Breaking an Artist in the Digital Age Pt. 6: K-Pop (A Case Study)

Over the years I have become a big fan of Korean Pop Music (K-Pop). The business of K-Pop is as lucrative as the music is catchy, and makes for an interesting case study for record labels and artists worldwide.

The Korean Wave (Hallyu) refers to the increase in the popularity of South Korean culture since the late 1990s. In terms of K-Pop, Hallyu equates to a high profit margin.

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What makes K-Pop so profitable? K-Pop stars have become all encompassing entertainers: singers, dancers, actors, presenters; which takes years of training and artist development.

Sean Saw, S.M. Entertainment’s strategy and planning rep, notes that “each of S.M.’s 20 to 30 trainees costs $100,000 a year, for anywhere between three and seven years. As is the case with the majority of these systems, once artists have been selected to ‘debut’ as part of a boy group or girl group, they’re offered a contract, or, as Saw phrases it, ‘partnership,’ that can last as long as 15 years.”

Read more: Seoul Trained: Inside Korea’s Pop Factory

What’s the pay off? For S.M. Entertainment, the pay off is massive. S.M. Entreatment’s revenue increased by 82% jump in 2012, taking in $225 million, making it the biggest label in K-Pop.

Landing a spot in a K-Pop group, however, is not easy. Over 300,000 applicants from over nine countries apply for spots in music groups each year. For the few who make the cut, and survive the years of training, their hard work and efforts can lead to a prosperous career.

Read more: Korea’s S.M. Entertainment: The Company That Created K-Pop

Online Song Lyrics & Royalties

The exclusive rights granted to songwriters under U.S. Copyright Law and assigned rights under publishing agreements is a vital source of protection and income for copyright owners in the music industry. Copyright owners receive royalties when song lyrics are used, and it is generally understood that copyright owners are compensated when songs are used on television, in movies, and are otherwise performed.

So what about websites that compile the lyrics to songs?

Lyric aggregation sites are once again under scrutiny for copyright infringement allegations for posting song lyrics without paying royalties to songwriters. According to LyricFInd, lyric searches on Google reach an estimate of 5 million per day, which stacks up to serious cash for songwriters whose lyrics are found on non-paying websites.

Music publishers are reaching out to lyric aggregation sites to have sites obtain licenses or face take down notices for infringing activities. Not only will licenses help songwriters get paid for their works, but they can also help regulate the quality of lyrics posted to sites. Many lyric aggregation sites rely on user submitted lyrics, which often contain incorrect lyrics and can devalue the songwriters’ creation.

Some music industry professionals and lyric sites question the fight against unlicensed online song lyrics, finding the payout to songwriters is inconsequential compared to the time and money battling unlicensed use. According to a study by Peter DiCola of the Northwestern University School of Law, only roughly 6% of an artists’ revenue stream comes from songwriting royalties. Although this percentage is small in comparison to other revenue streams, it is not representative of the non-performing and non-touring songwriters.

Whether or not licenses from online song lyric sites will provide songwriters with a big payout, the battle over song lyric aggregation sites will perceivably continue.

When Franchises Lose Endorsements: LA Clippers Face Repercussions

Following the aftermath of Los Angeles Clippers’ owner Donald Sterling’s racial comments that led to his eventual lifetime ban from the NBA, the Clippers franchise face potential financial losses due to suspended endorsement deals.

Anyone with access to the radio, tv or Internet is familiar with the idea of endorsements: partnerships between a famous person or organization and a product or service to increase sales. What happens when one party to the partnership is involved in a publicly unacceptable scandal? And what happens within complex relationships when a person associated with a party to the endorsement partnership jeopardizes the entire deal?

Let’s first explore why and how public scandals can destroy endorsement deals. When a company is paying a celebrity or sports team to help sell more products, any scandal in which the celebrity or sports team is involved can harm the reputation of the company. Most endorsement deals involve moral clauses that allow deals to be suspended or canceled if one party to the deal publicly diminishes his or her reputation. I touch on these clauses in a post entitled (Reverse) Moral Clause: Protecting One’s Own Brand. So harm to one’s reputation is usually the “why” and moral clauses usually cover the “how.”

Next comes the question of complex relationships; when a person who is not a part of the endorsement deal diminishes the reputation of a party to the endorsement partnership because of personal or professional associations. Let’s look at past practices, in particular the Lady Gaga Monster Ball and planned Fame Kills tours.

Back in 2009, Lady Gaga ran into bad luck with touring with rappers. Gaga and Kanye West were set to headline the Fame Kills tour which was called off following West’s infamous interruption of Taylor Swift’s acceptance speech during the MTV Video Music Awards.
Statements regarding the tour’s cancellation range, with speculation pointing towards poor ticket sales due to anti-Kanye sentiments. Gaga’s bad luck continued when Kid Cudi, an opening act on Gaga’s Monster Ball tour, left the tour five days after jumping off stage to attack a fan during a performance in Vancouver.

Although no statements were made regarding the behaviors of the rappers, their relationship with Gaga or tour sponsorship, speculation arose about the negative affects of the rappers’ behaviors on tour sponsorship and repercussions that Gaga could face with her fan base.

Gaga’s situation is similar to that of big-name Clippers players like Blake Griffin and Chris Paul, both of whom have endorsement deals that are directly or indirectly connected to the Clippers franchise and – consequently – the detrimental actions of Sterling. Like Gaga’s situation with both rappers backing out of the tours, Griffin and Paul’s reputation were saved due to swift efforts to disassociate ties to Sterling.

The Clippers franchise, however, may not be as lucky. Several companies have stated that endorsement deals are suspended, but statements about future relationships with the franchise have not been publicly made since Sterling’s lifetime ban. Public statements also fail to discuss the extent of the suspensions, leaving the question of whether Griffin and Paul’s endorsement deals will be affected because both players are associated with the Clippers franchise.

Moral clauses help protect parties to endorsement deals from the negative reputations and scandals that may arise, but how can parties protect themselves from loss of endorsement deals and blows to reputation due to associated parties?

One option may be by creating a legal relationship with associates that outlines monetary damages or other recourses when associated people and organizations ruin endorsement deals or otherwise get in the way of business ventures. Partnership agreements are common when two or more parties engage in business relationships and/or professionals ties in which one party’s actions could cause financial harm or damage to reputation merely because of association.

If you have questions about morals clauses, partnership agreements, or legal relationships regarding your business and/or musical ventures, please contact a licensed attorney.

Covering Your Ass(ets) pt. 1 – Why Musicians should Get Their Ducks in a Row

Musicians usually think to turn to their attorneys for the big stuff: negotiating recording deals, licensing intellectual property and, of course, seeking legal ramifications when something goes wrong. An important part of a musician’s financial and personal interest, however, is the musician’s legacy.

While no one wants to think about the distribution of their assets upon their death, estate planning is critical to an artist’s legacy and, ultimately, the control of his or her property upon the artist’s death.  Although most people consider their estate to merely encompass money, cars and houses, an artist’s estate covers much more than this. When it comes to estate planning, artists should meet with their attorneys to discuss more than who will access to their bank account…especially since all of the artist’s financial and non-financial assets will affect estate taxes and estate debts!

Finances

Although there is much more to an artist’s estate than his or her finances, finances usually cause the biggest problems in estate disputes. For artists, finances can reach beyond the typical income flow. When creating an estate plan, there are a few considerations that artists may want to keep in mind:

  • Royalty escalation – a royalty escalation is a provision in some recording contracts in which an artist receives a higher royalty if a certain amount of sales – or other measuring unit – have occurred. For example, an artist may receive a 15% royalty for the first 100,000 albums sold, with a bump up to a 17% royalty for albums sold after the 100K mark. Because an artist may sell more albums after he or she has passed away, the artist may want to consider the legal – and tax – implications that such a bump in posthumous record sales will have on his or her beneficiary(s).
  • Licensing and Publishing agreements – many artist sign publishing agreements with an independent music publisher or incorporate a publishing deal into his or her recording contract. Likewise, many artists enter into licensing deals for the use of their music, image or other intellectual property for various uses, whether in conjunction with, or independent of, their publishing and recording deals. Depending upon the terms of these agreements, an artist may want to consult a lawyer to see how these deals will alter revenue streams that are paid out to his or her beneficiary(s).

Non-Financials

Non-financials are equally as important to the legacy of an artist, and his or her estate, as financials. As a result, artists should consider the distribution of their non-financial assets when creating a will. Such assets may include:

  • Copyrights and Trademarks – artists often retain interest in their copyrights and trademarks. As such, artists can assign an administrator to their intellectual property rights. Such an assignment is important with respect to the use of an artist’s intellectual property after he or she has passed on. This is an important consideration since whoever holds the copyright or trademark interest has the say as to the use of the intellectual property rights.
  • Internet and Social Media – Although the Internet and social networking is a relatively new component of the entertainment industry, it should not be ignored. As with intellectual property rights, an artist may want to consider who will control his or her online presence after he or she has passed away.
  • Memorabilia – many artists keep mementos from their music career. Rather it be concert posters, instruments, original lyrics or anything else of sentimental value, an artist should consider memorabilia when planning out an estate. As memorabilia can sold to help pay of estate debts, or used in a way that could be averse to an artist’s desires and interests, detailing who gets what can save an artist’s beneficiary(s) major litigation – and emotional – costs.

Estate planning is difficult for most people, but the lack of estate planning is difficult on family members and loved ones who may not see eye-to-eye on the distribution of assets. Often times, poor estate planning can force families, friends and other loved ones into long and bitter disputes that, often times, end in litigation. By sitting down with a lawyer to create a will, an artist can save his or her loved ones a lot of time, money and hurt feelings while preserving the desires and the interest of the artist.

On the Up: Music Based Ad Revenue

Ad revenue has been an important funding source for many music based services, and is becoming a foundation in the era of digital music. With terrestrial radio ad revenues remaining unparalleled in the music world, mobile and internet based music services are finding sustainability in the once overlooked digital ad-generated business model.

When internet music service Pandora announced that it was going public on June 15, 2011, skeptics doubted the company’s ability to break even, let alone profit.  Since digital radio stations pay statutory license fees – unlike traditional radio stations who are not required to pay for playing music over terrestrial radio waves – skeptics questioned ad-based music services’ ability to rake in enough money to cover license fees and to reach the point of profitability.

Pandora, however, proved skeptics wrong, receiving a majority of its total revenues from advertisements. The company’s ad revenue jumped 102% to $66 million in the its third quarter after going public.

Pandora is not the only digital music service to thrive off of ad-based models.  During the D: Dive Into Media conference, Vevo’s CEO Rio Caraeff announced that, “In the last year alone we’ve generated over $150 million…We paid the labels about $100 million [over the last 2 years]. So we’re making money.”

Digital marketing and media research company eMarketer estimates that revenues from ad-supported mobile music services will increase 52.7% in 2012, bringing in an estimated $433.8 million. Further, eMarketer puts ad-based mobile content in the $1 billion range by 2015, projecting 30% of mobile music services’ profits to come directly from ad-based revenues.

The much-anticipated music streaming service Spotify, however, is struggling to stay afloat. Although the company saw 458% increase in revenue in 2010, the company had a net loss of $41 million.

With the projected increase in ad-based music services, advertisements play an important  part in creating a sustainable business model. Whether used alone or in conjunction with a subscription model, ad-based music services will continue to drive the music world.

It’s 2012: Revisiting Predictions – The End of the (Music) World?

With 2012 officially underway, rumors that major record labels will end CD production by the end of 2012 have subsided.  These rumors have alarmed music fans fond of the physical music world, but the rumor has never been confirmed by major labels.

The idea that physical music will soon become a mere afterthought is nothing new (you can read more about it here), but 2011 record sales have largely quieted doomsayers.  
Last year U.S. album sales rose for the first time since 2004, increasing 1.4 percent from 326.2 million units in 2010  to 330.6 million units in 2011.  Cheaper CD prices and the raising popularity in vinyl records is largely attributed to the increase in overall record sales.
Interestingly, however, CD sales fell by six percent, leaving the increase in album sales being attributed to vinyl and digital album sales.  Digital album sales alone made up 103.1 million units sold, with vinyl sales increasing to 3.9 million units.
With the 2011 stats showcasing CD sales continued decline, independent music retailers are becoming a great resource in predicting the fate of CD production in the relative future. One of the top independent music retailers, CD Baby, has shown an interesting shift in the indie music scene.  
The 2011 CD Baby stats highlights a unique trend in album distribution by artists. Of new albums listed on the site, 62.1% of titles had CD and digital units for sell.  Despite the 8.4% decrease in CD sales, dropping from 691,340 units to 633,2800 units, CD sales remain a vital revenue source for the company.  With the increase in CD units being offered on the online retailer, indie music offerings prove the strength of the CD market.
For a full 2011 music sales data, check out The Nielsen Company and Billboard 2011 Music Industry Report.