The Risk Record Labels Take

Steven Knopper of Rolling Stone reported this past week that Lady Gaga will need to undergo hip surgery and will have to cancel the remainder of her Born This Way Ball tour. Gaga and her concert promoter, Live Nation, will have to refund close to $30 million in tickets, and due to doctors orders, most likely, will not see Gaga gross another $161.4 million like her 2012 world tromp.

You can read Knopper's full article here.

If anything, Gaga's tour cancellation proves the huge risk that record companies take on when they sign a new artist to their roster.  There has been a lot of negativity cast on the record companies introduction of the 360 deal, which allows them to take a percentage of the artist's entire revenue stream from record sales to touring, merchandising, and sponsorship income. Truth is, the record executives had to push for this new standard contract because musicians have moved away from selling tangible products such as CDs into offering a service to their fans.

For the record companies, artists, and their management a service based business provides a different set-of risk elements for the brand. The biggest in this instance is the concept of inseparability. Under this theory concert goers expect Lady Gaga and nobody else when they purchase a concert ticket, pay for parking, and buy a beer. And as we are witnessing with the current Gaga situation, once the brand must separate the artist from the equation there is no money to be made.

While I will not go on to justify record companies and the 360 deal, I will cut them some slack. Very few business models take on this level of risk and require the hefty investments they are willing to fork over. To get an artist "off the ground"  a record label will invest hundred of millions of dollars in crafting an album, promoting the artist and their music, establishing a brand presence online, in social media, and in the national market, and then fork over more money to establish a tour, merchandise, another album, etc.

That is a huge investment for any company, and while insurance will probably cover the losses for Gaga it often does not, leaving record companies hanging when their product, the artist, gets sick, injured, or goes AWOL.  I encourage all musicians out there to think about this when the time comes to sign that deal. It will help you respect where the label is coming from and provide you with a more educated bargaining position.