Keeping up with the Jacksons

In March, Janet Jackson signed an unprecedented $40-million record contract. Nine days later brother Michael got a deal that guaranteed $65 million-plus. Suddenly, the recording business is looking like baseball with its escalating contracts. Will there be a spending frenzy? The record company execs say it’ll never happen. The stars are already talking to their attorneys.

Don Engel, the Los Angeles attorney who is known in the record industry as the “contract-buster,” says he’s never seen anything like it.

“I’m swamped,” he says. “In the last couple of months, I’ve been retained by eight artists and entered discussions with about 10 others. What we’re talking about here is major artists trying to break contracts.”

The rush to Engel--and other attorneys--followed news of the two biggest signings in record industry history:

* An unprecedented $40-million deal on March 12 between Janet Jackson and Virgin Records.

* An estimated $65-million-plus landmark agreement nine days later between her brother Michael Jackson and Sony Inc., which bought CBS Records in 1988.

Suddenly, the record business--which no one had ever accused of underpaying its superstars--is looking like major league baseball, where deals escalate so fast that a player salary that appears breathtaking one day is dwarfed by a new contract the next. Will these two deals touch off a spending frenzy? What do these two deals mean for artists who are just starting out, journeyman bands that would like to get in on the big money or proven million-sellers like Guns N’ Roses or Prince? If Janet Jackson is worth $40 million, how much could Madonna get?

“I wouldn’t want to be looking at Bruce Springsteen and (manager) Jon Landau right now, if I was Mr. Morita, after having just done that big deal for Michael,” offers Irving Azoff, president of Giant Records, referring to Sony Chairman Akio Morita. “What does Bruce (who is also a Sony artist) deserve now?”

“There is no way that the two Jackson deals will become the model for the industry,” says Al Teller, who succeeded Azoff as chairman of the MCA Music Entertainment Group. “It just won’t work. If the components of these deals became industry standards, the record business as we know it would not be able to function.”

But Engel--and other attorneys--disagree.

“This is a new era and the companies know it,” he suggests. “When they say that this isn’t the beginning of a trend, they’re just putting on a brave front.”

Engel likes the baseball analogy.

“When the biggest star in the league suddenly gets $10 million, then all the $3-million guys want to move up the ladder to $5 million,” he says. “That’s why all of a sudden so many multi-platinum artists are coming to me saying, ‘I got to have some of the same things that Michael got.’ ”

This isn’t just the age of MTV and corporate sponsorship in the $7.5-billion-a-year world of pop music. It’s also a time when the Dow Jones financial charts seem to be as important to executives as Billboard magazine’s weekly pop sales charts.

The recent series of dramatic corporate acquisitions underscored just how much money is at stake in the music industry.

The cycle began in 1986 with the $300-million purchase of RCA Records--the onetime home of such major sellers as Elvis Presley and Perry Como--by Bertelsmann Inc., the West German media conglomerate.

But that figure was surpassed two years later when Sony paid $2 billion for CBS Records, a deal that New York industry attorney Allen Grubman describes as “the day the record business was ‘bar mitzvahed.’ ”

That Sony deal was followed by a buying fever in the industry:

* The Time Inc. and Warner Communications Inc. merger announced in June, 1989, a $14-billion deal that brought together two of the world’s leading communication conglomerates.

* The purchase that same summer of Island Records by PolyGram, a subsidiary of the Dutch electronics company Philips N.V. Estimated price: $300 million.

* The $500-million acquisition in 1989 of A&M--the Hollywood-based independent label started by Herb Alpert and Jerry Moss--by Philips, which also owns Mercury, Vertigo, Polydor, London and Fontana.

* David Geffen’s sale in 1990 of his Geffen label to MCA for $550 million in preferred stock.

* The purchase of MCA Inc. itself the same year by Matsushita Electrical Industrial Co. Ltd.--the Japanese electronics giant whose brand names include Panasonic and Quasar. Price: about $6.6 billion in cash and securities.

In addition MCA, in a joint venture with Boston Industries, paid $61 million in 1988 for Berry Gordy’s fabled Motown label, and Capitol-EMI in 1989 bought 50% of London-based Chrysalis Records (whose roster includes Sinead O’Connor and Billy Idol). Capitol-EMI also paid $26 million earlier this year for the remaining 50% interest in SBK Records (home of Vanilla Ice and Wilson Phillips).

The deals demonstrate that investors are bullish on pop music.

“I think the record industry is one of the strongest industries in the world at the moment,” said Virgin Groups President Richard Branson, the noted British entrepreneur who personally signed Janet Jackson to his Virgin label.

“Despite the recession, it has hardly been affected at all. And my guess is that over the next 10 years, the industry will grow much faster than almost any other industry. I’m sure that is one of the reasons why the (large foreign conglomerates) are showing such an interest in the business.”

Jeffrey Logsdon, senior vice president of Seidler Amdec Securities Inc., a Los Angeles brokerage firm, challenges that assumption. He doesn’t believe the economic outlook is dramatically different for the record business than for other industries.

“I wouldn’t look at what happened in 1990 as being indicative that the record industry is recession-proof,” Logsdon says. “While it is true that successful artists can generate enormous amounts of profit, there is no way to gauge how long consumers will continue to purchase CD versions of old catalogue items which helped support the market last year.”

But John Branca, the Los Angeles attorney who represents such major acts as the Rolling Stones and Prince and several major record companies, believes the flurry of corporate moves--and the dollar amounts involved--are bound to result in artists and their agents asking for a greater share of the pie.

Just as it’s the superstar baseball players who lure customers into the park, it’s the superstar artists who draw them into the stores.

“If you analyze what makes a record company profitable . . . what really drives the company, the superstar is the locomotive,” says attorney Grubman, who represents such artists as Michael Jackson, Bruce Springsteen and Billy Joel. “And that’s how these large contracts came to be. The same executives who were involved in restructuring the record business a few years ago now understand that the stars should be compensated for their true value.”

Azoff, former head of MCA Records as well as onetime manager of the Eagles and Stevie Nicks, compares superstars to priceless artwork.

“When you’re talking major artists, it’s like auctioning a painting,” he says. “There are only so many of them, and you need at least one to hang on the wall. When you’re buying a Michael or a Janet, it’s like now buying Picassos.

“The deal isn’t just, ‘Can I ever hope to make back the money on signing this artist?’ It’s also about what will this do for the worth of my company and the morale of my employees.”

Some observers believe that Azoff’s Picasso theory was clearly at work in the Jackson deals.

The Sony record division had just gone through a change of management, and it was important to send a signal to the industry--and to investors--that everything was under control. It just wouldn’t look good to have the biggest record seller in history walk away.

The issue was particularly delicate because of widespread industry speculation that one reason Sony replaced Walter Yetnikoff as president of the record division was that he had lost the confidence of such key Sony artists as Jackson and Springsteen.

“In Michael’s contract, the change of administration at Sony during the negotiations added to Jackson’s bargaining power,” says Bertram Fields, one of the attorneys who represented Jackson in the Sony negotiations. “This situation is really analogous to a drug company that announces it has some new hair-growing tonic.

“If your company has a Michael Jackson or a Bruce Springsteen, it’s the same as having a hair-growing formula,” says Fields, whose list of clients also includes such film stars as Dustin Hoffman and Robert De Niro. “If you lose them, it’s like you lost your patent on the formula. There is always this intangible desire to invest in a company that seems successful. There is no question about it. If Sony had lost Michael, it would have been very damaging to the company.”

Joe Smith, president and chief executive officer of Capitol-EMI Music Inc. and a major player in the industry for three decades, also stresses the psychological importance of Sony’s keeping Jackson happy.

“With Sony having so heavily invested in the music business and this artist being so much above everybody else, even the thought of ‘trouble in paradise’--which is what you’d have if your biggest artist left--was nothing that Sony wanted to face,” Smith says.

Another factor involved in the escalating contracts, many industry observers speculate, is that some record companies are trying to beef up their rosters with superstars so that the company is more attractive to potential buyers.

This, many feel, is why Virgin--rumored in recent months to be for sale--was willing to pay so much for Janet Jackson, whose international sales are impressive (nearly 16 million for her last two albums).

Al Cafaro, president and chief executive officer of A&M Records, which Jackson left to go to Virgin, thinks that Virgin may have been trying to attract potential suitors in signing her--a view widely shared in the record business.

“I have a real show-me attitude about that deal,” he says. “It would seem that they might have made it to attract a buyer. Virgin will have to sell a lot of records to make it work.”

But Branson challenges that theory. He insists that his company isn’t for sale and that he signed Jackson strictly for her sales potential.

“This talk about us signing Janet to attract a buyer is rubbish, absolute rubbish,” he says. “We’re the fifth-biggest record company in the world, and I don’t think we need to add to the collection if we wanted to attract buyers if we ever did decide to sell. But we have no plans and no wish to sell.

“Janet’s a talented, determined lady. She wants to be the biggest star in the world. I think that is important. She is someone who will work extremely hard to see that she stays up there. As far as an investment is concerned, it’s a great investment. She’ll deliver the goods. She won’t let us down.”

The Janet Jackson deal stunned the record industry; her brother’s contract electrified it.

The Sony press release announcing the deal said it could be worth as much as $1 billion to the entertainer, but that estimate is widely viewed in the film and record worlds as hugely inflated. Jackson could conceivably earn that much; he could make $2 billion if he shattered all existing and imaginable music, film and video sales records--time and again.

But he’s guaranteed only about $65 million under the pact. The reason is that Jackson--confident in his own abilities--sacrificed a bigger guarantee for a joint profit-sharing arrangement that will give him more money in the long run if he continues to have big hits.

The deal gives Jackson an unprecedented share of the profits from his next six albums, his own label--Nation Records--a role in developing video software products plus a foothold in the film industry.

The profit-sharing plan is based on a practice that has become increasing popular among superstar actors in the film business. A handful of actors and actresses command a percentage of the distributor’s gross receipts that starts at about 10% to 15% and escalates to a top rate of about 30%, a figure achieved if sales reach or exceed about $150 million. But Jackson’s 50% participation in profits of records goes beyond even those deals.

The Jackson pact was so complex that it took a year to complete. Negotiations were started by Jackson’s then-lawyer John Branca, and concluded by attorneys Fields and Grubman. Geffen, a longtime friend of the singer, also served as a confidante during the talks.

None of these representatives would discuss the contract provisions, but industry sources say the deal means that Jackson would make more than $120 million if he comes up with another album that matches the 40 million in sales of “Thriller,” his mid-’80s smash. According to industry sources, that’s about $35 million more than he earned for “Thriller.”

Jackson is reportedly guaranteed $18 million for the first album under the six-album pact and $5 million for every subsequent album. But the guarantee is just the starting point.

He will also be paid a 25% royalty from each album based on retail sales plus half the profits of every record that comes out on his own label--between $2.50 and $3 an album. In addition, sources say the singer is expected to be paid a signing bonus of $4 million plus $1 million a year to run his own record company.

Sources say Sony agreed to put up an additional $2.2 million a year in administration costs for the record company, plus more than $10 million to cover the cost of videos for his new record.

But the deal extends beyond recordings. The film provisions reportedly guarantee Jackson the actor a $5-million fee for every film, plus a large advance for each movie against a healthy percentage of the gross receipts.

Ron Wilcox, senior vice president of business affairs and administration for Sony Music, says, “Michael is the great superstar in the music industry and the contract is (totally) justified by his past achievements, existing talent and future potential.”

For all the talk about the deal escalating other artists’ contracts, most of those involved in the negotiations downplay it as a trendsetter.

Geffen says Jackson commanded the record figures because he is the biggest-selling recording artist in history.

“I don’t see the Sony deal as a sign that other record companies are going to start tearing up contracts of other artists and adding zeros--at least not until someone else comes along who can sell almost 70 million records (for his last two albums),” he says. “Michael is a unique artist, and therefore his contract is unique.”

Fields agreed.

“While it probably will cause other artists to ask for more, it is unlikely that anyone will get a partnership deal like Michael did,” he says. “Michael can sing and write and dance and act. Having Michael is like having Frank Sinatra, Fred Astaire and Bing Crosby in one package.”

But a lot of artists would be quite pleased to get what Jackson’s sister got--and she hasn’t sold 50 million records.

Janet Jackson’s deal with Virgin reportedly guarantees the singer a whopping $40 million for three albums plus a 22% royalty on the retail price of every record she sells.

While Virgin will also foot the majority of the bill for Jackson’s videos, the key element in the contract is a real shocker in the industry. Rather than being tied to the new label for years, as is common in the record business, she is free to leave Virgin relatively quickly, according to sources. That means she can become a “free agent”--to use a term popularized by sports contracts--possibly after as few as two albums.

Normally, the record industry goes to great lengths to keep artists from becoming free agents. Contracts with new artists frequently give companies options for as many as six to eight albums--usually at a low royalty rate (say 12% to 14% of retail). Most of these newcomers never make a profit for the company, but the money rolls in so fast once an album hits that the company is eager to renegotiate the contract.

The subsequent deal typically gives the artist the advantage of a higher royalty rate (say 16% to 18% of retail) but usually requires the artist to add an album or two to the original obligation. If the artist’s sales continue to mount, the company may even renegotiate a second or third time--upping the royalty rate but also requiring more albums due. Because of this, it is rare for artists to become free agents.

Madonna, for instance, could no doubt command a Jackson-level contract if she were a free agent, but she reportedly owes Warner Bros. as many as four more albums.

“It was absolutely essential to the Jackson-Virgin deal that she was a free agent,” attorney Branca says. “The last time there was a free agent of this stature was the Rolling Stones in 1983, and they set the all-time record for the largest guarantee in a record deal at that time.

“So when Paula Abdul walks in or Steve Winwood or whatever other Virgin artists walks in and asks for a contract like Janet’s, the company is just going to say, ‘Hey, look, when you’re free, we’ll sit down and talk about it, but you’re not free, so you can’t get the deal that Janet got.’ Still, renegotiation is a fact of life in this business, and while that artist may not get as much as they could get as a free agent, the company may give them something close to it.”

Janet Jackson’s free-agent status was so rare that at least eight companies entered the bidding, including Capitol, MCA, Atlantic and her old label, A&M. In fact, Virgin’s Branson insists that his bid--for all the interest it has stirred--wasn’t significantly higher than several rival offers.

Another element in her favor was her age--24. “Of all the big-money deals around, we were really interested in Janet,” says Capitol-EMI’s Smith. “She was the most appealing to me because by the end of the agreement she would still be a very young woman. Often when you are making a deal with an artist at the top of their game, they are in their late 30s or early 40s. For instance, if you wanted to sign Mick Jagger, he’ll be 60 by the time the contract is over, and you wonder what relevance he’ll have at that point.”

Branson is surprised by all the hoopla his deal has caused.

“All the record companies who didn’t manage to sign her are out there saying we’re going to fall flat on our face, but our bid came in at a similar level to the other record companies’,” he says. “Janet’s deal is large, but all we have done is advance her an amount that we think we can recoup on her first Virgin album. Nothing more. The sum of money we paid is one with which I feel extremely comfortable.”

Like Madonna and Prince, most superstar acts are years away from free agency. The main exception this year is the Rolling Stones, who have fulfilled their contract agreement with Sony and are testing its free-agent value. Other artists believed to be near the end of their contract obligations include David Bowie and ZZ Top.

But what about artists who have tied themselves up for five or six albums and want to make a dramatic leap in royalty rate or guarantee amounts? Do they have any leverage?

If artists don’t feel they are being paid enough, they could delay delivery of their next album--something that would hurt them financially but would also hurt the company because it wants the profits from that album.

If that doesn’t work, there’s always the threat of the controversial seven-year statute.

To challenge multi-album deals that could conceivably bind artists forever, attorneys pointed to provisions of a longstanding California law that stipulates that entertainers cannot be tied up by a company for more than seven years.

The statute was specifically designed about 50 years ago to free actors from long-term studio deals, but record industry attorneys have adopted it for their purposes.

“Artists looking for better terms who still owe the company five albums after seven years come to me and they say, ‘I’ll be dead and in my grave before I finish this contract,’ ” Engel says.

Though the statute is open to wide interpretation, it appears to be a powerful weapon because record companies don’t want to test it in court. If they were to lose, it could trigger a wholesale exit of artists. So the companies often try simply to sweeten the deals.

Four years ago, the Recording Industry Assn. of America--the organization that represents most of the major U.S. record companies--asked the California Legislature to extend the duration of contractual obligations for entertainers to 10 years.

Although the lobbying effort failed, it did succeed in securing an amendment that grants record firms the right to sue and recover damages for any product still owed the company by a performer opting to break his or her contract by invoking the seven-year statute.

“Speaking from a company standpoint, I think the seven-year law is very unfair,” says Capitol-EMI’s Smith. “If I make a deal for a certain amount of records, and I pay the money to get that amount of records, I think the artist is under obligation to deliver those records. But nobody wants to test it. Everybody does their best to avoid it.”

One way around the impasse, Smith believes, will be the adoption of one-album contracts for superstars, leaving them free to shop each new album around if they wish, the way an actor or actress can move from studio to studio for each movie.

“We’ve always had the advantage in this industry of having exclusive rights to artists’ recordings for an extended period of time,” Smith says. “But those days may be nearing an end--at least in terms of superstars.”

In fact, Engel negotiated a one-album deal for the rock group Boston with MCA Records in 1986 and the arrangement worked well enough that the group and the record company just signed another one-album deal.

Despite all the talk about superstar deals, record industry executives seem united in one point: The healthiest way to build a company is to sign and develop new artists rather than to try to throw big bucks after superstars.

Even Virgin’s Branson agrees:

“Over the years, Virgin has built a reputation for developing new talent . . . people from out in the streets who we feel have a unique talent: Lenny Kravitz, Neneh Cherry, UB40, the Divinyls, Paula Abdul.”

Clive Davis, whose luring to Columbia of Neil Diamond from MCA Records in the early ‘70s is often pointed to as the first of the high-priced superstar signings, also emphasizes the importance of building new artists.

“Experience has shown that the major-dollar-guarantee deals that people have made--whether it was for Paul McCartney as a solo artist or the Rolling Stones--have lost money,” says Davis, who now heads Arista Records. “I’ve always felt the only way to have a successful company was to sign artists from scratch or to reach out for artists who might be (underachieving) at another label. I’ve never done it by way of way outbidding other people. . . . Take the Neil Diamond deal for instance. I paid $400,000 an album for 10 albums, which was exactly what other companies were offering.”

A&M’s Cafaro, whose company lost Janet Jackson to Virgin, believes that sinking millions into superstar deals is counterproductive.

“The time, energy and money spent on these mega-deals detract from new artist development,” he says. “Not only do they cause severe morale problems with other artists on the label, they can end up causing the superstar to be viewed more as a profit-and-loss statement on the company’s ledger sheet than as a creative human being.”

At the same time, most record executives acknowledge that they’re not going to sit on their hands the next time a superstar free agent becomes available.

Tony Attanasio, a San Diego attorney who has specialized in sports contract negotiations for 20 years, says he sees a parallel between what is happening now in the record business and what happened in the sports world in the ‘70s and ‘80s.

“I heard precisely the same doomsday argument from the baseball team owners back in 1974,” says Attanasio, who represents such baseball stars as Oakland pitcher Dave Stewart and St. Louis first baseman Pedro Guerrero. “The baseball owners say, ‘Oh, the sky’s going to fall. These prices are going to drive us out of business. The players are going to ruin the sport. The fans will stop coming to the games.’ I’ve heard all the arguments, but the fact is, they’re just not true. Free-agent deals in baseball have not destroyed the game, and they won’t destroy the music industry. . . .

“In our society, the market dictates what an artist is worth. If the fans keep coming to the games and keep buying the records, then the companies will have to pay the artists the amount of money that they are worth. The owners may not like it, but that’s how capitalism works.”