CMU Trends Labels & Publishers Legal

Trends: The digital royalties debate

By | Published on Thursday 6 March 2014

Eminem Pie

However much money is paid into the music industry by the digital sector, there remains the question of how that income is split between the various stakeholders.

One debate from the early days of digital that is sure to resurface is how the money from downloads and streams should be shared between those that control the sound recording rights – ie the record companies – versus those that control the publishing copyrights – ie the music publishers.

The current system, which is based on the splits traditionally agreed for ‘record sales’ rather than ‘public performance revenue’ from radio and suchlike, significantly favours the former. But in the streaming domain, which is more akin to radio than the record shop, the publishing sector – and certainly the songwriter community whose work they control – is likely to demand for that system to be reviewed.

But in the short term the live debate around digital royalties centres on how much of the money generated by downloads and streams labels should share with their artists.

Most of the debate on digital royalties has centred on heritage artists with record contracts that pre-date iTunes, because here the question is about what record companies are legally obliged to pay their artists, rather than what they should ethically offer.

There are ambiguities here because of the way record contracts were traditionally structured and worded. Record deals with new artists are (nearly) always totally stacked in the label’s favour, to justify the investment the record company is making into unproven talent, and to allow for the fact that 90%+ of all the investments traditionally made by record companies fail to break even.

Once a label has made back all and any monies it invested into launching a band, and releasing all and any of their records, it then agrees to share with the artist any future revenues that are generated by the sound recordings created under the contract. Though usually subject to a plethora of further deductions and charges, especially when recordings are monetised by another subsidiary of the label group the artist signed to. Some record contracts are more generous and less complicated than others.

The key point is that the ways in which future revenues are split between label and artist often vary according to the kind of income stream. Usually the vast majority of record sale income, which is traditionally by far the most lucrative kind of revenue, will stay with the label (under a traditional deal the artist would be lucky to negotiate more than a 15% cut here). But for ‘other’ and/or ‘licensing’ income, the contract would usually be more generous, providing the artist with anywhere up to 50%.

It’s worth mentioning that copyright law, in the main, has no opinion on these splits; though contract law may provide some rules about how such agreements should be negotiated.

Record contracts that pre-date the web (and in some cases contracts signed as late as 2002) make no reference to revenue generated by the sale of downloads or per-play fees earned by content being streamed, posing the question: should such income be classified as ‘record sale’ revenue, so the lower artist royalty is paid, or ‘licensing’, so that most artists will enjoy a much bigger cut of the money.

Most labels, certainly when it comes to downloads, have treated this income as record sale money and paid the lower cut. The argument goes that MP3s or AAC files sold via a download platform are simply the digital equivalent of CDs sold in record shops, and therefore the rules that govern physical product releases should apply.

But many artists, or more to the point their legal representatives, do not agree. It’s a particular problem where a heritage artist’s contract specifically refers to ‘licensing’ income. Because the agreement that exists between the labels and digital platforms like iTunes is clearly a licensing agreement, even if some labels have refrained from explicitly calling it that, foreseeing this debate.

The label provides a single copy of any one recording to the download store, and – through licence – grants permission to the download firm for it to grant permission to its customers to make a copy of that track by downloading it to their PC or device. There may be a ‘record sale’ of sorts at the outset, when the label provides a copy of its recording to iTunes or whoever, but the money is actually generated as a result of a licence being actioned.

And besides, the MP3 or AAC file the digital music customer acquires doesn’t behave like a CD (whereas CDs did behave like cassettes which did behave like vinyl records after past shifts in recorded music formats).

For starters, as has been widely remarked upon online, usually in the form of an untrue story involving an angry Bruce Willis, a download collection technically can’t be left to a customer’s decedents, because their ‘end-user’ licence is non-transferable. And with that in mind, the American labels have been adamant that the ‘first sale doctrine’ which allows customers to resell CDs on eBay or to second hand record stores cannot apply to the controversial MP3 resale service ReDigi.

All of which provides ammunition to artists with old-school record contracts to push for the significantly higher licensing cut on all and any download income, including past ring-tone sales as well as iTunes-style monies.

Though the labels would likely argue that, in this debate, the artists are exploiting a semantic technicality to rewrite past agreements. To be fair to the labels, had these contracts been written in a time when iTunes existed, or was foreseeable, then it seems unlikely many record companies would have been so generous in the revenue split it provided to the artist, not least because if the labels really did have to pay 50% of all download revenue to all their artists they’d likely go out of business.

Therefore, if the courts were to enforce the higher split to be paid because of the use of the ‘licensing’ word in those old record contracts, would they not be punishing the record companies for failing to foresee the future? Though given that some of these contracts seemingly date from the late 1990s, by which time the future was more than apparent, perhaps they should.

And, it should be noted, in the American jurisdiction, the courts do seem to have enforced the higher split. The landmark case here is the long-running legal battle between early Eminem collaborators FBT Productions and Universal Music’s Interscope, over the production outfit’s stake in the early Slim Shady recordings. In the end FBT prevailed, opening the floodgates for new lawsuits from similarly affected artists.

What is still to be tested is whether the ruling in the FBT case sets a general precedent on digital royalties which can be extended to all recording artists with pre-iTunes contracts. It remains to be seen which of the plethora of ongoing cases reaches court first, and in the meantime how many lawsuits the majors can prevent from reaching the courtroom through pre-trial settlements with individual artists. Though some of the lawsuits so far filed are class actions which make killing the whole debate through standalone agreements tricky.

Both Sony Music and Warner Music have now proposed separate roster-wide settlements that would apply to any artists with a relevantly dated and worded > record contract, the latter major making its proposal right at the end of 2013. Neither settlements were especially generous, given the increase in royalties many artists could expect if download money was actually treated as licensing income, but as settlement deals are routinely bound by non-disclosure agreements, it’s hard to know which artists are settling, let alone on what terms.

Meanwhile, there are two other elements to this saga.

Firstly, how long before the legal battle crosses the Atlantic to Europe? While managers and lawyers may be waiting to see what happens if and when one of the post-FBT cases goes before an American court, such a ruling would have little actual influence in European jurisdictions, so cases could be pursued here in the meantime. Though regular rumours that such legal action is being actively considered by UK or other European heritage artists has yet to result in any actual litigation.

The second element of this saga is streaming revenue. Most of the lawsuits on digital royalties to date centre on download income, but what about streaming, which is becoming an increasingly significant part of digital revenue in some markets? Even if labels can convince the courts that downloads should be treated as the digital equivalent of record sales, streaming services are more akin to radio than the record store, making the argument for licensing splits even stronger.

Some labels have already conceded that second stage of the debate and are splitting streaming income with their artists on a 50/50 or ‘licensing income’ basis. Others are not. And if streaming income is to ultimately usurp download revenue in the digital domain – as some argue it might – then that part of the debate is actually more important long term.

For artists signed since the launch of iTunes, there should be less ambiguity in record contracts with regard to digital royalties, in that how monies generated by download sales are shared with artists will be explicitly stated (and one would hope all contracts from that era will also provide for streaming service splits too, though some may not). And if the contract states that artists get the lower record sale split for digital, no court is going to interfere with that agreement.

Nevertheless, some do argue that artists should be earning a bigger cut of digital money, because while labels may be taking as big a risk as ever when they sign on to launch a new artist, the workload undertaken by the label for each individual digital sale or stream is considerably less than in the physical product days.

This was an argument put forward by Billy Bragg last year as artists debated loudly the royalties paid out by Spotify et al, with Thom Yorke and Nigel Godrich leading the charge for those who feel the streaming services are underpaying creative talent. Writing on Facebook, Bragg said it was pointless artists railing against a music delivery platform that was proving popular with fans, and should instead consider whether their own business deals were fit for purpose.

Bragg: “The problem with the business model for streaming is that most artists still have contracts from the analogue age, when record companies did all the heavy lifting of physical production and distribution, so only paid artists 8-15% royalties on average. Those rates, carried over to the digital age, explain why artists are getting such paltry sums from Spotify. If the rates were really so bad, the rights holders – the major record companies – would be complaining. The fact that they’re continuing to sign up means they must be making good money”.

Posting to Facebook from Sweden, he noted how the streaming royalties issue was being debated in the artist community there, continuing: “Here in Sweden artists have identified that the problem lies with the major record labels rather than the streaming services and they are taking action to get royalty rates that better reflect the costs involved in digital production and distribution. UK artists would be smart to follow suit”.

Of course, with cautious record labels – aware that the recorded music market is still 40% smaller now than in the 1990s – actually looking for a bigger share of new artists’ revenue streams, artists and their managers might find it hard to push for a bigger cut of digital when negotiating those first deals.