Warners extend their reach in merchandising tie-up

October 2018

CONTRACT

 

Last week Warner Music Group (WMG) purchased the German merchandising company EMP for $180m,[1] Europe’s top provider of merchandise for video game (including Nintendo and Play Station; TV and film including Marvel, DC, Disney, Star Wars, Game of Thrones; and clothing and music for a catalogue of bands/artists’ almost exclusively in the heavy metal genre).  For EMP, CEO Ernst Trapp said that by joining WMG, his company “will be able to expand our international reach, explore new genres, reach new audiences, and take fan experience to a whole new level.”

 

Once the deal is complete, EMP will become a stand-alone, direct-to-fan business unit within WEA – WMG’s global artist and label services division.  Stu Bergen, CEO of International & Global Commercial Services, Recorded Music, WMG said the deal “will be a perfect complement to our global artist development and marketing strategies.”[2] This deal brings to WMG the expertise of a specialist merchandising company with a client base in 18 European countries. Warner Music Artist Services already provide tour services, campaign marketing, e-commerce merchandising and licensing for their roster of artists.

Of the other two majors, Sony Music Entertainment have their own in-house merchandising company, The Thread Shop, whose artist services include exclusive merchandising for tours, brand collaboration, retail licensing and e-commerce on a worldwide basis;[3] whilst Bravado Merchandising are a part of Universal Music Group (UMG), described as a 360-degree full service merchandise company which develops and markets products, licence artists’ merchandising rights to third party licensees; and selling product on tours, through selected global retail outlets and web-based stores, e-commerce and direct-to-consumer experiences.[4]

 

By providing artist services, the major record labels are able to offer some form of 360-degree deals when signing artists.   Under the old deals, an artist was paid a recoupable advance on royalties with the income on sales of recorded music – CDs/DVDs, compilations, videos, etc going to the labels, and the artist retained their income from live concerts, merchandising, endorsements and other business deals.  Following declining sales, the labels began to seek to maximise earnings from the artist’s career and the Robbie Williams deal in 2002 was a high-profile example of what has since become a default business model.

 

Under the 360 deals, in addition to the traditional royalties paid on recorded music, the label takes a share of income from the artist’s merchandising, sponsorship, live ticket sales, e-commerce and website sales, and if possible publishing income.  There emerged two types of deals, the active deal suitable for newly signed artists where the label took an active part in promoting and marketing the artist, sharing in additional revenue; and the passive deal suited to an established artist where the label paid an advance and took a percentage of the artist’s non-recording revenue.

 

The justification was that the labels have invested in the artist’s career, promotion and marketing; thereby raising their profile in creating a brand as a saleable commodity leading to lucrative endorsements, live concert ticket sales, merchandising and brand licensing.  In order to fulfil their obligations, the labels brought in-house the ancillary artists services and they can now offer artists the full career experience.  Only last week it was reported that Elton John had inked a deal with UMG for the rest of his career to include among other things the merchandising and licensing of his final three-year ‘Farewell Yellow Brick Road’ Tour.[5]

 

For a new artist, merchandising may make up a larger proportion of their income if they tour regularly and develop a loyal fanbase.  Some companies will take a percentage from 10% to 50% – all negotiable – of gross income from ancillary sources.  However, this could leave the artist with little or no profits after deducting the label’s share plus the cost of manufacturing and distributing the merchandise.  A percentage based on net receipts of profits after expenses have been deducted would be a better deal.  Some labels insist the income is shared for the life of the contract and/or it can be negotiated whether to limit the revenue share to the end of the first contract period or until the advances have been recouped.[6]

In deals involving multiple rights such as recording, publishing, merchandising, etc.; cross-collateralisation can operate across the different agreements with the same company.  These can be either simultaneous running across all agreements or sequential where one agreement ends and the artist signs a new deal with the same company.  The concept is that advances and recording and other costs paid under one contract can be recouped under the same or any/all other agreements.  Similarly, advances paid for tour merchandise may be recouped from retail, e-commerce sales and third-party licensing.[7]

 

For artists, especially new artists, the advantage is that the various advances offered can amount to more than they would have received under the old recording deals; whilst the labels’ focus has shifted from producing hits to developing talent across all income streams.  Paramore is one artist who attributes their major success to the 360 deal.  For an established artist such as the Rolling Stones whose catalogue of the past 50 years is already distributed by UMG; in a new deal, Bravado Merchandising will have full control of their global merchandising rights, retail licensing, brand management and e-commerce, including their iconic tongue logo; thus monetising their future income.[8]

 

By George Chin LLB(Hons)

 

[1] Ashley King, ‘Warner Music Group acquires EMP Merchandising for $180m’ (Digital Music News 17 September 2018) https://www.digitalmusicnews.com/?s=merchandising

[2] https://variety.com/2018/biz/news/warner-music-to-acquire-emp-merchandising-for-180-million-1202944001/http://www.wmgartistservices.com/?frontpage=true

[3] https://www.thethreadshop.com/#services

[4] https://www.universalmusic.com/label/bravado/http://www.bravado.com/services

[5] Ashley King, ‘Elton John inks a Deal with Universal Music Group for the rest of his career’ (Digital Music News 21 September 2018) https://www.digitalmusicnews.com/2018/09/21/elton-john-universal-music-group/

[6] Ann Harrison, Music The Business, (7th Edn, Virgin Books 2017)

[7] Donald S Passman, All You Need to Know About the Music Business (9th Edn, Simon & Schuster 2015)

[8] Jillian Ambrose, ‘Rolling Stones sign up to fresh partnership with Universal Music’ (Daily Telegraph 9 July 2018) https://www.telegraph.co.uk/business/2018/07/08/rolling-stones-sign-fresh-partnership-universal-music/

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