360 Deals, Conflicts of Interest, Operational Inefficiencies & Bruce Springsteen

The current state of the recorded music industry has caused 360 deals to become the standard recording agreement that any artist, who wants to get signed, must enter into. The reason for this is because record labels feel that they establish the artists they sign and therefore deserve a cut from all their endeavors. The rationale behind this is that the artist wouldn’t typically get many of the opportunities presented to them if it weren’t for the label’s substantial investment in them. With 360 deals, on top of the record label receiving profits from record sales, labels get a cut of the artist’s concert revenue, publishing revenue, book deal revenue, acting revenue, merchandise sales, endorsement deals, ringtone sales, and appearance fees.  Labels primarily seek these deals to offset their potential losses from album sales.

The issue with 360 deals, aside from them being inherently unfair to artists (because the label takes monies generated through other revenue sources that used to strictly belong to the artist), is that it is rife with conflicts of interest and potential inefficiencies. Some of the areas of potential conflicts of interest and inefficiencies are as follows:

Potential Conflicts of Interest:

• Artist endorsements that would normally be accepted might not be approved by the label (because it might not represent the label in a positive light) and the artist would have to decline that endorsement.

• Labels cross-collateralize monies generated form the ancillary income generated through the 360 deals with the artist’s album losses, thereby reducing the artist’s overall income.

• Labels have close relationships with certain companies that might be in direct competition with companies that want to pursue endeavors with the artist. This relationship would, most likely, prevent the artist from doing business with the competitor company because of the label’s fear of alienating the company that they already have an established relationship with.

• If the label finds a manger for the artist, the manager will most likely represent the label’s best interests and not the artist’s. The manager should be representing the artist’s best interests at all times. If the label obtained the manager on behalf of the artist, the manager might feel indebted to the label for providing them with the job and will seek to obtain the best deals for the label, rather than the artist, at the risk of alienating them and not receiving future referral business from them.

• If labels have had problems with select retailers who might be interested in distributing the artist’s merchandise, labels might not allow the artist’s merchandise to be sold in those stores (thereby reducing the artist’s income and nixing an opportunity that the artist would’ve previously been able to capitalize upon).

Potential Operational Inefficiencies That Could Harm The Artist’s Income:

• Labels are marketing, promotional, and distribution machines. Labels are not experts in the live industry, merchandising operations, or at obtaining endorsements and paid appearances for artists. Their inexperience in these areas could lead to increased costs of goods sold, decreased profits and a reduction in merchandise quality, as well as, could diminish the amount of appearance and other associated opportunities that would’ve normally been presented to the artist.

• Labels also might not have the connections to be promoters; therefore they may not be able to successfully organize the artist’s tour. Their inexperience at being promoters could reduce their ability to obtain venues, advertisers, and ticketing services, which would negatively impact the amount of revenue that the artist could generate through his or her touring efforts. With the label handing all of the artist’s touring, this would also limit (if not eliminate) the artist’s ability to have a company, that specializes in arranging and booking tours, handle their touring.

The 360 deal situation imposed upon artists today is not much different than the across the board deal that Bruce Springsteen entered into in the 1970’s. The only major difference is that his across the board deal was arranged with his manager and not his record label (CBS Records). In the case of Bruce Springsteen, he signed a management contract with Mike Appel’s company (Laurel Canyon), which was renewed verbally. Through the agreement with Laurel Canyon, Appel was tasked with managing Springsteen’s career. Laurel Canyon also acted as his record production company/label—in conjunction with CBS Records (he owed Laurel Canyon two records in addition to the seven records he owed CBS). Appel’s company also owned and controlled all of Springsteen’s publishing and they shared the same lawyer. At one point in the relationship with Springsteen Appel and his associate Barry Bell wanted to form a booking agency, so that they could represent Springsteen’s touring interests.

This arrangement was rife with conflicts of interest. The first conflict of interest is that both the manager and Springsteen had the same lawyer. By each party having the same lawyer (and the lawyer having been obtained by the manager) the lawyer could not effectively represent both parties’ interests properly. The lawyer’s loyalties lied with the manager, thus creating deals that were unfair to and not in the best interests of Springsteen. That is why Laurel Canyon ended up owning all of Springsteen’s publishing. Aside from this, another conflict of interest arose with Springsteen’s touring. In this situation, Chateau Merrill wanted to become Springsteen’s agent. When presented with this opportunity Appel, who was supposed to act in the best interests of Springsteen, could not be unbiased and provide him with information that would be most beneficial to his career. The reason for his lack of impartiality was because Appel stated that he wanted to be Springsteen’s agent (through the company that he and his associate Barry Bell were going to create).  Above all else, the manager is supposed to act in the best interests of the artist he represents and not in his own personal best interests. Like with record labels’ 360 deals, Appel sought the best deals for himself and not for the artist he represented.