2021/04/04

Music industry deals and mobile gaming

Below is an article that I wrote in 2014. 

Just thought I'd publish it anyway 

As I was thinking about how to improve publisher deals in the mobile gaming world, I came across a book called "All you need to know about the music business" (8th edition) from D. Passman. It seems to be industry standard literature and I thought why not elaborate on some deal terms between a record company (RC) and an artist that are discussed in the book. Surely, there might be some interesting findings we might get from their industry norms. Here are some fundamental principles of a record deal.  



Basics of a record deal
  • The RC pays artist an upfront royalty payment (or advance payment)
  • Advances usually cover record costs
  • After sales start, the RC keeps money until the upfront payment is paid. This is called recoupment.  (see below for clear definition). In other words, "the process of keeping the money to recover an advance is called recoupment, and we say an advance is recoupable from royalties. The amount of unrecouped monies is called deficit or red position".
  • Usually, the RC carries the risk of recoupment, which means in case actual revenues are not exceeded by upfront payment, it is never paid back by the artist
  • In case there are more record deals between the RC and the artist, the upfront payment is cross-collateralized which means unless the sum of record A and B recover the advance payment, no royalty payment is being made to the artist. 
  • Deficits of A and B are carried forward to the next album sequentially and the artist has a red position.  ("under this or any other agreement") 
  • Royalty % going to the artist can range between 13 - 20% with latter being "super stars". 
  • Royalty % can also escalate. E.g. after x units are sold royalty % increases by 1-2% as an example. 

CD Revenues for an artist: 
                                   CD
PPD after discounts   9,00 €
Royalty %                  15%
Royalty                      1,35 €
Net Rate                     0,99 €
    
Producer % of PPD    4%
Royalty PD                 0,36 €

*PPD = wholesale price

Note that a personal manager (PM) of a usually gets 15% of the artists gross revenues (usually capped at 50% of net )

PM Fee as % of gross    15%
PM Fee in €                   0,20 €

So the artist would have to deduct 20c from 99c net rate = 79 cents

The net rate implies that the artist is "all-in" meaning he/she is responsible for recording the song and paying the producer.


Funds 
Today most recording deals are structured as funds. A fund is a set amount of money that may be payable to the artist as an advance. So any excess amount outside of recording costs goes into the pocket of the artist.

Usually there is a formula for advances which caps upside and downside of a deal from the RC's perspective. The advance for the second album is 60-70% of earned royalties of the first album (within the first 6 - 18 months after release). The floor (ceiling) is the minimum (maximum) amount for the advance for the next album. This could look as follows: 

Album           Floor           Ceiling
1                    175.000 €    n.a.
2                    175.000 €    400.000 €
3                    200.000 €    450.000 €
4                    200.000 €    550.000 €
5                    250.000 €    700.000 €
6                    300.000 €    800.000 €

For the sixth album, artist will not get a higher advance than 800k $ in fund advances.
The problem is that when the collateralization is mingled with this concept and the artist is "in-red". There needs to be a subfloor meaning a minimum amount which is needed at least to finish the recording.

Note that the floors ceiling curve is steeper to protect the RC's downside



360 Deals
RC's want a share of the total income of artists. This also includes touring, songwriting, merchandising, fan clubs, sponsoship money, etc. Usually a record company will get about 15 - 30%  of net-income from those revenue streams or 7,5 - 15% of gross revenues.




Conclusion 
Although I am sure that not all concepts are new to the mobile gaming industry, there some valuable concepts:
  1. Collateralization: Interesting in particular when developer and publisher work together for a longer period of time 
  2. Floor: To incentivize developers for the next project regardless of past failures
  3. Ceiling: To keep publishers cash flow under control 
  4. 360 deals are a great way of publishers to earn from the brand-building of lets say characters within a game.  
















Superdistribution, blockchain and the concept of NFTs

 Finally the concept of superdistribution by Roichi Mori comes into being: 


This is copied from the following website

Superdistribution

"Lets consider a different approach that might work for any form of computer-based information. It is based on the following observation. Software objects differ from tangible objects in being fundamentally unable to monitor their copying but trivially able to monitor their use. For example, it is easy to make software count how many times it has been invoked, but hard to make it count how many times it has been copied. So why not build an information age market economy around this difference between manufacturing age and information age goods?

If revenue collection were based on monitoring the use of software inside a computer, vendors could dispense with copy protection altogether. They could distribute electronic objects for free in expectation of a usage-based revenue stream.

Legal precedents for this approach already exist. The distinction between copyright (the right to copy or distribute) and useright (the right to 'perform', or to use a copy once obtained) is long-established in copyright law. These laws were stringently tested in court a century ago as the music publishers came to terms with broadcast technologies such as radio and TV.

When we buy a record, we acquire ownership of a physical copy. We also acquire a severely limited useright that only allows us to use the music for personal enjoyment. Conversely, large television and radio companies often have the very same records thrust upon them by the publishers for free. But they pay substantial fees for the useright to play the music on the air. The fees are administered by ASCAP (American Society of Composers, Authors and Publishers) and BMI (Broadcast Musicians Institute) by monitoring how often each record is broadcast to how large a listening audience.

Dr. Ryoichi Mori, the head of the Japanese industry-wide consortium, JEIDA (Japanese Electronics Industrial Development Association) is developing an analogous approach for software. Each computer is thought of as a station that broadcasts, not the software itself, but the use of the software, to an audience of a single 'listener' [MORI]. The approach is called superdistribution because, like superconductivity, it lets information flow freely, without resistance from copy protection or piracy.

Its premise is that copy protection is exactly the wrong idea for intangible, easily copied goods such as software. Instead, superdistribution turns ease of copying into an asset. It actively encourages the free distribution of information age goods via whatever distribution mechanism you please. You are positively encouraged to acquire superdistribution software from networks, to give it away to your friends, or even send it as junk mail to people you've never met. Broadcast my software from satellites if you want. Please!

This generosity is possible because the software is actually 'meterware'. It has strings attached that make revenue collection independent of how the software was distributed. The software contains embedded instructions that make it useless except on machines that are equipped for this new kind of revenue collection. The computers that can run superdistribution software are otherwise quite ordinary. In particular, they run ordinary pay-by-copy software just fine. They just have additional capabilities that only superdistribution software uses."