When I was in Nashville, I was told that contracts between record companies and recording artists were quite unusual, but I didn't stay long enough to investigate further. Now, in the wake of Korn's new deal with its record company and promoter, I am wondering whether "Entertainment Financing" should be a new chapter in my entrepreneurial finance book:
Under the terms of the arrangement, Live Nation Inc. will share far more than is typical for a promoter, which normally receives a cut of the band's box-office sales but little else. Instead, the company is paying roughly $3 million for an estimated 6 percent stake in the band's box office, licensing, publishing, merchandise and CD revenue for its recently released album, "See You on the Other Side," and its next album, music industry executives involved in the deal say. Live Nation will also be the exclusive promoter of Korn's concerts in the United States.
The deal reflects a new twist on relationships that generally involve only two players. Music acts sign contracts with record labels to distribute their CD's; the acts strike separate deals with concert promoters to market their live performances. The labels and promoters historically have not shared in each other's earnings, but under Korn's arrangement with Live Nation - and an earlier all-encompassing pact that the band struck with the music giant EMI Group - the money will flow into one shared pot. The three-way partnership is the latest example of how the various players in the music business are scrambling to keep pace with a shifting market.
The interesting issues here are about incentives and branding. Instead of trying to make money from a particular show or set of shows, promoters will be inclined to see brand as the focus and shows will be a means of building that brand. According to Jeff Kwatinetz, a founder of the Firm, the management company that brokered the deal with Live Nation:
We've taken the biggest promoter and one of the biggest record labels and incentivized them to think long term and to think career about our band. We believe long-term career planning is what's been lacking in the business. We believe that's part of the solution to the woes the music business is experiencing.
I like the innovative thinking and will watch with interest to see whether this sort of arrangement becomes the industry standard.
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