By: Erin M. Jacobson, Esq.
This article was originally published on Forbes.com.
The dispute between artists and labels over the income earned from digital downloads continues to rage.
Traditionally, record labels sold physical copies of music mediums, like CDs, and then would pay a royalty to the artist for each record sold. When iTunes came on the scene in 2001, the labels treated the sales of digital downloads the same as sales of physical CDs, and ever since have paid the artist a royalty on sales of those digital downloads. However, labels actually license the master recordings to digital distributors like iTunes and after a while artists began to make the argument that the income earned from digital downloads should be treated as licensing income and not sales income. The reason why artists want downloads to be treated as licensing income is because instead of getting a small percentage for a sales royalty (most commonly ranging from 11-20%, with an average of about 15% of the wholesale purchase price), licensing income is usually split 50-50 between the label and the artist. Therefore, artists stand to make a lot more money in royalties if a digital download is treated as a license rather than a sale.
This issue came to court starting in 2007 with the case FBT Productions v. Aftermath Records, a case involving royalties paid on Eminem recordings at the “sales” rate rather than the “licensing” rate. FBT won the lawsuit, establishing that income from digital downloads should be treated as licensing income rather than sales income, but Universal Music Group (owner of Aftermath Records) argued that this case should not set a precedent for all artist or record deals. Even though Universal tried not to set a precedent with this case, many artists renegotiated their deals behind closed doors to get better royalty rates for digital downloads than was originally provided for in their contracts.
Now the issue has once again arisen with classic group The Carpenters. Surviving member Richard Carpenter (fighting on behalf of his sister Karen Carpenter’s estate, as well) audited the band’s label, A&M Records/Universal Music. Artists often audit record label books to make sure that they are getting paid the proper royalties. Richard Carpenter’s audit showed that the label was under-reporting the number of downloads sold, was calculating the royalty on those downloads at a lower base price than they were supposed to, and that the label was paying a royalty on digital downloads at the sales rate instead of the licensing rate. Apparently, attempts to resolve the issue amicably were unsuccessful, and thus Richard Carpenter sued.
The Carpenters’ suit cites the FBT case as a precedent, and if the court follows FBT’s ruling then Carpenter has a good chance of success. Another case is currently pending between Sony Music and 19 Entertainment (the producers of American Idol) regarding how labels pay on digital streams. It’s the same argument as in the Carpenters’ case, but the position of a stream being treated as a license is even stronger than in the digital download scenario. However, it’s unclear at this point which way the court will side in both cases.
The labels make the argument that if they had to pay a 50-50 split on all digital download income, they would go out of business. However, the 50-50 split model is quite common with independent labels in the current marketplace and the indie labels are not necessarily going out of business. Both artists and labels often like the 50-50 split model because it creates more of a feeling of partnership between the label and the artist rather than an adversarial view of big company versus small artist.
What should be more of a concern to major labels’ fate than royalty rates is the fact that this digital age has made it much easier for artists to be independent and make a living off of making music without major label backing. Major labels can ensure their longevity by creating a new model that involves a deal that artists want to be a part of, that is advantageous to both the label and the artist, and provides for a long-standing working relationship, rather than one where artists are constantly concerned about being taken advantage of by the label. The tighter that major labels hold on to their traditional model, the more artists are going to look for alternative means of pursuing their musical careers — whether that be making direct relationships with distributors or other scenarios that benefit them financially and allow them to create a sustainable career off making music. This issue is not going away, especially with the growing popularity of streaming as a way of consuming music, and it’s time to adapt.
*This article does not constitute legal advice.
Erin M. Jacobson is a music attorney whose clients include Grammy and Emmy Award winners, legacy clients and catalogues, songwriters, music publishers, record labels, and independent artists and companies. She is based in Los Angeles where she handles a wide variety of music agreements and negotiations, in addition to owning and overseeing all operations for Indie Artist Resource, the independent musician’s resource for legal and business protection.