US Court: distribution of digital tracks is about licensing, not sales

An interesting set of recent lawsuits in the music industry is about to determine the value digital music sales represent for artists that started selling music long before the advent of digital sales. A number of “older” artists are debating with their record companies about the revenues from their digital sales. The question is how much a song on a digital music service should be worth to the performer?

Four years ago, the producers who discovered Eminem sued his record label, Universal Music Group, over the way royalties are computed for digital music. Eminem’s entourage have a very compelling argument, claiming that an individual song sold online should be considered a license and not a sale. The difference significant because, as with most artists, Eminem’s contract said that he is entitled to 50% of the royalties for a license but only 12% in case of a sale. The court has now ruled that Eminem's contract gives him 50 percent of the royalties for songs sold online. Many older artists, whose contracts predate the digital era, are expected to receive larger payments because of this court decision.

This case reached an end last week, when the Supreme Court declined to accept a petition from Universal to reconsider the case. A lower court’s decision that digital music should be treated as a license has been established by the dismiss of appeal. To the record labels, this is a very disappointing outcome. The sale of older music is an important source of steady and long-term income. The digital part of that source will now significantly dry up. Lawyers and music executives say that few younger artists are likely to be affected by the decision because since the early 2000s record companies have included seperate agreements on revenues from digital sales in their contracts. Eminem’s first contract was signed in 1995. Many older artists, however, whose contracts predate digital music and have not been renegotiated, stand to profit significantly from the decision.

The judges agreed that record companies’ arrangements with digital retailers resemble a license more than a CD-sale, because, among other reasons, the labels only make a single master recording that it then duplicates for customers. “Unlike physical sales, where the record company manufactures each disc and has incremental costs, when they license to iTunes, all they do is copy the master,” said Richard Busch, a lawyer for the plaintiffs.

Royalty rates vary, but today most acts get 10 to 15% of their music’s net sales, minus packaging and other deductions, lawyers say. But for decades, licenses of music — to movies, television or other third parties — gave artists a 50% share, without the same deductions, on the principle that a third party was bearing the relevant costs.

In separate cases, the Allman Brothers have sued Universal and Sony BMG Music Entertainment over similar contractual issues. The Sony case was settled, but the lawsuit against Universal, filed in 2008, is still pending.

Source: The New York Times