Labels, artists mull sharing royalties and ancillaries as way to trump slump

When “Spider-Man” rocketed to $400 million in domestic B.O. this summer, you could almost hear the Sony brass shouting for glee in Culver City — not just at the gross, but at the megabuck ancillary revenue streams that were just a few handshakes away.

Execs at Sony Music didn’t have that luxury when Celine Dion’s latest disc sold half a million out of the gate last spring. Once the record sales peter out, that’s the end of the revenue road.

For decades, the music industry has been working without a net.

While film financiers have long learned to magnify the earnings power of a hit with video, DVD, syndication and other ancillaries, major labels have exactly one revenue stream — record sales — to make or break their results.

And even those revenues come from the precious few releases that make it to the top of the charts, financing the majority that barely make a blip on the consumer’s radar screen.

That was a minor headache when record sales were growing steadily. Now that the biz is in a brutal slump, it’s becoming a full-blown aneurysm.

But new ideas on how to force a radical change in that model are starting to creep into the collective consciousness.

A growing chorus — attorneys like Jay Cooper, Marc Jacobsen and Fred Davis, among them — argues it might be time for artists and labels to share in touring, merchandising and music-publishing revenues.

In return, they say, labels should offer artists more control over their own destinies: co-ownership of master recordings, a bigger share in record royalties, and shorter, more flexible contract terms.

These radical models are mostly still in the theoretical stage — even in times of crisis, the music industry is about as nimble as the Titanic.

But record execs are warming to the ideas, and a few trailblazing companies are trying to make some of them work.

Some of the industry’s biggest artists are also experimenting with pieces of this new model.

Pearl Jam, for example, is said to be talking with its label Epic Records for a new contract that could include ownership of ther masters and a new joint-venture label.

Such new concepts would break some big taboos in the industry. Artists, long suspicious of labels’ accounting practices on record royalties, have always seen income from touring, merchandising and especially publishing as the one thing the suits can never take from them.

Likewise, labels almost always retain full rights to the masters of the artists they record — a contract point that earns them millions in licensing fees long after the disc has fallen off the charts.

The industry has also fought hard to retain its leverage in setting contract terms — hence the Recording Industry Assn. of America’s pitched battle against a move in the California Senate to close a loophole that exempts recording acts from the state’s seven-year limit on service contracts.

But the potential benefits of the new revenue-sharing models, say proponents, could far outweigh the risks.

For one, CD sales would no longer be the only thing putting bread on the table at the record labels. In fact, a few forward-thinkers note that albums could even be given away for free — significantly reducing the incentive for would-be cyber-pirates — as promotional tools for other revenue streams.

It wouldn’t be the first time such a strategy was used.

Vidgame hardware makers sell their boxes at a loss and make up the slack on high-margin game sales. Publishers “polybag” free promotional CDs in with their magazines. And retailers like Best Buy and Wal-Mart often sell music below cost, pulling people in for bigger-ticket items like TVs and DVD players.

The new business model could also be a tidy solution to mounting concerns about artists’ rights that have troubled the industry in recent years.

Artists like Don Henley and Courtney Love have become increasingly vocal about what they believe are predatory and deceptive business practices in the major-label system, including royalty under-reporting and onerous contracts.

But if the interests of artists and labels become more closely aligned, says Cooper, there will be less incentive for one to swindle the other.

“What is needed is for artists and labels to get on the same side of the table and move forward,” he says. “With more of a joint-venture arrangement, artists wouldn’t feel like they’re just employees, or even slaves.” Execs at the majors are cautious about embracing such a dramatic break from the traditional ways of doing business. But if the artists and their representatives are truly openminded about sharing revenues, then such a deal could work, says Motown topper Kedar Massenburg.

“If they say, ‘let’s put everything on the table,’ then I’d love to consider that,” Massenburg says. “But that generally doesn’t happen. Scenario No. 1 is usually, ‘I want a share in my masters, and that’s it.’ ”

The type of artist is also a major consideration, the exec adds. For example, he says touring revenues can often be much more lucrative for a rock act than an R&B or hip-hop performer, making it a more important negotiating point.

Early adopters

Because the majors are still wary of taking a flyer on a totally new business model, many of these ideas are finding their first practical application at smaller companies with less corporate baggage.

One such entity is iMusic, a new division of online/offline music company ArtistDirect. The premise behind the new imprint couldn’t be simpler: Each contract will be a one-album deal; all net profits are split 50/50; and at the end of the term, the artist walks away with full ownership of the masters.

For a major, whose typical contract makes “War & Peace” look like a pamphlet, that sounds like a pipe dream.

ArtistDirect founder Marc Geiger hopes to make it a reality by signing mainly established midlevel artists, thereby cutting out the huge marketing outlays needed to build a brand around a rookie act.

Geiger freely admits this model isn’t for everyone. The artists he’s signed so far — including U.K. rockers Gene, Smiths guitarist Johnny Marr, and former Arrested Development front man Speech — already have some name recognition.

“The majors have to spend out in front of their sales” to market an unproven act, Geiger says. “And the sales on a baby band could very easily be zero.”

One experienced act experimenting with new ways of doing business is Dishwalla. The group had some success on A&M records in the mid-’90s, but grew disillusioned with the label after it was sold as part of Polygram’s mega-merger with Seagram in 1998.

Dishwalla elected to sign an unusual deal with fledgling indie Immergent Records. The band entered into a joint venture with the label, getting a bigger piece of record royalties and even sharing some of their tour income on a gig-by-gig basis.

Dishwalla front man J.R. Richards says the experience has been gratifying so far — the band has much more input in the way its music is created and marketed, and costs are kept under control, so all parties see higher profits per record.

“It has really worked like a business partnership instead of just us signed to a deal,” Richards says. “There are certain things we’ve had to give up and share. But that’s OK, because for the first time, they’re sharing with us.”

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