Music Marketing

Don Passman is an entertainment lawyer who has represented some musical titans, including R.E.M.,Tom Waits, Tina Turner, Quincy Jones, Green Day, Bonnie Raitt and many more. He’s also an author who has written one of the most thorough and practical guides to understanding the music industry. All You Need To Know About The Music Business is now in its 7th edition, and I had the good fortune of connecting with Don to discuss his thoughts on 360 deals, direct to fan options, file sharing, and the current state of the music business.

Congratulations on your revised and updated book! What do you see as being the most significant changes in the record business since the book first came out twenty years ago?

Well, there’s no more vinyl…[laughs]. In the record biz the changes have been profound. The record companies have gone from being incredibly powerful players to still powerful, but not nearly as much as they were. The biggest change is of course piracy, which devastated record company revenue. The record business has gone through such a hard period because it is difficult to compete with free. The record companies have been blamed for being asleep at the switch. They could have probably done more than they really did–although there wasn’t much anybody could do even with a rear view in the mirror.

Speaking of revenue, the 360 deals are certainly a way for labels to engage in other revenue streams, but are 360 deals a good option for artists? Is that something that an artist should be interested in if they are going to be signing to a label?

Whether they are interested in it or not, if they’re going to sign with a major or even an independent, they will have to make one of these deals as none of these companies will sign them without it. The labels are essentially trying to position themselves as branding companies, and are saying that they are not just a record company; i.e. we’re people that are investing in your career, we’re going to help you build your brand, and when you get benefits from that brand we should share in them.

This seems like a contradiction to me. The majors have downsized over the past few years, they have fewer resources, yet they are promising more with the 360 deals. Can they deliver?

No. In fact, they quit making promises a while ago. They started out by saying they would give you more attention, that they would give you a better record deal if you gave them 360 rights. They wanted the 360 rights to hedge their bet. That’s all gone. Now it’s just a record deal that looks pretty much like a stand-alone.

Are you saying that if you provide a label with the rights to merchandising, touring, or publishing there is no guarantee they will provide any marketing support to help increase these sources of revenue?

Correct. There are two kinds of 360 rights, active and passive. Some of the labels are actually taking the merchandising rights to manufacture and exploit, some the publishing rights, and others are just taking a part of income–meaning that you make your own deals for a piece of the pie. In the situations where they have a merchandising company, they are of course going to give you those services. They’ll do the manufacturing, the distribution, and the marketing. If they have a passive interest, however, they’re not really going to do anything.

That sounds like a pretty tough deal for artists. In the past, the only possible option was to work with a major label to get worldwide distribution, marketing support, tour support and more. Do you think that now is a good time for artists to be working with independent labels, which might be less constrained by the concept of multiple rights deals?

Well, the independent labels have gotten just as aggressive as the majors in terms of 360 rights. So you don’t actually get much comfort by going to an indie label. You may make a better deal, but they are still going to want the 360 rights as well.

Do you think it would make sense for a developing artist to switch their focus away from labels and instead try to market and sell themselves with the help of partners like an indie PR firm, a low-cost online distributor, or another artist service-based company?

It depends on what kind of artist you are. Nobody that is mainstream and wants to sell a multi-million release has done it yet without a label behind. That may change. But that is where we are today, Nov. 2nd. If you are an indie artist that has a niche market and a cult following, and you are content to stay there, then you can do just fine without a label. You can sell directly to your fans, you will know who they are, and you will have control of your marketing database. Anywhere in between, the answer is a little bit trickier. You’re better off economically on a per unit basis doing it yourself, because you can make so much more if you keep the 360 rights. But the question is: Will you sell enough going through a label to make up the difference? This is of course unknowable. It is easy to sign up on MySpace, use Tunecore, or have someone distribute your music digitally (or even do physical distribution). The problem is everyone can do that too. There’s no barrier to entry, and there are four million bands in MySpace. How do you break through the noise? That is essentially what record companies help you do.

France is adopting the so-called ‘three-strikes’ law, where Internet users could face a suspension of their services for sharing files. Britain might go the same way. Do you think that this is an effective way to fight file sharing?

It is certainly better than what we have right now. Presently, there is no consequence to infringers, really—there have been consequences for a few people here and there, but for the most part file sharing is rampant. So, I’m in favor of anything that makes piracy more difficult. But I also think it has to be coupled with something that people actually want, which we haven’t done a good job of providing yet. And by the way, that is not completely the industry’s fault. A lot of it is technological. There are limits to what [the record companies] can deliver today.

Do you think that technology will develop to the point where piracy might stop being an issue? I am thinking of the new Spotify model, where the idea is for premium users to pay a subscription to effectively have “anytime, anywhere” music with the inclusion of a smartphone app. It seems to me that offering a legal and more convenient option for fans to get music might be a better route than cutting off their Internet service.

Yes, if we offer something people really want. In that case, I think we can ‘conscript’ the pirates. There will always be piracy. Every business, from grocery stores to anybody else has some kind of theft. But it is minimal. In music, it is rampant. If we come up with something that is easy to use and readily accessible and cross-platform, I think we’ll have something that people will really want and should be able to monetize. It could be very good for new bands, because people who would never buy at a record store may now be willing to pay for music.

As traditional CD sales drop, are new income sources—such as video streaming services and the like—showing promise as alternatives to recorded music sales?

Well, none of that means much now. The revenues from videos are relatively modest when spread out, at least on an ad-supported model, because videos haven’t worked very well. It is hard to tie advertisers to a specific video and the advertisers are not willing to pay much for it anyway. This may change, but at the moment such revenue has not amounted to much. The same applies to cell phones. In the future, more things will be possible, but as yet there are relatively few options.

After years of contention, rights holders and commercial webcasters have agreed on pricing terms for online music streams; the prices will stay in place until at least 2014. In the updated edition of your book, you refer to the Copyright Royalty Board and this recent agreement. How does this change the playing field for consumers and artists?

It doesn’t change anything for consumers and artists. It really has to do with an alternative break in the statutory rate for webcasters, who were complaining that it was so expensive they couldn’t do it. So they came up with a private settlement, affordable to most, that makes the cost a bit less. So I think it would help consumers in the sense that there would hopefully be more services available that would cheaper. But otherwise, it’s not a direct impact.

In the new edition of your book, you also talk about P&D and ‘upstream’ deals. Could you discuss some of the options independent labels have if they chose to join forces with major distributors and labels?

A P&D deal works fine except that it is very risky and you are taking the risk of the manufacturing and the returns coming back. It can be expensive, but when it works you make far more per record. The upstream deals are deals that kick-in after a certain critical mass [of sales] is reached. Then, you no longer have a P&D deal, but a profit sharing deal. You are not taking any financial risk, and the major label takes over the cost of marketing, promotion, and so forth. Again, you make less, but presumably they take it to another level. Some of these deals have worked pretty well, but a lot of them haven’t, so it is not clear where the advantage lies. You may be better off or not. Just keep the P&D deal, and if it really works then your label will have more leverage to go out and make a better arrangement with the distributor.

At what point should an independent label think about a P&D deal? What should they have going before they even consider a P&D?

Product… [laughs]. You can make a P&D deal at any time. You just need to know that you are taking a pretty big risk with it. Maybe that’s all you can get, because nobody will give you any money, so they’ll only press and distribute the records. But that’s probably the deal you will end up having to make to get things going at the beginning, when you have no kind of track record or buzz.

It’s been widely reported that Touch and Go, a seminal independent record label (as well as a distributor of other fantastic indie labels), is cutting back its label operations and discontinuing its manufacturing and distribution operations completely. Here’s the message from Touch and Go’s Corey Rusk:

It is with great sadness that we are reporting some major changes here at Touch and Go Records. Many of you may not be aware, but for nearly 2 decades, Touch and Go has provided manufacturing and distribution services for a select yet diverse group of other important independent record labels. Titles from these other labels populate the shelves of our warehouse alongside the titles on our own two labels, Touch and Go Records, and Quarterstick Records.

Touch and Go will be returning to its roots and focusing solely on being an independent record label. We’ll be busy for a few months working closely with the departing labels and scaling our company to an appropriate smaller size after their departure. It is the end of a grand chapter in Touch and Go’s history, but we also know that good things can come from new beginnings.

It’s sad to see a label so artist friendly (the handshake deals that Touch and Go does with bands pays them 50 percent of the net profit on their records–about four times the industry’s standard royalty rate) in this situation. Physical distribution is a tough business (as is physical retail), and as Rusk mentions in the last sentence of his note, good things can come from new beginnings. Innovative thinkers (like Terry McBride from Nettwerk) are forging a new direction with music companies that are based less on the reliance of income generated from distribution and sales of physical product. I hope Corey Rusk can do the same with Touch and Go.

Terra Firma is the private equity firm that purchased EMI, one of the remaining four major labels (the others being Sony BMG, Universal and Warner), last August. A friend passed on a letter that the Chairman of Terra Firma, Guy Hands, recently sent to artists signed to EMI and its subsidiary labels (Capital, Virgin, Astralwerks, Blue Note, among others). Take a look:
***

Dear colleague,

Last Friday, I was on a panel on embracing change at the UK’s annual
major convention on broadcasting at which all the industry’s major
players were represented and which received some press coverage.

I made the point that Terra Firma’s biggest successes over the years
had been when we had bought those businesses in need of the most
change and in sectors facing the biggest challenges and that EMI fits
that model perfectly. I went on to say that Terra Firma’s model
transforms companies that have been in the past poorly managed and
have lost their direction and EMI had to date not disappointed in its
potential for transformation. However, this is not just an EMI issue
as the recorded music industry as a whole has not positioned itself
well for the changing environment over the last ten years and has
failed to anticipate or adapt to the new market place.

With regard to EMI specifically, I believe that there has been too
much management focus over the last seven years on a potential merger
with Warner and on a continuous cost cutting programme which has
failed to deliver a new business model and sadly has led to the loss
of many talented people from the business. Terra Firma has inherited
EMI past management’s business plan which is currently being executed.
However our future focus is to develop a plan that ensures that EMI’s
Recorded Music business, as an independent company (i.e. without a
merger with Warner), can best serve its artists, the music industry,
its customers and employees. Put simply, focusing alone on the
production of multi-million selling albums cannot produce a
sustainable business model. In developing the business plan for EMI
Recorded Music, we intend initially to look at these areas:

* the relationship between EMI and its artists and what contractual
relationship best serves those artists;

* digitalization and how EMI’s recorded music business can embrace and
benefit from it;

* how EMI can be the most efficient partner in recorded music for
artists who are likely to sell less than 200,000 copies of their
albums;

* how EMI can develop a closer and more valuable relationship with its
customers;

* what services and products EMI should be developing and delivering
to its artists and customers; and

* how EMI can provide multi-million selling artiists with a top
quality service internationally.

In short, how EMI can be big enough to serve anyone but small enough
to truly care.

So far, we have not spent a huge amount of time on analyzing what
might be done with EMI’s publishing business. As I said at the
broadcaster’s convention “if it ain’t broke, don’t fix it.” However,
Roger Faxon has a number of new initiatives which he is intending to
roll out to ensure that EMI Publishing will continue to grow and
prosper which Terra Firma supports.

In the near term, I am embarking on a roadshow over the next month in
which I intend to meet as many of EMI’s employees as possible. At
those meetings, I will be happy to answer your questions.
Additionally, feel free to email me in confidence on the following
email () any ideas as to how we can make the business work better to
the benefit of EMI, its staff and its artists.

In spite of a lack of clear direction and an extremely challenging
market, EMI’s artists and employees have delivered a huge number of
successes in recent years and have much to be proud of. I continue to
be impressed by your commitment and creativity and would simply ask
that you continue to be focused on the work you are doing for EMI and
its artists. Terra Firma’s commitment to EMI is total and we have
invested more financially, both personally as individuals and as an
organisation, in EMI than any other company in our history. We are
absolutely committed to making EMI the world’s most innovative and
consumer-focused music company and the best home for musical talent. I
look forward to working with you in order to achieve just that.

Guy Hands

Chairman

***

This is a much more succinct and realistic outline from a major label chairman than things I have read from other folks (LA Reid’s quote being the most egregious as of late). Still broad strokes, but nothing in here strikes me as being completely outrageous.

I like:
* Focusing on artists that sell less than 200k (200k would have been a
major label failure back in the day). Realistic expectations in changing
environment.
* Developing a closer relationship with it’s customers (instead of an
adversarial relationship). I also like that the label realizes that
relationships with customers should come before their relationship with
radio, retail, and other outdated gatekeepers.

Questions:
* “Top quality service.” Moving the label from manufacturing, promotion and distribution entity to “360″ merch, management, publishing, marketing entity?
* “What contractual relationship best serves artists.” Label perhaps looking to move into non-traditional contracts involving other revenue streams with artist? Cut of merch, touring proceeds?