Tour merchandising will always be a low-margin business, however. The potential for entry keeps margins low, and short-term contracts enable artists to capture the lion’s share of the value of their brand. Lubin’s biggest fear is a giant, deep-pocketed competitor coming in and disrupting the market. I also heard this fear expressed years ago from Ticketmaster’s then CEO, Sean Moriarty, when eBay purchased StubHub and entered the ticket business. Moriarty feared that eBay could easily spend hundreds of millions of dollars in an unprofitable strategy that jeopardized Ticketmaster’s viability. As Peter Lubin told me, “The only good time for us is when everyone thinks merchandise is a terrible business, and they don’t want to make extravagant deals.”
Despite the challenges, the future of the merch business seems bright. Disruptions in the record business that diminished royalties have made it an imperative for artists to tour to earn a living. This has elevated the role of merch in a band’s revenue stream. In addition, over the last five years a growing number of retailers have been open to selling artists’ merchandise in their stores and collaborating with artists. And the Internet allows artists to develop a direct relationship with their fans and sell products directly to them, without going through a gatekeeper. These developments have turned merchandise into a year-round business, even when acts are not touring, to the benefit of artists, merch companies, and fans. Peter Lubin concluded our interview by saying that despite his cynicism developed over forty years in the business, he has never been as excited about the future of merch.
Homeward Bound
“We’re in an industry that prices its product worse than anybody else,” Ticketmaster’s chairman, Terry Barnes, observed in 2006.40 The industry has come a long way since then, but there is still much room for improvement. Verified Fan, slow ticketing, dynamic pricing, and expanding supply (à la Garth mode) are some of the new strategies to improve the efficiency of ticket distribution. We should expect more innovation in the future, especially for the hottest stars and best seats.
While Garth Brooks labors to expand supply to satisfy demand at an affordable price, several artists—including Paul Simon, Elton John, Joan Baez, and Lynyrd Skynyrd—have recently announced their farewell tours, which is a way to limit supply and drive up demand.
Even after these rock icons retire, however, there will be plenty more first-class live entertainment to see. In his 2017 year-end business column, Barry Ritholtz wrote, “We are now in the golden age of, well, everything…but especially live music.” He advised, “If you haven’t been going out to regular live events, you don’t know what you are missing.”41 One piece of advice from rockonomics research could save you some money: if you buy tickets on the secondary market, you can get the best deals by waiting until the latest possible moment to purchase your ticket. Prices tend to decline on the day of the show—after all, a ticket becomes worthless after the event is over. As long as you are not too risk averse, or if you have the option to see the show on another occasion, you can generally get the best deal if you wait to buy until just before showtime.
*1 Although it should be noted that dysfunction in the secondary market for mortgages caused the entire world economy to crash in 2008.
*2 As the 1977 Jackson Browne song “The Load-Out” goes, “Let the roadies take the stage / Pack it up and tear it down.”
*3 Lubin noted that there are a small number of merch superstars who would not generally be considered superstars in the music world, such as Bring Me the Horizon or Korn. But these cases are few and far between.
Bruce Springsteen and the E Street Band performing at the Verizon Center in Washington, D.C., in 2012. Photo by Pete Souza
Bruce Springsteen charges less than the market price for his concerts, and his fans show their appreciation. Photo by Pete Souza
When Max Weinberg is not touring with the E Street Band, he often assembles a band of his own. Here he is playing in Philadelphia’s World Cafe Live in October 2017. Photo by Alan Krueger
Jon Bon Jovi performs the last show of his This House Is Not for Sale tour at the Capital One Arena in Washington, D.C., May 14, 2018. Photo by Pete Souza
Beyoncé’s net worth exceeds $350 million according to Forbes. She earns most of her income from concert sales. Photo by Emmett Perrini
Aretha Franklin performing at the DTE Energy Music Theatre in Clarkston, Michigan, on July 12, 2014, near her hometown of Detroit. Photo by Terry Matlen
Brandi Carlile pictured here at the Beacon Theater, New York, on April 7, 2018. Photo by Pete Souza
Andra Day performing “Rise Up” at the Global Citizen Festival in Central Park, New York, on September 23, 2017. Photo by Alan Krueger
Alessia Cara, a Canadian singer and songwriter, won Best New Artist at the 2018 Grammys. She is pictured here performing at the 2017 Global Citizen Festival in Central Park, New York. Photo by Alan Krueger
Tony Bennett prolonged his career by performing duets with top young female artists. Here he performs with Lady Gaga at a presidential inaugural ball in Washington, D.C., 2013. Photo by Lisa Krueger
Gloria Estefan is the most successful crossover artist of all time. She and her husband, Emilio, received the Library of Congress Gershwin Prize in 2018. Photo by Jesus Cordero
After several hit records, Janelle Monáe has starred in two movies, Hidden Figures and Moonlight. Here she is performing at the Austin City Limits music festival, October 14, 2018. Photo by Alan Krueger
Garth Brooks celebrated being selected as the first performer inducted into the Pollstar Live Hall of Fame in March 2018. Photo by Alan Krueger
Green Day’s front man Billy Joe Armstrong performs at the Global Citizen Festival in Central Park, New York, on September 23, 2017. Armstrong met Green Day cofounder Mike Dirnt at the school cafeteria when they were ten years old. Photo by Alan Krueger
Questlove discusses the role of curation in creativity at the Bass Museum in Miami with the poet Tom Healy and the painter Pedro Reyes, April 15, 2018. Photo by Alan Krueger
The Chainsmokers have a regular gig in Las Vegas but have been paid more to perform at music festivals in China. Here Andrew Taggart performs at the Global Citizen Festival in Central Park, New York, on September 23, 2017. Photo by Alan Krueger
The sunrise concert in Ravello, Italy, sells out as soon as tickets go on sale. August 10, 2018. Photo by Alan Krueger
Two-time Grammy Award winner Jacob Collier of London was discovered by Quincy Jones through music that he created in his bedroom and posted on YouTube. Here he performs at the YouTube Space LA in June 2016 to celebrate the release of his album In My Room. Photo by Betsy Newman
Steve Ferrone said he feels “bullet proof” while on tour. Here he performs with Tom Petty and the Heartbreakers before 20,000 fans at the Amalie Arena in Tampa, Florida, on May 6, 2017. Photo by Andy Tennille
Independent record label Dualtone signed The Lumineers to a one-record deal in 2011. After their eponymous album sold 2.4 million copies, the band decided to resign with Dualtone for their second album. Here front man Wesley Schultz performs at the Global Citizen Festival in Central Park, New York, on September 23, 2017. Photo by Alan Krueger
Steve Liesman is a television reporter for CNBC’s Squawk Box by day, and guitar player in a Grateful Dead cover band by night. Here the Dead’s Phil Lesh jams with Liesman in 2017. Photo by Rob Schmidt
Dan Donegan, David Draiman, and John Moyer of Disturbed engages the crowd at the Austin City Limits Festival on October 13, 2018. Photo by Alan Krueger
Lars Ulrich came to the United States at age sixteen to train for a professional tennis career. He placed an ad for a singer/guitarist in The Recycle, which James Hetfield answered. In 1981 they formed Metallica. Cliff Burnstein and Peter Mensch of Q Prime noticed shoppers
wearing homemade Metallica T-shirts in a London record store in 1981, and they have managed the heavy metal band ever since. Photo by Alan Krueger
George Washington presents Sir Paul McCartney at the White House after President Obama awarded him the Library of Congress Gershwin Prize for Popular Song on June 2, 2010. Photo by Pete Souza
Paul McCartney’s One on One tour grossed $132 million in 2017 and sold nearly one million tickets. Here he performs at the Prudential Center in Newark, New Jersey, on September 12, 2017. Photo by Alan Krueger
Quincy Jones invited the author to his Bel Air home to chat about rockonomics, August 11, 2017. Photo by Donna Nairi
CHAPTER 7
Scams, Swindles, and the Music Business
As it turned out, the one thing about business is that it does have to be looked after.
—Paul McCartney
Sitting on the sofa in attorney John Eastman’s office at Eastman & Eastman, located in a townhouse across the street from the Museum of Modern Art in Manhattan, it is hard not to feel in the presence of rock and roll history.1 Eastman’s first client in the music business was the soft-rock band Chicago. He also represents his brother-in-law Paul McCartney, Billy Joel, and Andrew Lloyd Webber. David Bowie was a client and friend before he died. John’s younger sister, Linda, was married to Paul McCartney from 1969 until she died of breast cancer at the age of fifty-six in 1998. Despite the urban legend, the Eastman family has no connection to the Eastman Kodak company. In fact, John’s father, Lee, changed his family name from Epstein to Eastman after graduating from Harvard Law School.
Back in 1968, shortly before Paul McCartney and Linda Eastman were married, McCartney asked his future father-in-law to help straighten out the Beatles’ messy business arrangement with Apple Corps. Lee Eastman brought in his son to help, and the pair managed McCartney’s career while the rest of the Beatles chose Allen Klein as their business manager after manager Brian Epstein died of a drug overdose in August 1967. Their ensuing business and legal disputes were the last straw that broke up the Beatles in 1970.
John Eastman, who is nearing eighty, graduated from Stanford and earned his law degree at New York University. He told me he has never represented a record company. His two passions seem to be helping musicians gain control of their financial and creative lives (which means wrestling rights back from record companies or suing unscrupulous managers who took advantage of naive musicians) and pondering the origins of creativity in art and music.
I asked John why so many musicians have been swindled in one way or another by their managers or record labels. “The answer to your question, most politely, is cupidity and easy pickings,” he said. John has had a front-row seat to an unconscionable amount of greed and avarice on the part of unscrupulous managers and soulless companies. “For each of my rock and roll clients,” he explained, “I began with a lawsuit successfully removing his manager for cause and then over time restructured his affairs largely around his owning his copyrights and all that flowed from his creative output.” This strategy rescued Billy Joel from financial ruin. And John and Lee Eastman managed Paul McCartney’s music career so well that McCartney earned more money during his years with Wings than he did with the Beatles.
Are musicians easy prey for financial hucksters because they are capricious and not attentive to the business side of the music business? Yes, he answered, but he quickly added that it doesn’t have to be that way. “I’ve never let a client do a deal when they couldn’t sit where you’re sitting right now,” he said emphatically, “and with a pen and pad outline the deal on one page. And I would say, ‘If you don’t understand this, we’re not doing it. Or we’re sitting here until you do understand it.’ They’re smart if you just talk to them like people, for godsakes.”
This seems like good advice for musicians and non-musicians alike. Business arrangements can be unfavorable to musicians because they have little bargaining power, due to fundamental supply-and-demand factors, or because the artists are hoodwinked by unscrupulous business partners. Recognizing the difference and understanding how to avoid being hoodwinked are the subjects of this chapter.
Contract Theory
My brother-in-law Jon Bick, who sometimes serves as my lawyer, once explained to me that a contract codifies in writing the understanding between the parties to an agreement. A contract is legally binding, so signing a contract is not to be taken lightly.
A well-established branch of economics called contract theory studies how parties design contractual agreements to pursue their various goals in the face of overlapping and conflicting interests, uncertain outcomes, and imperfect information. A contract works best when the parties’ interests are aligned. Often, however, the parties’ interests conflict, at least in part. For example, a record company makes more profit if it takes a liberal view toward counting expenses, which are deducted from an artist’s royalty payments, while the artist has the opposite incentive.
Not all contingencies can be anticipated in a contract. For example, what happens when the music delivery format unexpectedly changes from vinyl albums to digital streaming and the contract does not specify a royalty rate for streaming revenue? These types of unexpected contingencies, which render contracts incomplete, can lead to lawsuits, although bad faith and distrust may be more common root causes of lawsuits.
If the parties expect to have a continuing relationship from which both would benefit, then they have an incentive to treat each other in good faith and take actions that are in each other’s interest, even in the presence of unanticipated contingencies and incomplete information.
Another common concern is that one party—usually the record company—has more information than the other party. For example, contracts now typically require the record company to distribute a specified percentage of revenue from song streams and album sales to the artist. As the economist Richard Caves has noted, “From the artist’s viewpoint, a problem of moral hazard arises because the label keeps the books that determine the earnings remitted to the artist.”2
Examples of labels underreporting sales, and thus underpaying royalties to artists, are legion. The Beatles were locked in lawsuits over insufficient payment of royalties with EMI and its U.S. subsidiary Capitol Records for years. The potential for moral hazard in accounting practices leads to an obvious strategy that can be summarized as “Trust but verify.” Artists benefit from having the ability to have their representatives audit their label’s books. Allen Klein launched his career by uncovering multiple forms of underpayment for his musician clients. Today, I am told, there is much less financial chicanery on the part of record companies.
Record Contracts
Record contracts, like everything else in the music business, are negotiable and thus vary across labels and musicians. The typical record contract signed by a new artist with a major record label, such as Universal or Sony, lasts for four or five albums, but it could last for as long as seven albums. The contract does not guarantee that a second album will be produced; instead, the record company has the option of producing a second album. In fact, the first album may not be produced either. The commitment is to produce the first album if it meets “commercially satisfactory” standards, which means that the record company thinks it will sell.3 Probably half or fewer of the artists who sign recording contracts do not produce a second album, and many do not even produce a first album.
In exchange for exclusive rights to the recordings made by the artist, the record company agrees to pay the artist a royalty of around 13 to 14 percent of revenue collected from streaming, licensing, and selling the artist’s recordings.*1 Rates can be as high as 20 percent for established stars. The artist transfers the rights to the recordings (excluding the composition rights) to the company in perpetuity, although established artists can limit the duration of the transfer of ownership rights to a relatively short period of time. The company typically pr
ovides the artist an advance against future royalties and agrees to allocate a certain amount of money for promoting the artist’s music. The artist’s advance and cost of producing the recording are deducted from future royalties. The artist, however, does not need to repay the label if the stream of royalties does not exceed the sum of the advance and expenses. That is, expenses and the advance are recoupable but not refundable.
With his client Chicago, John Eastman pioneered a strategy of letting artists retain the rights to their music and leasing the rights to the record company for a period of time. This approach was also used by the Rolling Stones (although their co-manager Andrew Oldham cleverly kept many of the rights for himself) and by Phil Spector. But relatively few musicians command sufficient bargaining power to be able to negotiate such an arrangement.
An entertainment lawyer shared with me, only partly in jest, a saying in his field: “If an artist receives a royalty payment, the lawyer didn’t do his job well.”
John Eastman had a different view. “The advance in a record contract is just expensive banking,” he told me.
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