The 360 Deal

What The Hell Is It And When Will It Go Away?

Foreword:
This is a multipart blog on 360 deals. Although it is a complicated topic I have tried to keep it as simple as possible. To understand the deal points I will explain the revenue streams and their history in the music business. Once you understand where we have been I will layout the mechanics of the 360 deal as it relates to those issues. Finally we will discuss whether it is good or bad and the future of these types of deals. Without further delay, on with the show.

Think of your musical career income as a whole pizza. All the money you make (or want to make) in music is represented by a slice. These pieces have names such as tour money, merchandise, publishing, record sales and everything else. Some pieces are bigger than others and historically, the record companies only wanted the biggest slice of the pie. This was the record sales slice and represented your cost of entering into the business. Presently, most music is downloaded illegally, or purchased as single songs on iTunes, Amazon, or elsewhere, so that record sales slice isn’t very big anymore and the record companies aren’t getting their fill. They are hungry, and now, they want more of that pizza. Welcome to the 360 deal. The record companies now want to take a bite of every slice you have. They want a percentage of your touring, your merchandise, your record sales, and (some think) first born child.

But let’s back up for a second so we can fully appreciate why the music industry has moved towards 360 deals. In times past, the record companies made their money on record sales. Back before the Internet, record sales were a very lucrative revenue stream for an Artist, because a huge percentage of the overall income of the Artist came from the physical sales of their album. The record companies controlled everything involved with making an album, from manufacturing, distribution, marketing, to selecting the studio and producers, and some of them even had subsidiary publishing companies. Between all of these sectors, the record companies did well for themselves. After a while, the record companies began to want to take a piece of the Artist’s merchandising, but very very rarely did a record label seek tour proceeds or other sources of the income from the Artist.

But then Al Gore invented the Internet (ok! not really) and the record companies were collectively caught with their pants down. Burning and ripping software coincided with the Internet, and in the early 1990s, you started seeing CDs replace cassette tapes and MP3 collections grow on larger and larger hard drives. At first, this activity was relatively harmless to the industry as it was mostly for personal use. Instead of giving a mix tape to a friend, they got a CD. It was like recording a television program on a VCR. However, as Internet connection speeds increased from dial up to high speed connections, it became easier to transfer files from computer to computer. This technology impacted the music industry more than any other industry, due to the small sizes into which songs could be compressed and the fast speeds these files could be transferred. Napster was the first, Kazaa was the second, and now Bit Torrent servers are all over the world from Sweden to Indonesia containing nearly every musical work ever recorded. This worldwide distribution system of music impacted mainly one thing, record sales, and the record companies were failing fast.

Now, physical sales are nearly dead. iTunes is the top volume seller of music in the United States, and now you can even get the Beatles catalogue through Apple. Most of the major record companies of years past have consolidated into a few super labels that can be counted on one hand. Traditional recording deals have evaporated, and many artists choose to not even be associated with a record label and release music by themselves or through a small independent label. The end result of all of this is that the revenue stream the record companies relied on for the previous half-century has literally crawled to a stop. But like every business, the record companies were not going to go out without a fight. The music industry was failing, but it wasn’t because people stopped liking music, it was because the business model changed and the record machine was running out of gas (i.e. money). That, my friends, brought us the 360 deal and why they want more bites of your “Musical Pizza.”