Enjoy incestuous relationships? Have fun with a 360 deal! Sure they sound attractive when someone tells you that all the agreements can be bundled into one. This quickly allows everyone to focus on the music/career because “hey man, we’re a one stop shop for everything you need.” Bad starting point. Essentially you’ve just been blinded with “let’s get creative and ignore business” communication. With everyone intertwined (i.e. -management, label, publisher, agent, publicist, etc.) who is keeping the checks and balance system? For example, if the label stiffs the artist, the manager (who is also employed by the label) will be unlikely to call the label on the sour situation at risk of losing his own job. In many U.S. states and foreign countries artist managers (and agents in some cases) have to fulfill a fiduciary duty to their clients. Welcome to the legal world. Once this basic standard of care becomes violated, managers (or any other respected party) have essentially violated their fiduciary duty. Bring up fiduciary concerns on the front end and I can assure you negotiations begin immediately on that so-called “non negotiable” contract.

2. Know Your Strengths
Some artists do a tremendous job selling and promoting music. Others do not. Know your strengths. Should you already have a substantial following, high record sales, sync deals, merch sales, etc. why sign a full 360 deal? Peel off the irrelevant sections in order to bifurcate a 360 into a 220, 180, 100, and so on. Build the model that works for you. This is not only realistic but it’s also good business.

3. Know Your Rights
*Unquestionably the most important aspect of 360 negotiations.
The most valuable rights an artist can possess: (a) copyrights and (b) trademarks dictate the strength of multiple right negotiations. Copyrights control so much more than artists realize. When you legally own a copyright to your work, you actually own a bundle of rights (6 to be specific). As these rights vary country by country, essentially the bundle allows the owner to the following:

• The right to dictate reproduction of the work
• The right to control derivative works
• Distribution rights
• Performance of the copyrighted work
• Display of the work publicly via film/images/etc.
• Performance by means of digital audio transmission

Take the bundle as a whole or isolate any particular portion and the owner can dictate the scope of use, time, geographical location, or purpose. Putting these concepts in motion, let’s assume BAND X receives a 360 offer from Live Nation located in The United States. In regards to the copyrighted material, BAND X can grant Live Nation distribution rights (in the U.S. only), rights to derivative works (in Finland only and then to another company for rights in The United States), performance rights of the copyrighted work (for no longer than 12 months in the U.S. – not globally), etc. Artists own the bundle of rights and they should never blindly give away the entire bundle. Negotiate by being specific about geographical locations, duration of time, and/or purpose of the work. We’ve only touched the tip of the iceberg here, as a new world of negotiation can be opened up when discussing other rights (i.e. – trademarks) publishing, bookings, or merch rights.

4. One Word Speaks Volumes – “NO”
Presented with a non-negotiable 360 deal – just say “No.” If you’re as good as you think you are, if you’re in as high demand as your friends tell you, or if venues are drooling for you to perform – reject a 360 deal. If the offering party is serious about signing you they’ll present you a second offer. If they don’t it was probably one-sided to begin with. Nothing speaks volumes more so than a rejection.

The Problem With Artist Endorsement & Equity Deals

Many claim the entire music industry model is broken.  I’m not one of them.  Several components however do need minor tweaking while others need considerable overhaul.  One are of repair is with the basic endorsement deal and artist equity agreement.   Absolutely this statement is biased, but I believe the missing ingredient with any broken industry model is the lack of indie relevance.  Indies have a voice, and a loud and large one at that; but not all indie artists have the opportunity to obtain massive exposure often introduced via “the endorsement deal.”   Yes – hundreds, if not thousands of indie groups have endorsement alignments but most of these deals lack out of the box creativity and none are on par with endorsements presented to major acts.  Understand endorsement deals are based upon many obvious factors (radio, touring exposure, fan base) and other non obvious factors (label partners, publishing, management, etc.), none of which I’ll discuss here.  These are huge factors that can dictate the success and strength of the endorsement – far too detailed to address in a single blog post.   The purpose of this piece is to hopefully shed light on a new age of endorsements, a new world of artist equity, a world where not only artists generate money but so does the endorsee and labels by generating a tight knit community of brand and band loyalty.

Now whoever the village idiot that created the mass endorsement / music model needs to disappear.  Call me a pessimist, but I don’t dub anything a successful model if it only works for less than half a percent of artists.  The chances you’ll land an endorsement deal (one with monetary meaning) is equal to the chance I’ll let you sleep at my house and give you a bag of money as a hosting gift.  To combat the growing opposition to the endorsement deal, some industry folks have begun hyping up the “equity endorsement” as if it’s some sort of new age brainchild.  The counsel of village idiots continues.  So we’re clear, allow me to briefly distinguish endorsement deal v. equity deal:

ENDORSEMENTS:

In its simplest form, endorsement deals are nothing more than a performance contract.  Company X pays Band X to perform (i.e. – talk about the company, perform wearing the product, wrap their tour bus with signage, act in commercials, etc..).  Endorsements are mutually beneficial – the artist gets paid handsomely and the company in return gets to develop public connections between the artist and product.  Not a bad gig for either party.  This years high profile endorsements include Lil Wayne and Nicki Minaj with Pepsi, Tim McGraw with Pennzoil and Lady Antebellum with Lipton.  On paper, there’s nothing wrong with an endorsement deal – hell, they just make sense.  However, two particular components dilute the effectiveness of artist endorsements: (1) authenticity, and (2) indies don’t receive equal opportunities.

EQUITY:

A slight wrinkle to the endorsement model, equity deals allow artists to capitalize from their fame by owning a piece of the company in which they partner.  These are typically seen between artist and liquor companies but have seeped into other brands as well.  Currently, the bigger equity stake deals include Cee-Lo and Ty-Ku Sake, Puff and Ciroc and Toby Keith with Wild Shot Tequilla.  Equity stake may happen as a trade (i.e. – artists exchanges leverage of fame for a percentage of the company), or sometimes it’s a combination of a monetary endorsement in conjunction with a buy-in for a percentage of the product.   Equity deals are a good model because both artist/company have skin in the game therefore developing an organic endorsement on the backend in which both feel passionate about the product – however two problems with the equity deal: (1) only the artist and company reap the benefit (if any), and (2) they lack creativity.

So what is wrong with today’s endorsement & equity model?  What works?  For starters, both lack partnership creativity.  All relationships (good relationships), develop naturally.  They develop because of shared interest.  Equity and endorsement relationships are born purely from money, and further only develop between the endorsee and the artist.   This “business” we call music, it is about money but it’s also about lasting relationships – and typically that’s where things fall short.  There is another model, a model where creativity is the driving force.  People will say it doesn’t work, I’m here to tell you it does.  Speaking from the attorney standpoint, when the perfect storm is formed between label, artist, endorsee, and publisher the result is truly something beautiful (i.e. – the “new” endorsement deal) – and I see it happen weekly, unfortunately it’s not the norm.

The model applies to major acts wiling to take a chance and indie bands looking to hustle.  Recall the Lady Gaga and Polaroid endorsement?  Essentially Polaroid paid Gaga an inappropriate amount of money to endorse their cameras.  As I’m unaware of the deal points, I imagine Lady Gaga granted Polaroid permission to use her name/likeness in relation to the product resulting in commercial spots, billboards, print campaigns, etc.  Possibly it went a step further where Gaga wrote a quick 15 second jingle for specific use by Polaroid.  Either way, at this point the relationship between Gaga and Polaroid ends.  Gaga has no incentive after being paid to continue pushing Polaroid.  Now imagine the difference in the equity model where Gaga would receive backend funds because she owns stock equity in the company which could result in a major win or a major loss.  What if Gaga did the endorsement for free – neither an endorsement model nor equity model?  Polaroid doesn’t offer Gaga a nickel and Gaga doesn’t demand a dollar.  Who wins?  Answer – Everyone!  This is the new model.

Companies don’t need to pay for endorsements or a synch license and Artist don’t need to demand it.  What both sides must demand is a “temporary” partnership.  There is too many hands in the pot, most of which aren’t necessary.  The song placement business has become as congested as the digital music marketplace; and the true visionary bands and labels will break this mold (I’ll reserve my thoughts on how the Publisher makes money – got to protect some ideas!).  Example – instead of Nike paying an artist $10,000 for song rights in a commercial spot, the artist gives Nike the track for free.  In return, Nike forms a partnership, trading an upfront price tag for potential backend results.  Nike becomes the music distributor, plugging the particular song via 30second commercials spots intertwined with their product campaign, channeling all potential traffic to their site.  On the site visitors have the opportunity to purchase the song in the commercial campaign “exclusively” on the Nike website.  Essentially Nike becomes a distributor, a record label for a brief moment of time.  If a track sells, Nike gets a distributor cut and the artist (or artist/label) receives the rest.  It’s no different than a record store or a digital download.  The result is a company who is loyal to the band because they obtained song rights for $0 with an opportunity to actually make money (not spend it) on tracks.  On the flip side, the band receives massive benefit from exposure, direct sales via a unique distributor and a mutually beneficial relationship spearheaded by a visible company.  Would labels love this?  Absolutely.  It’s free promotion on particular tracks (for a limited window of time) which inevitable results in a backend album sale, exposure, touring, merch sales – all profit bundled within the 360 deal (aka. Multiple Rights Deal, aka. Collateral Entertainment Activity Agreements).  The only thing the endorsee cares about is (1) paying the lowest price for a popular song (in this case FREE music), (2) obtaining loyal customers, and (3) making money.  I’m certain the rebuttal at this point is “sure this works for major acts but who cares about a partnership with an indie group?”  Answer – nobody, if you present it to the endorsee the same way as millions of other groups via a licensing broker.  Answer #2 – everyone, if you pitch it in a way that makes sense.  Indie bands are illusive, they can attempt several things without breaking the bank and more importantly have die hard loyal fans.  All of which are massive attractions to potential endorsees. What indie bands lack is a team component which helps bring plans to fruition, especially when securing proper endorsement deals.  In this respect, challenge your team, don’t just hire a manager because you need a manager.  Don’t hire an attorney because you need someone to review a contract.  Don’t sign with a label because you think it’s necessary.  Build your organization – an organization that thinks differently, performs differently and is passionate about the entire team moving upward as opposed to individual interests.  A basic endorsement deal and/or equity deal is a quick buck with a short life span.  Challenge the system and be different – establish longevity.

How Casino Labels Will Change The Industry

Casino funded record labels will change the music industry.  Slight rephrasing – “if” casinos spawn record labels, it will forever change the music industry by setting the bar so high major labels can’t compete.  With new label players such as Wynn Casino partnering with NYC indie label Ultra Music and the Hardrock organization birthing HardRock Records, what’s all the hoopla with labels?  Labels today mean something different.  They’re not just about selling records and turning profits.  Many organizations could care less about “music based” profits; rather they use music as a marketing tool to drive sales elsewhere (i.e. anti-360 labels).   Casinos happen to be the latest associations jumping on the label train – and if they do it properly, casino labels will change the industry.

People assume the record industry is sucking wind – it’s not.  Casinos however find themselves in a desperate situation, a condition that calls for a severe recalibration.  Las Vegas, the epicenter of entertainment, faces a punch to the throat that makes the record industry piracy days look like a misplaced dime.  In 2011, the Las Vegas Convention and Visitor Authority reported 38.9 million visitors to Sin City; but most of these visitors didn’t come for dice and cards.  Paralleling this statistic, the Nevada Gaming Board claims only about 46% of the cities revenue is generated from gambling (down from 60%).  Out of the 46%, only 34% of the revenue is generated via food and entertainment.  In short – casino generate less revenue from gambling and even less from entertainment.  The Vegas entertainment model of old can no longer be sustained in Vegas today.  You may argue casinos continue bringing headline entertainment to their showrooms so what’s the problem.  True – casinos will frequently drop crazy money for headline dates, but most of the time these are “one off dates” that the casino never plans on booking for long-term nightly shows like a Celine Dion.   One off dates can’t revive an entertainment economy; it’s simply a short term money maker.  However this piece isn’t about what Vegas does poorly; it’s more about what Vegas (and casinos) do right.  They invest in entertainment, they brand entertainment and subsequently, theydon’t care about entertainment.  It’s a beautiful model.

Music today is consumed differently.  Labels must marketing to the masses, selling albums to as many people in the mainstream market that will purchase it.  This is the only way to survive in the label business.  This is a difficult model because it’s reliant upon (a) selling music, and (b) selling music to as many people as possible in order to generate profits.  Profits spawn more potential artists’ signings, which can increase label visibility and penetrate more potential music buyers.  Again, the model boils down to (a) music sales, and (b) selling music to the masses.  This is a terribly model plus it’s not reality.  Reality is a niche marketplace.   Effective businesses have perfected the art of narrowing the mass market into a specific niche, than controlling the niche by maximizing sales.  This in return generates customer loyalty and niche specific products.   What does this have to do with casinos and record labels?  When Hardrock Records launched, co-head of A&R Blake Smith said “the label is a nonprofit venture designed to put the focus on artists.  We talk to artists and they’ll assume that there’s a catch, and there’s not a catch.  You (i.e. – the artist) keeps everything the whole time, and if labels come knocking, we say, we hope they sign you.”  This mentality can only be adopted by casinos.  To quickly defuse naysayers that the above statement isn’t reality, it is – our firm negotiated the Hardrock Records contract – they truly give it all back to the artists.  Couple the mentality of giving everything to the artists (i.e. – we don’t care about music profits), back to what I said earlier about casinos understanding entertainment.  Casinos by design are 100% entertainment.  Everything is essentially a theatre within a theatre within a theatre.  Casinos care about entertainment only to the degree it generates revenue on the casino gambling floor, hotel occupancy, and food/drink sales.  Essentially casinos spend money on entertainment but they don’t expect money from entertainment directly.  This is a stark contrast from the model I previously identified which labels need to sell music and sell music to as many buyers as possible to turn a profit.  Casinos know the exact dollar amount correlation generated on the casino floor and hotel room occupancy based upon the concert attendees.

With the soon to be success of Wynn and Hardrock and their respected labels, I’m convinced more casinos will start record labels simply to fill the diminishing gambling revenue.  These labels won’t care about music and they won’t care about record sales, but they will care about marketing.  Marketing is the ultimate currency for casinos because it means exposure; exposure translates to potential tourists which subsequently generates gambling revenue.  Labels give casinos the opportunity to constantly market themselves.  Not only can casinos generate constant branding opportunities and product tie ins (ex. Motley Crew had logos on the felt tables at HardRock), they can invest top dollar to assure sold out shows and guarantee some of the most beautiful venues in the world.  For casino labels, hitching onto a band means promotion.  Albums can showcase the casino trademark, product tie ins, albums can be recorded LIVE in the showrooms, etc. -sssentially bands become the brand ambassador for the casino just like artists have done at Converse, Mountain Dew, and RedBull.  The difference in what could make casino labels more successful than other anti-360 labels is simply the gambling revenue.  If an artist generates positive conversation for Mountain Dew, Mountain Dew may sell a can of sugary pop.  Despite the positive outlets anti-360 labels create, it’s expensive to use bands for marketing to simply drive sales on an inexpensive product.  Generate positive conversation for a casino, and the casino will make money on the gambling floor, hotel business, food, drink, and various entertainment.  Wynn Las Vegas, via Ultra Music and their respected YouTube page has generated 1.8 billion views.  Can you image what that does for Wynn visibility and potential gambling profits on their casino floors?   They have tapped into 1.8 billion folks without spending top marketing dollars yet their marketing machine is continually promoting 24/7 365 thanks to musicians.  If the casino label revolution takes off, major labels could be done for overnight.  It’s impossible to compete with an organization willing to give artists everything, bankroll projects and not demand recoupment, along with provide top shelf marketing without demanding anything in return.  Casinos are the only organization structured to get away with such proposal.

Why You Should Own A Trademark {Video}

One of the most misunderstood money makers for recording artists is trademarks.  Understand how to own them and how to use them and gain all the leverage.  

In today's DIY market it's important to understand all the potential income streams. A large chunk of this is understanding how intellectual property can work to a bands advantage. Many assume this means "copyrights" but in actuality it's a combination of both "copyrights" AND "trademarks." Learn why you need a trademark, how to file them, and better yet how to use them as leverage and control.

Band Agreements

BY music attorney 

MFRASCOG

May 4^th 2012, the music community mourned the passing of musical pioneer in Adam Yauch.  

Easily predicted – sales skyrocketed the week of Adam’s passing.  According to Billboard figures, in a two day period singles jumped 802% while album sales surged 1,235%.  Hours prior to Adam’s passing, The Beastie Boys were slapped with an untimely lawsuit for alleged copyright infringement on several samples contained in their greatest hits.   

All the attention brings along two very interesting questions: (1) What happens to the income generated from sales, and (2) what happens to the group moving forward, does the group “Beastie Boys” exist, and if so, who defends the lingering lawsuit?  Blame it on the attorney curse but my first thought following the news of his passing and increased album sales was that this could be a colossal mess.  Not “could” – it “will.”  Luckily for the parties involved most will take place out of the public eye.   However, while the public mourns, I can assure attorneys, band members and Adam’s beneficiaries will be sitting in a backroom untangling the inevitable legal labyrinth.  Eventually all will be resolved, but to generate answers to the questions presented above, all paths will lead to one piece of paperwork – The Band Agreement.

I have no idea if The Beastie Boys have a band agreement and I have no idea what language it contains, assuming they do; but a band agreement is literally the foundation for musical groups which dictates a host of potential legal issues.  The band agreement is the internal blueprint of how your business (i.e. the band) is run.  Agreed upon by the group members, the document ultimately dictates how dollars are to be divided, voting formats, ownership, the legal rights for departing members, the legal rights for passing members, etc… Prior to the inclusion of labels, managers, agents, and so forth, the band agreement becomes the document everyone must follow.

In this case, like most typical band agreements, The Beastie Boys likely addressed how assets would be divided, and more importantly, to who: active members, expelled members or deceased members.  Somewhat straightforward, active members may be defined as one of the participating members of the group.  EXAMPLE – If Band X has four members, and all actively perform, band income may be divided equally 25% to each member.  Expelled members (i.e. -members kicked out of the group for various reasons), typically have less rights to band related income once they depart the band (songwriting and publishing remain completely different issue).  The definition of deceased members is an area where band agreements vary drastically – minus the obvious exception of someone being dead.

Sometimes, if language allows, a deceased member may transfer his/her rights to band related income – later referenced via their will.   Other language may suggest “band related income” seizes once a member passes (again, songwriting and publishing remain separate issues).  EXAMPLE, if BAND X  has four members and one dies by a freak mudslide accident, coincidentally the remaining band members play a show three days later for a  fee of $12,000 – the active members would divide $12,000 three ways ($4,000 per member), not four ways ($3,000 to the performing members and $3,000 the deceased members estate).  Pending on the contractual language with The Beastie Boys band agreement, Yauch beneficiaries may or may not see a portion of the album sales spike.   As for the pending lawsuit, once again the band agreement will ultimately dictate who’s in the band; therefore identifying the proper defendants in this case.  If Yauch, despite being deceased, is deemed an “active member” this legal mess will unfortunately become inherited.  What about the group name – Beastie Boys?  Who owns it?  Legally speaking, do three members have rights in the name?  Can Yauch’s wife use the name “Beastie Boys” for monetary gain?  Can a third member be added in Yauch’s absence but still call the band Beastie Boys?  Will the label release additional albums without Yauch?  Does the label own the trademark for “Beastie Boys” therefore potentially recreating the band with new members as they see fit?  You guessed – all of this would be dictated via the band agreement.  In the Beastie Boy situation, this will play out over time and we’ll receive a subtle glimpse as to what was in the confidential agreement.

The Beastie Boys are a widely popular group operating at the highest of levels, so do band agreements apply to the indie band just starting off?  Absolutely.   

Regardless if major label success arises, band agreements dictate how the business operates – not to mention having a plan is just good business.  If a major label opportunity should arise, success has the potential to develop rapidly, therefore the band agreement becomes an afterthought – which I can assure becomes detrimental.   

At a minimal level – every band should have a document defining 4 basic terms:

1.     Voting – Develop the appropriate method for deciding band related questions.  Do we invest in more equipment?  Do we save money or spend money on development?  Do we hire manager X or manager Y, etc..  Identify decisions that need a unanimous vote from band members and which decisions simply need a majority vote.  Decide if everyone shares equally in votes (i.e. – 1 vote per member), or does someone deserve more say based upon financial investments or duty overload.  Defining the voting structure allows for ultimate transparency and eliminates backend bickering.

2.     Income/Ownership – It’s imperative to set an income structure – meaning when a dollar comes in the door, where does it go?  Are members being paid equally, or is a percentage being earmarked for development, equipment investments, etc?  Ultimately this will compliment the voting structure previously discussed.  Ownership on the other hand becomes a sticky sticky sticky issue.  Ownership issues can be simple like who’s the songwriter, who owns publishing, relevant splits and so forth.  Other times ownership issues are not clear (often unpredicted).  EXAMPLE, many bands file for copyright protection, but whose name is on the application?  Is it one member?  Guess what, legally speaking the filing member owns the songs – not the group – therefore the band agreement must untangle ownership arrangements.

3.     Trademark  - Who owns the band name and logo?  Don’t assume everyone shares in equal parts.  If BAND X consist of five members, and three leave the group after six months, can the remaining members still be called BAND X?  Can the departing members refer to themselves as BAND X?  Have a plan to combat this situation, and statistically speaking, it will arise.  EXAMPLE, Imagine operating under the name, BAND X, for five years.  The energy and effort in developing a fan base is very expensive.  Now imagine, one member decides to leave and begins calling himself BAND X.  Now we have market confusion – two BAND Xs.  What happens if this argument ends in a lawsuit and the courts determine that neither party has rights to the name BAND X?  Everyone has to start over – new band, new name, new fans, new development, etc = not good.  A trademark can be the cash cow or the ultimate money pit.

4.     Jurisdiction/Venue – This relatively unknown factor is likely the most argued element between entertainment attorneys.  For bands, should an issue arise, you want to know how the dispute will be argued, in what court (if any), where the dispute will take place, what law will apply, etc.

Releasing albums should be the exception, not the norm

What is an album? 

"Not everyone has a "illmatic" in them..."

I think at different times it has meant different things. In the digital age, the album usually signifies a collection of songs which might or might not have a coherent theme that groups them. Before that, albums were often not much more than retail products – a package defined by its restraints. And if that last sentence rubs you the wrong way, then you are like me, and believe albums should be more than just the package.

I can’t exactly remember the first album I ever bought. However I can remember the first album I ever bought that seemed like a coherent whole. It was Mr. Lif‘s concept album I Phantom, which tells a story from first to last track, the album artwork giving additional explanation. I fell in love with it. It redefined hiphop for me and I listened to it on repeat. The same thing happened a couple of years later, when I discovered Pink Floyd‘s Dark Side of the Moon, or the Beastie Boys‘ Paul’s Boutique, or Venetian Snares‘Rossz Csillag Alatt Született. These are creations by artists who understood how to use the time restrictions of packaging and turned it into something marvelous.

Music is a creative business, but for most albums, it’s just business. The songs by themselves might be coherent works of art, but the albums are often reduced to compilations of coherent bits of art. I can understand this business choice if you sell a lot of music and the primary way in which this is sold is through CDs or vinyl, though I do not commend your creativity. However, for most artists the reality is that digital and live are the biggest sources of income. So why are you letting status quo-imposed restrictions define the way you release your music? It’s not the nineties anymore: following the status quo is now the worst strategy to choose.

The new package is the MP3, or whichever format you prefer. The new package is the stream.

Those packages are thriving!

As you can see, digital album sales can never make up for physical albums. Why? Because the album was a retail solution, optimising the material cost of the package by adding value to it in terms of music volume. However nowadays, what are you adding value to by putting out releases that are 50 or 70 minutes long? The grand illusion of this industry is that people pay for music. They don’t. Unless you’ve ever directly commissioned an artist, or requested a song from a musician and payed for it, you have not ‘paid for music’. You have bought the package, you have purchased access to a live experience or paid for access to music libraries. You’re not selling music. You’re selling things people associate value with because of your music. Music is not the product.

In the music business, we also love to jump into the role of the victim. I have a theory why this is. Making a comfortable living from music is, and has always been, one of the most difficult career paths. Then came Napster. Influential music executives, whom had been enjoying a predictable market and the comforts of market stability due to their oligopoly, were shocked into utter confusion. Through their influence, this confusion spread. Previously, to many artists, it seemed like there was only one route to get a career in music. Get signed and sell albums. Despite both aspects increasingly being less likely, newcomers would still aim for those paths. Since then, we’ve all remained comfortable in this womb of confusion, letting our roles as victims serve as excuses as to why we should not be thinking more creatively and more revolutionary about our business.

Due to great DIY examples and opportunities created by the likes of CD Baby, Jeff Price’s TuneCore, or Kickstarter, an increasing number of artists is now able to let go of the idea that getting signed is an essential step towards success. And Kickstarter, Pledge Music and other crowdfunding platforms have actually opened artists’ eyes that their albums are not the only product their fans might be interested in.

Now is the right time to ask yourselves: “why am I making an album?” Is the value of the whole greater than the sum of its parts? If yes, great. However if there is even the slightest suspicion that you’re making an album because “that’s the way things are” then rethink. You don’t have to release your music in economically dying formats just because you think that’s what people expect you to do. Doing the unexpected is more exciting.

You don’t have to follow last-century business models into their graves. You are free. Make music.

3 Legal Tips for Amanda Palmer-style crowdfunding

Raising over a million on Kickstarter is amazing. But what are the legal implications? Entertainment lawyer Frascogna explains

Make no mistake about it, Amanda Palmer achieved the impossible. Who would have thought an indie artist could successful raise $1,000,000+ via crowdfunding, an amount which rivals most label release budgets? Well, lots of people thought this was possible. not to mention an entire community of indie musicians. Amanda would likely be the first to say it was a perfect orchestration of luck, personality, fan connection, and unremitting work to pull off such feat. Her navigation into the unknown was handled flawlessly, resulting in a marvellous project in the making and a world of inspired indie musicians. This is a good thing. This is a very very good thing.

Raising millions via crowdfunding doesn’t come without questions, and more so, legal implications. Where does all the money go? Is there a legal obligation to investors? Because Amanda’s successful Kickstarter will inevitably inspire others to initiate crowd funding campaigns, artists can avoid future pitfalls by implementing the following techniques:

1. Treat It Like a Contract

Successful crowdfunding is a positive result from a healthy artist/fan relationship, but the monetary exchange is much more complex than a simple donation. Kickstarter, like most crowd funding sites, requires a section list of deliverables. Donate $1 and the artist will give you X. Donate $5, and the Artist will give you Y, and so forth.  Due to this element,the relationship becomes contractual. If the Artist offers a service/product and the Fan accepts this offer by monetary consideration (i.e. – the money), a mutual contract exists. Artists using crowdfunding techniques MUST deliver, otherwise it’s a breach of contract which could have further legal implications if the donor so chooses to pursue. Yes, it’s unlikely a lawsuit will spawn from a undelivered $5 gift exchange. However, artists potentially face a more daunting public relations nightmare. The important information nugget here is to deliver upon what you offer. Because Kickstarter is often criticised for their failure to “assure” implementation and fund allocation (rather than simply overseeing of the process itself), it’s likely future policies interpreted in the U.S. Securities & Exchange Commission concerning crowdfunding will be initiated and further setting precedent for other countries.  Currently these issues are being identified under the Jobs Act passed by President Obama on April 5^th 2012.

2. Assure the Proper Entity

Tax implications emerge when raising money. For starters, who raised the money? LLC, Corporation, Individual, etc? Unfortunately, many artists haven’t properly set up their business by filing the appropriate paperwork, therefore they simply operate as an individual. Pending on the entity of operation, the funds will be taxed accordingly. In Amanda’s case, she’ll likely pay a Massachusetts State Tax along with Federal Taxes on the money raised. Additionally, once again pending on the entity, taxes and potential deductions will vary. For example – let’s assume Amanda has a Massachusetts-registered business. She can potentially deduct certain funds as business expenses (i.e. pressing the product, album design, mailing cost, etc.) therefore, on paper reducing the amount of business profit and reducing the amount of taxable income. If the funds were raised by Amanda (acting as an individual), it’s likely funds will be reported as personal income which she’s taxed upon, forfeiting the advantage to claim certain business-related deductions. Clearly all of these aspects vary pending on country, state, and tax codes – however it’s an area of ultra-concern and important tax implications.

3. Transparency Is Key

A compelling aspect of Amanda’s campaign was the fact she remained extremely transparent throughout the fundraising process – constantly identifying where funds would be allocated. “Recording will cost $X, Publicity will cost $Y, Producer will cost $Z” and so forth. Donors want to feel involved in the creative process and have a general idea where their money is going.  However certain areas of Amanda’s campaign fell short in this regard.  As funding escalated, Amanda stated that she would likely spend excess funds on “debt and staff fees.” What debt? Personal debt?  How much? Staff? What staff? The resistance was minimal at best but take notice of these complaints in order to avoid fan friction in the future. Be transparent.

 
Oddly enough, Amanda Palmer’s successful campaign shed light upon another important issue, an issue often overlooked in the indie community – a proper release is incredibly expensive.  When labels front these cost and incur the risk, why are they interpreted as evil? A different debate for a different time.

But what Amanda did show was alternatives. Realistic and achievable alternatives. An alternative to bypass the several areas of fine print found in the standard label Recording Agreement. An alternative way to start a project in the black as opposed to the recoupable red found in the traditional label contract.  Amanda doesn’t have to worry about selling merch, touring, and album sales to pay off debt. She has laid the foundation to make money immediately upon release. At a minimum, this feat should be honored as a monumental accomplishment, whether you’re on the label side of the fence or an indie artist hustling to make it on your own. Cheers to you Amanda Palmer.  Well done.