360 Music Contracts, COVID-19, and the Future of the Music Industry
By: Jonathan Gonzalez
Since the turn of the century, music accessibility has quickly become greater than ever before, though listening formats have changed in popularity. As cassette tape sales waned in the 1990s, CDs became the most profitable format in the US. This trend continued through the late 2000s when CD use declined. Since 1999, falling music sales have been a consistent reality, due in no small part to newfound free, albeit illicit, access to music, offered by file sharing websites like Napster and the ever-reviving, peer-to-peer torrent site The Pirate Bay which at their peaks had sixty million and fifty million users, respectively, as well as Limewire.
Piracy then blunted the growth of the music industry and not until recently did the industry’s financial outlook begin to improve. In 2016, streaming revenues represented 51% of the music retail industry’s revenue, overtaking CD, vinyl, and download sales combined. Streaming subscriptions that year drove an over 11% increase in total recorded music revenue to $7.7 billion, the largest such increase since 1998, though that sum is still only half of previous industry highs in 1999. The advent of streaming and its embrace by American music consumers shows no signs of stopping, with a 41% increase in streaming requests from 2017 to 2018 to the tune of over 534 billion streams as album sales, including CD and digital formats, continued to plummet.
This backdrop of a shrinking and slowly recovering music market is useful in contextualizing the evolving discourse over who should get a piece of those profits as music consumption evolves. An innovative but controversial development of the early 2000s intended to maximize record company profits is the 360 contract, a type of record deal that arose out of ailing record companies’ desire to share in the profits of most or all artist revenue streams beyond just album sales. Such contracts are accordingly known as multiple rights agreements, as the rights an artist assigns to their label extend access to additional revenue streams such as merchandising, touring, and music publishing, among others. The earliest new artist 360 contract was created by Jeff Hanson, former manager of the band Paramore, alongside Jim Zumwalt, his partner, Orville, and Kent Marcus. Paramore released music on independent record label Fueled by Ramen while simultaneously signed to Atlantic Records, leveraging the image of an up-and-coming artist rather than one signed to a major label, initially accruing losses of millions of dollars as Atlantic promoted and developed their talent. After gaining fame, Paramore credited their 360 deal for allowing their band to grow slowly and with lenience. These arrangements designed to increase record company revenues can potentially yield mutual benefits as companies are incentivized to more heavily promote artists while artists may enjoy heightened profitability; however, the lack of standard 360 deal terms means they are not all profitable.
These 360 deals are frequently “cross-collateralized,” meaning that advances from all revenue streams can be recouped by the record companies and artists aren’t paid until these expenses are recovered. These deals can lead to unsavory scenarios where record companies that require payment based on gross tour profits must be paid even if the artist lost money on that tour. If a label actively participates in managing an artist’s other revenue streams, that artist is giving up substantial control over their career. Indeed, this version of 360 deals has given rise to commercialized “band branding” that puts profits before music quality.
Alternatively, a label’s passive participation would allow musicians to freely enter into merchandising or publication deals and retain more image control. Such concessions are especially steep in light of the fact that record labels indefinitely own the master recordings of any music recorded during the contract term. Musicians now find themselves in an age where Spotify and its competitors pay out between “$0.006 and $0.0084 per stream in royalties” to record companies, with an estimated 10% of those per song streaming revenues going to the artist while on a macro scale, musicians only received 12% of the total music revenue generated in 2018.
Enter 2020, where live music has been put on hold. In response to the COVID-19 pandemic, California Governor Gavin Newsom postponed or cancelled large gatherings over 250 people in the state through at least the end of March 2021, including concerts, with little hope of restrictions being fully removed soon as concerts are in the final stages of California’s reopening plan. As of April 2021, California has begun letting up on these restrictions. New York City followed suit, cancelling summer concerts in May and June of 2020. These sorts of cancellations were the norm during the pandemic, which effectively shut down the industry as it was forced to bet on the return of live music sometime this year. Among the largest resulting music festival cancellations were Austin’s SXSW festival and the Coachella Valley Music and Arts Festival’s postponement and subsequent cancellation, followed by another cancellation in 2021. Concertgoers have struggled to secure refunds largely owed to fluctuating policies contingent on whether concerts were ultimately postponed or cancelled altogether.
Artists, too, are struggling. By August 2020, a survey of US artists showed 94% had experienced income loss. The UK reported similarly dismal predictions in November that UK musicians’ income would drop by 65% and potentially up to 80% for musicians particularly reliant on live concerts. Year-end 2020 revealed that the live music industry had lost $30 billion due to COVID-19. Alarmingly, 90% of independent music venues anticipated shutting down in early 2021 without receipt of further help. Luckily, Congress recently authorized $10 billion in assistance to independent music venues in the Save Our Stages Act, with maximum potential grants of $10 million per applicant, up to 45% of their 2019 gross revenue.
On the other hand, during the start of the US COVID-19 quarantine, illegal album torrenting rose 15% and Spotify revealed that of those cancelling their paid subscriptions in the first quarter of 2020, one sixth did so due to COVID-related reasons. With sales from popular distribution formats in the past like CDs and iTunes, artists would see royalties amounting to less than 10% of their retail prices. Gross streaming royalties are divided up between various rights holders such as publishers and record labels before they eventually reach the artist at a rate agreed upon in a prior contract; if that rate is similar to the 10% rate of CDs and iTunes sales, this could mean that a band with a “niche indie album” that grosses $3,300 a month in streaming royalties could end up with a monthly net of $330 or even lower. With musicians facing a resurgence in piracy, paltry streaming earnings, and a further 9.2% decline in total US album sales to 102 million in 2020, what more can be done to secure a musical livelihood?
Various musicians have taken actions over the years to increase control over their own affairs in response to excessive record company control. Radiohead eschewed industry norms by self-releasing their seminal album In Rainbows in 2007 with a pay-what-you-want scheme, all the while owning their masters to that record and pocketing the profits on three million album sales, earning more than the sum of their three prior albums combined. Elsewhere, Mac DeMarco created an independent record label prior to releasing his album Here Comes the Cowboy in 2019 and advised new musicians to avoid 360 deals no matter “how much money [record labels are] offering,” adding that “nobody should touch” their tour merchandise revenues.
However, after the emergence of an economically devastating global pandemic, the question naturally arises: What, if anything, should be off limits to record companies? Perhaps virtual concert revenue. Some musicians have devised creative solutions to remain “on tour” this past year. Deathcore band Suicide Silence announced a geo-gated, “virtual world tour” streaming unique live concerts to locals in the immediate area surrounding the virtual tour stop. Across the world, French disco band L’Impératrice also produced a high-quality pre-recorded virtual concert for each geo-gated stop of their own virtual world tour to take advantage of the emerging format. A benefit of these virtual concerts is lower ticket prices compared to conventional concerts, reflecting improved accessibility to shows. In the short term, there remain a number of options available to musicians to try to make their contracts more lucrative as well as ensure that they successfully navigate the pandemic. Musicians should attempt to negotiate COVID-19 related addenda with their record companies, including a provision to establish “virtual touring” revenues as a category supplemental to conventional touring and distinct from one-off concert streaming, to try to create and exempt an additional revenue stream likely to be missing from their 360 deals, if they have one. An artist should also add a “force majeure” provision to their contract, with specific language covering pandemic-related public health emergencies so that both parties can avoid litigation over breach of contract for non-performance. In addition, artists could ask their labels for stipends for necessary living expenses, including monthly rent payments, out of their touring funds until the sooner of either the end of the pandemic or the recommencement of safe in-person touring occurs, allowing these payments to be recoupable after the end of a subsequent touring cycle.
Ideally, the future of the music industry will include a move closer to so-called “270” or “180” deals, where new artists can retain more of their rights and earnings. In a post-pandemic world, however, it may be more likely that 360 deals will adapt to survive by expanding in scope to encompass the creative new ways that artists too have adapted to survive.
About the Author: Jonathan Gonzalez is a 2L at Cornell Law School and Co-President of the California Law Students Association. He obtained a bachelor’s degree from the University of California, Davis in French and Political Science – Public Service and worked previously at Cornell’s Legal Information Institute.
Suggested Citation: Jonathan Gonzalez, 360 Music Contracts, COVID-19, and the Future of the Music Industry, Cornell J.L. & Pub. Pol’y, The Issue Spotter (May 7, 2021), http://jlpp.org/blogzine/360-music-contracts-covid-19-and-the-future-of-the-music-industry