What They'll Never Tell You About the Music Business

by Peter M Thall

  11 • MERCHANDISING

  Your Band, Your Brand

  I was, however, approached by Chinese journalists, one of whom observed how interesting it was that I combined politics—which is practical—and music—which is fantasy. I replied that they had it the wrong way round!

  —EDWARD HEATH (PRIME MINISTER OF THE UNITED KINGDOM, 1970–74)

  While the purpose of this book is to explore those things that “they will never tell you,” it is sometimes necessary to put the previously unknown into a familiar context. So please bear with me while I provide a brief overview of merchandising.

  One does not merchandise people or things; one merchandises intangible rights. In the case of the performing and recording artist, these consist of

  • artists’ individual name

  • artists’ trade names

  • artists’ likenesses, including photographs

  • logos and artwork identified with artists

  There used to be two principal ways in which artists exploited their merchandising rights: touring and retailing. Now there are three: web merchandising has come into its own in the past few years. Obviously, many of the issues discussed below will not have particular application to bands engaged in touring via small club performances or festivals, but some will.

  There are a variety of companies that specialize in marketing merchandise to fans; some are actually owned by the record companies and, more frequently, some merchandising rights are actually granted to the record companies at the time the original record deal is entered into. This chapter contemplates a more traditional situation, one in which an artist is free to license merchandising rights to one or more independent companies. In the case of touring, the period of the license most often coincides with the length of the artist’s forthcoming tour or album cycle. Retail deals are traditionally for slightly longer periods.

  The following sections deal both with issues that are specific to tour merchandising and with issues specific to retail merchandising.

  TOUR MERCHANDISING

  Delivering Heads

  Touring agreements differ depending on whether or not the act is a headliner. The main characteristic of these deals is that, while the merchandise company will provide a substantial advance to the artist—an advance that will help finance the production elements of the tour—the company will insist on the artist “delivering” a certain number of audience members—affectionately called “heads”—and the failure to do that will have fairly dire consequences. It is a rare deal that does not include such a delivery commitment, so it is worth explaining how these provisions work.

  Contract provisions identifying the kinds of heads that are to be delivered are often ambiguous. For example, does the artist have to be a headliner? This becomes important because when the contractual requirements to deliver heads have not been met, there arises an issue as to whether the artist, or an individual member of the artist’s group, can fulfill those requirements at some future time by live performances other than as a headliner.

  If the artist is not a headliner, the parties determine a formula in the contract by which the number of heads is “imputed.” For example, the particular mix of headliner and supporting act or acts may suggest that one artist, the supporting act, is likely to draw only about one-third of the total audience. Thus, a per-head dollar figure will be negotiated and divided into 33.5%. If that dollar figure (which is the figure that the parties minimally expect the fans of the supporting act who are attending the concert will pay for merchandise) is, say, $4, then each person who actually shows up at the concert (this is a count that is attainable after all) will be deemed to be contributing about 8% toward the “imputed” total (33.33 divided by 4 equals 8.33). Thus of every 12.5 people that show up, 1 (or 8%) will be deemed to be attributable to the supporting act. The reason the merchandise companies do not simply divide the total attendees by 3 (which would represent one-third of the audience) is that it is presumed that the two-thirds of the audience that is there to see the headliner is far more likely to pay money—and pay more money—for merchandise than those who are present to see the supporting act.

  Suppose, for example, a merchandiser is prepared to offer $1 million as an advance to a headliner, and intends to sell merchandise at its stands for the supporting act, which is expected to draw one-third of the audience. The headliner has “guaranteed” that over the course of the tour, the act will perform before 450,000 concertgoers, and in fact the number of attending concertgoers over the course of the tour does add up to 450,000. Yet of that number the 150,000 that are likely to be fans of the supporting act are only counted as 12,000 people (that is, 8%). Adding the 300,000 heads imputed to the headliner to the 12,000 heads imputed for the supporting act yields 312,000 heads, 138,000 short of the contractually promised 450,000.

  No matter how cleverly one can try to calculate the value of a head, the fact is that in most situations, merchandisers would rather not impute any heads to an opening act. In fact, most merchandisers assume that no one is showing up at all at the gig, let alone someone to see the opening act. At the same time, they will tell you that even if some of the 19,000 people showing up at Madison Square Garden are there to see the opening act, and not the headliner, even they will probably buy the headliner’s T-shirt, not that of the supporting act.

  In the end, it is really an issue of how much money the artist can negotiate by way of an advance and how much has to be paid back if projections do not meet expectations. Anyway, this is the thinking.

  If the “guaranteed” number of heads is not “delivered,” the artist will owe the merchandiser either an amount of money that was advanced against the guarantee that has not been met, or (get this), the artist will owe the merchandiser an amount of heads at some future date on a tour that has not yet been scheduled!

  There are numerous problems with this solution. One is that, for liability purposes, artists customarily establish separate service corporations to present each tour and the corporation is often dissolved, or at least put into mothballs, after the tour ends. (Dissolving a corporation is an act that can expose the shareholders to liability for the corporation’s actions and promises and therefore is not an action that should be taken lightly.) Merchandisers are aware of this process, and, since the promise made by the defunct corporation to owe future heads is of no particular value, the merchandiser does not want to hear about the artist’s touring corporation: it will insist on personal guarantees and usually will get them.

  Personal guarantees are also problematic because once an individual member of a band guarantees something personally, that band member is in potential danger for a long period to come—even if the member leaves the band and joins another or goes solo. A well-known band from a British commonwealth country was on its third album and third tour. Unfortunately, the interest in this group suddenly waned and the tour failed. However, a lot of money had been paid to this group by way of an advance by a merchandising company. The money was naturally spent—mostly on preproduction expenses—building the stage, designing the lighting and sound, guarantees for trucking, buses, etc.—but the band did not perform to the required number of heads. The manager commissioned the advance, as did the business manager, for a total of 20% of the advance. Unfortunately, the entire advance was lost by the merchandiser, so each individual member of the band owed the merchandiser 100% of the money (not 80%) until the merchandiser was fully compensated.

  Complicating this was the fact that only one member of the band had any funds set aside from previous earnings and that same member of the band was the only one who would have a career following the demise of the band itself. Thus, this one member was suddenly the one targeted either for the return of the money or for delivering the un-delivered heads at some future date. She (she was the lead singer) ultimately honored the obligation of her band, took a role in a Broadway show for four years, and paid back the merchandiser.

  In negotiating a band member’s agreement a
t the inception of a group artist’s career, an understanding should be reached as to what will happen in the event of a loss such as that just described. Under customary partnership law, if one band member is liable for the acts of the group, the member can cross-claim against the other band members for damages. Provisions of the band member agreement may supersede or even controvert this result.

  Whose Fault Is It Anyway? In the example related above, neither the manager nor the business manager returned their share of the merchandise advance—in part because they felt they had done the job they were hired for. They deserved to be paid out of the gross because, essentially, they would have worked for nothing unless and until some money found its way into the artist’s coffers. Clearly, however, this was not a good result for the artist. Suppose the artist felt that the tour should not have been structured so ambitiously, that the people who planned it had not made a realistic assessment of whether the band could support such a tour financially. And to whom would the artist have looked for the proper guidance? The manager and the business manager, of course.

  As with many such situations, various factors go into determining whether management has or has not been effective. It is difficult for nonmanagers to put themselves in the place of managers in given circumstances and to understand the pressures these people face. On the other hand, in most other businesses (including the “businesses” of government and war), people are expected to take responsibility for their actions. Shouldn’t the same rules apply to those of us in the music industry who are responsible for doing a particular job to assist the artist to achieve a full potential—record company personnel, the business management office, the tour management office, the attorneys’ office, the agent’s office, etc.? There may be hundreds of people involved in planning a tour, but when an artist does not deliver the sufficient number of heads, guess who pays? It is not out of the question for an artist to ask his or her professional representatives how they define their jobs and what responsibilities they believe they are undertaking. What comes out when those discussions take place might surprise everyone. Before agreeing to a heads-delivery condition in a merchandising contract, there is every reason for the artist to require from his or her manager and business manager a promise to return their share of the merchandising advance. In fact, the management agreement, in anticipation of such circumstances, should provide specifically for such an eventuality.

  Accruing Interest and Accrual Date Once a merchandise deal is breached due to the failure of the act to fulfill its promise to deliver a minimum number of heads, financial consequences begin to multiply. (Of course, the minimum number of heads might not have purchased the projected amount of merchandise anyway, but the breach is in the failure to deliver the heads, not in the failure to sell the merchandise.)

  Some deals require that the unrecouped balance at the point of the failure becomes subject to interest charges (at various, not always easily discernible, rates). If the rate is a variable one, and has increased at the time or times the interest becomes chargeable, the consequences can be enormous. If the interest accumulates for however long it takes for the artist to mount the next tour, the artist can be looking at a very large debt indeed. One thing that the artist can do in advance is to limit the “debt” to an increased number of heads that he or she must deliver; so that, at worst, the artist will not owe real cash to the merchandiser. This is a better result, if not a totally satisfactory one.

  In addition, there is always the question of when this interest begins to be charged.

  For example, some deals provide that it begins to be charged sixty days after the tour ends or is supposed to end. Some provide that the interest begins to accrue after the final accounting, which can occur quite soon after the end of the tour. As far as the merchandising company is concerned, it is out the money on the day the advance is paid, and the calculation of the number of heads the artist is required to deliver takes into account that the requisite number of heads (concertgoers) will be delivered only over a period of months after the money has been advanced. That is, a merchandising company will often increase the number of required heads proportionately to the time frame during which it expects to be recompensed for its investment. Thus, the argument goes, the failure of the band to deliver the number of heads over the anticipated period will cost the merchandiser more than simply the unrecouped balance, and, once the contract is breached, the merchandiser will want the interest to accrue from the date the advance was given, not from the alternative dates mentioned above. Of course, there are ways to modify this extreme position, but it is important that the artist and the artist’s team understand what the merchandiser is likely to try to do. As with any unsatisfactory provision, negotiations may result in (1) doing away with it entirely; (2) specifying another date; (3) reducing the advance, and therefore the risk; or (4) some combination of the three.

  It is also possible, on occasion, to negotiate an interest hiatus—a period during which no interest will accrue or during which a reduced rate of interest will accrue. The hiatus might be, for example, a period not to exceed six, nine, or twelve months between tours, the purpose being that the artist then can record a new album and carefully prepare the tour associated with the new album without worrying about paying interest on an “advance” that was turned into a “loan” due to circumstances that might have been the fault of any number of people. As with all entertainment industry deals, contract provisions will be more or less favorable, or harsh, in direct proportion to the amount of the advance. It is not always cause for celebration when the manager announces a $1 million deal. The flip side is buried within the contract language!

  Unrecouped Balances Obviously, if the artist promises to pay back the merchandiser in the event of a failure to deliver the agreed-upon number of heads, and then the tour is canceled for reasons beyond the artist’s control (illness—maybe even an act of God), the artist should not have to pay back more than the unrecouped balance, at most. Merchandisers will object to this result because they want not just to receive their advance back, but to make a profit as well. Nevertheless, if the advance has been recouped because enough dollars per head were accumulated before the tour was canceled, even if the contractual number of heads was not technically delivered, the artist should be relieved of the promise.

  Shared Risk On occasion, the merchandise company will permit the operating company of the act (which, as you will recall, is usually a corporation with limited liability) to assume some, if not all, of the risk and thereby get the artist off the hook on a personal level for at least that portion of potential liability.

  Saying “No” As noted earlier in this book, sometimes negotiating strength lies solely in the power to say “no.” Merchandising is an option, not a necessity. To be sure, there is income to be had, but there are tremendous risks involved as well. Gambling with the future financial security of an artist by foolishly making guarantees that might bankrupt the artist—or the artist’s group or any of its individual members—is not a game that I think most artists would want to play. As with everything, there has to be a balance between risk and reward. It is true that merchandising money will often assist the artist in getting the tour off the ground by providing the seed money to organize the tour in the first place. But there are other sources of money that involve far less risk, and an artist in a secure financial position will have a stronger negotiating position down the road, when it does makes sense to enter into a merchandising deal. However, those other sources are not commissionable by the artist’s manager and business manager and not always presented as an option.

  When a Band Member Moves On Special problems can arise when a member of a band that owes a debt to a previous merchandise advance wants to join a new band. As stated above, depending on the language of the original merchandising agreement, each band member may be responsible for that debt. For example, suppose the bass player of a now-defunct band is under an obligation to deliver the entire number of heads agreed upon b
y the previous band. If the bass player were, say, offered an opportunity to play with Garth Brooks during his upcoming world tour, he wouldn’t be able to accept it because Garth Brooks would never take on a musician with such a debt. It is here that the issues of whether an act’s responsibility to pay back the merchandising company only via income received as a headliner is of particular relevance. If in the original merchandise agreement, only headliners were liable for making up deficiencies in delivering “heads,” or if the bass player had the option of paying back all or some of the unrecouped debt (plus interest) in money, rather than in heads on behalf of his or her band mates, the bass player would be free to take a job with another touring band.

  The marketplace may also provide a solution for the band member who joins an existing band. The old merchandise company can make a deal with the new band’s merchandiser, so that some of the merchandise of the old band member might be sold through the new band’s outlets. Although, because of Mr. Brooks’s status and power, this is unlikely, it is an option that has been exercised in some instances.

  Head obligations, like others involving a situation where an advance is paid and the contractual commitment is not fulfilled (for example, in an exclusive songwriter’s contract), the delivery of a minimum number of songs or the recording or release of a minimum number of cuts can theoretically extend for a lifetime. At some point, however, such obligations become impossible for the artist to meet. Most states’ laws will permit a party to ultimately walk away from a never-ending duty to fulfill a contractual commitment that is either out of the party’s control or is virtually, or actually, impossible to fulfill. The artist’s representatives should understand the state laws in this area that apply to “head” provisions in the contract so that they can determine just what the artist’s true burden will be in the event promises are made and not kept. This is an example in which the boilerplate provision known as “applicable law” can have enormous negative (or positive) impact on the artist, notwithstanding many lawyers’ (and clients’) inattention to this provision—which, on its face, has nothing specifically to do with the deal. Here is another reason why, as indicated in the previous chapter, New York, California, or Tennessee law is often chosen by artists as the applicable law by which the provisions of an entertainment business contract are interpreted. The courts in those states have often considered entertainment-industry issues involving commitments extending far into the future.