I have been arguing this point for years as anyone taking one of my classes at Berklee can testify.  This past week, rapper Eminem and his former production company F.B.T Productions won a significant digital royalties lawsuit granting the artist and production company a 50% split of revenue from digital downloads and ringtones. Universal Music Group will be required to pay a higher share of royalties for downloaded music or on ringtone sales according to a recent ruling by a federal appeals court.

This is a potentially HUGE change from how the recorded music industry’s business model works.  This new ruling may now mean that digital copies of  music are digital “masters,” which command a much higher royalty share than single or album “sales” do.

When consumers purchase a download from iTunes, they are actually “licensing” the song for playback within certain boundaries. According to many label contracts, licenses are to be treated as splits, perhaps split 50/50 between artist and label. To date, that has not been the case as downloads via iTunes and other sites have been treated as “sales” of copies of the song, rather than a license of the “master recording”.  Eminem and company challenged that assumption.

The labels have been accounting as if a download was the same as the sale of a single, using the existing contract language to define the payments.

Publishing and licensing may turn out to be of great benefit to artists and writers for digital music.   If songwriters and artists band together, they can leverage the licensing provisions in their existing contracts to extract their fair share of  digital revenue.  New contracts and constructs can approach the transaction from a licensing point of view.  Artists and writer have the upper hand when it comes to new music and new deals.

This ruling could truly be revolutionary for the creators of content if it holds up.  Think of it this way.  If an artist can directly license their music to iTunes and keep approximately 70% of the proceeds from each transaction, then why should they be paid 8-12% for music that their label licenses to iTunes?  Shouldn’t the money paid to the label at least be split 50/50?  If this ruling stands up to appeal and becomes more broadly interpreted, artists and writers will benefit greatly, and deservedly.

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Comments

26 replies
  1. TonsoTunez says:

    I don’t believe this has anything to do with of a consumer’s purchase of a copy of a digital file… this has to do with the licensing of rights by the record companies to iTunes.

    If record company contracts with third party distributors rather than using their own distribution channels, most recording agreements state that the artist is entitled to 50% of the licensing fees received by the record company. That’s because licensors assume the all of the distribution costs and responsibilities.

    As far as songwriters and music publishers are concerned, there is really only one area where the traditional 50/50 split doesn’t come into play and that’s the area of printed music.

    If a music publisher assumes the cost of printing and distributing music, the writer paid at the royalty rate specified in their songwriter agreement … If, as is the case with most print today, the publisher who has the agreement with the songwriter licenses another firm to handle print, the resulting royalty paid by the print distributor is split 50/50. That’s because the royalty paid to the music publisher by the print publisher is very low due to the fact that the print publisher assumes all of the risks.

    I will say this … if Eminem eventually prevails it will be the end of discovering an nurturing new talent by record companies and will throw the music scene into more disarray that P2P ever did.

    This would not be a good thing for consumers and new artists alike.

  2. Dave Kusek says:

    Tonso

    You are correct that this is a licensing issue and not directly related to the consumer purchase. This has to do with how much the artist and writer receive vs the label on a download.

    I don’t agree that this would be the end of discovering and nurturing new talent entirely, but would change the balance of investment in artist development towards the artist and their manager, where it belongs. The labels have no loyalty to artists anymore and artists must find new means to finance their development, and recoup that investment.

  3. Paul H. Muller says:

    I’m struggling here to see exactly what it is that the record label brings to the table. No need to manufacture and distribute vinyl records or CDs – hardly any record stores left anyway. Does Eminem need help with publicity?

    You can create an album and upload it to CD Baby for $55 and it will be available on iTunes and Amazon. Artists need to band together into collectives – the workers now control the means of production AND distribution.

  4. TonsoTunez says:

    David:
    I don’t agree that moving the cost of investing in artist development to the manager and artist is where it belongs – initially. The economics just don’t work.

    The reality is that 95%+ of all new releases will fail no matter how much money is invested in producing and promoting them. The public just can’t absorb more new offerings than that at any one time.

    If only one artist is being promoted by and individual or some sort of consortium… the odds of success are about equivalent to playing the lotto. That’s an over exaggeration but not by much.

    Record companies are successful for several reasons.

    1. They fully understand the extremely narrow market they are trying to reach;

    2. They play several hands at one time offering music they are fairly sure will be of interest to their target market (mass market outlets and consumers) knowing that no matter how accurately they have targeted their market, most of what they offer won’t see the light of day – but knowing, too, that enough of it will stick to pay for those that don’t thereby providing money for future investments … some of which will pay of big time and allow them to turn a profit.

    3. They are plugged into every aspect of the mass market – sales, marketing, tour support, personal relationships – and everything else required to give their talent a real shot at breaking through the ever defining noise of everybody and his sister dumping every squeak and grunt they make into the internet musical cesspool.

    4. Additionally, through developing it themselves and acquisitions, major labels have aggregated large amounts of hit product – providing a solid foundation for future speculation.

    5. They have all the pieces needed to ‘brand’ and artist.

    Of course, once an artist is “branded” the chances are much better that they can be successful without the support of an organized label.. especially with the technology available today … But the branding process costly, requires expertise and is crucial.

    If you are one in a sea of one offs your chances of survival are practically nil. To date, only a tiny number of artists have broken through without the assist of a major label – and most of them have subsequently signed with labels in an attempt to continue to move their careers forward. …

    Sugar daddies and the uninformed have always wanted to ‘be in showbiz’ and are willing to pay for the opportunity – and there will always be a new crop of suckers coming along who will continue losing their investments by backing one offs. But savvy investors are going to find the odds against them too overwhelming to take a shot.

    Record labels are evolving and will eventually hone their skills to deal with the new era … takes a long time to turn a battleship around … And remember, that while record labels haven’t figured it out as of yet … neither has anyone else – We’ve heard a lot of rhetoric but have seen little, if any, real success — The only thing we’ve really learned is that the rhetoric that has been babbled for the last 10 – 15 years has been, for the most part, totally wrong.

  5. TonsoTunez says:

    To: Paul H. Muller

    FYI

    CD Baby Hits $150 Million In Artist Payouts. Is That Good?
    Digital Music News
    Monday, August 02, 2010

    Here’s another DIY fact, for what it’s worth. According to details shared Monday morning, CD Baby has now paid $150 million to artists since its inception in the late 90s (through July, 2010). The figure includes both CDs and downloads, and CD Baby expects to pay roughly $40 million in payouts this year alone.

    Sounds great, but what’s the per-artist payout? In a conversation with Digital Music News, CD Baby CEO Tony Van Veen was unable to share the cumulative number of artists receiving payments since inception. But he could confirm a current artist population of 230,000. Judging by the expected artist payout of $40 million, each CD Baby artist will make an average of $174 this year.

    That seems to reaffirm a brutal revision of the Long Tail, a part of the distribution curve CD Baby knows well. In fairness, a group of overachievers could be pulling decent payouts, though at present, figures on top earners are not available.

  6. Paul H. Muller says:

    Tonso:

    Thanks for the facts and figures – nice summary. I am in agreement that the independent artist is very unlikely to get rich from CD Baby. For those of us laboring in the outer darkness, however, we can put a collection together and have it in digital distribution for a modest amount – instead of waiting to be “discovered” by a record label.

    Your summary of what a label can do is very comprehensive – and fine as far as it goes – but it still seems like the lottery. CDs cannot be realistically seen as a major revenue source except for the most popular of artists. And if you are popular, you no longer need a label to put your work out there.

    Naxos says that a classical CD that sells 5000 copies is unusual, and they barely break even. I think the 21st century will allow emerging artists to stand on their own – or band together – to achieve what a label does now.

  7. Dave Kusek says:

    Tonso

    Everyone is entitled to their own opinion, and I wish you the best of luck with pursuing the major label model. Maybe you will figure something out that no one else has. It looks to me like they are all headed straight into the dust, and that without their publishing income, would already be gone.

    I think your CD Baby analysis is misinformed. Averages tell you nothing. Indeed if you use the same logic to account for major label artists, you would come to the same conclusion – namely that the “average” artist gets a pittance from the label.

    The truth is that only a handful of label artists ever made any real money, and the vast majority (95%) of artists signed, never recouped their advances. So in a way, there is really nothing new about CDBaby’s model. A few make most all the money, and the rest make very little.

    I think you are ignoring lots of new acts that are thriving without major label involvement or investment including Arcade Fire, Corey Smith, and Pomplamoose – all of which are described in the Berklee Blog network. Most of these musician businesses are succeeding because they are not just focused on recording revenue, but multiple income streams and vertically integrated marketing efforts. If you check out Mike King’s blog in particular, you can learn about direct to fan marketing and building a successful career without major label support.

    It can and is being done.

    Dave

  8. Reid says:

    It’s amazing to me, an independent musician and artist, that everyone talking and giving advice about the music industry is either not in the industry or has already made enough money to expiriment with different strategies.

    Here’s why this is a bad idea. Artists are seperate from songwriters. Even if they are on in the same. Under this provision the money coming in from digital sales gets split 50/50 between the owner of the master and the writer. This sounds great, but 95% of the music you hear is not written by the artist. This means that even less money would go to a majority of bands and artists. Sure this is great for eminem who writes his songs, but for the rest of the artists out there this would be a decision that undercuts the funding of all labels, not just major ones, including the label who signed the arcade fire. Without that money, the arcade fire and other bands like death cab, coldplay, Jimmy eat world, etc. would never be given a start. They didn’t come from nothing.

  9. Alex says:

    iTunes should have to pay these artists their fair share of money. These artists sell a product, just like any other company. But they are being taken advantage of simply becuase their product is digital media. These people are treating the artists unjustly becuase their product can easily be put on-line and sold in seconds flat all around the nation, unlike canned food. They have the ability to just as easily write their own songs, form a band, and sell their own music. These companies are treating the situation with an idea that, even though it is somebody else’s product they want to take more than their fair share of the profits, simply becuase it is easy to sell and distribute. Artists take huge losses of income in this digital age of piracy and this, however slow it may be, is an honest way for them to try and make a living. I guess you have to ask yourself, where the piracy is really taking place?

  10. Alex says:

    iTunes should have to pay these artists their fair share of money. These artists sell a product, just like any other company. But they are being taken advantage of simply becuase their product is digital media. These people are treating the artists unjustly becuase their product can easily be put on-line and sold in seconds flat all around the nation, unlike canned food. They have the ability to just as easily write their own songs, form a band, and sell their own music. These companies are treating the situation with an idea that, even though it is somebody else’s product they want to take more than their fair share of the profits, simply becuase it is easy to sell and distribute. Artists take huge losses of income in this digital age of piracy and this, however slow it may be, is an honest way for them to try and make a living. I guess you have to ask yourself, where the piracy is really taking place?

  11. TonsoTunez says:

    Dave…

    I’m not defending the record label model – If it’s not dead, it is certainly on life support.

    What I think has been taken away from artists, however, is the ‘brass ring” – With no hope of walking away a huge winner, what is the incentive to strive for excellence?

    When artists finally wake up and realize that the best they will ever be able to look forward to is a mediocre like – and that getting older and taking on the responsibilities of adulthood demands more than playing awful clubs, selling t-shirts, paying all the costs – up front – to play the game and spending your live trying to keep in touch with so called fans who, given today’s propensity to view music as dispensable, don’t really give a damn about you… where is the next generation of great talent going to come from?

    For instance, why would anybody pay to go to an amazingly wonderful school like Berklee if their chances of making enough money in their lives to cover the loans they took out to go their are close to nil?

    If Berklee is selling the dream of the possibility of great success as a result of the internet, then they are being disingenuous at best.

    Not only are record companies on the way out so is the whole wonderful musical culture their capitalist ways helped create.

    We had a wonderful run of the greatest popular music ever created from the mid twenties to the end of the century… and we had it because there was always hope that what one put into building their career would pay off … That’s gone.

    Artists reading this have got to realize … That’s Gone!

    You named a few acts that might be making good money as a result of a pure play on the internet … Given the fact that we are well over 5 years into a developed internet that could support pure plays… isn’t that a horrible batting average?

    In today’s world you have a better chance of making a living flipping burgers than you do being a musician… and, heaven forbid that you are a stand alone songwriter because you’ve got no chance at all.

    All I can say is this, when your parents tell you to get a real job rather than becoming a musician … heed their advice.

  12. TonsoTunez says:

    Dave…

    I’m not defending the record label model – If it’s not dead, it is certainly on life support.

    What I think has been taken away from artists, however, is the ‘brass ring” – With no hope of walking away a huge winner, what is the incentive to strive for excellence?

    When artists finally wake up and realize that the best they will ever be able to look forward to is a mediocre like – and that getting older and taking on the responsibilities of adulthood demands more than playing awful clubs, selling t-shirts, paying all the costs – up front – to play the game and spending your live trying to keep in touch with so called fans who, given today’s propensity to view music as dispensable, don’t really give a damn about you… where is the next generation of great talent going to come from?

    For instance, why would anybody pay to go to an amazingly wonderful school like Berklee if their chances of making enough money in their lives to cover the loans they took out to go their are close to nil?

    If Berklee is selling the dream of the possibility of great success as a result of the internet, then they are being disingenuous at best.

    Not only are record companies on the way out so is the whole wonderful musical culture their capitalist ways helped create.

    We had a wonderful run of the greatest popular music ever created from the mid twenties to the end of the century… and we had it because there was always hope that what one put into building their career would pay off … That’s gone.

    Artists reading this have got to realize … That’s Gone!

    You named a few acts that might be making good money as a result of a pure play on the internet … Given the fact that we are well over 5 years into a developed internet that could support pure plays… isn’t that a horrible batting average?

    In today’s world you have a better chance of making a living flipping burgers than you do being a musician… and, heaven forbid that you are a stand alone songwriter because you’ve got no chance at all.

    All I can say is this, when your parents tell you to get a real job rather than becoming a musician … heed their advice.

  13. nick says:

    TonzoTunes…
    Most artists are artists because that’s what they are good at in life and what they enjoy. They can’t help it. These types of artists are looking for a way to make some money out what they can do well (and not necessarily millions) and now days this possible by working with a good indie music company that believes in you and using tools such as CD Baby/Tunecore/etc. I believe that a larger proportion of online sales are coming from the ‘middle class’ artists. These are the artists that make enough from music to pay the rent/mortgage and put a little away for a rainy day. They are realistic – they know they won’t be superstars – but they know they can make a career out of it. And a place like Berklee can show how to do that

  14. TonsoTunez says:

    Nick Just read this somewhere…

    Excerpt from: Starving The Artist
    By William F. Aicher — There is a core group of people who will create and share their creations, regardless of any external motivation. There is also a never-ending flood of new people being added to the mix, simply by being born. But, as the individuals who create with the goal of being a professional wither and die amidst all the other noise, a demand for quality content will rise. The current phase of the Internet, especially in file trading, relies greatly on the creations of the past. The Beatles will never stop being enjoyed, but eventually a yearning for something new will rise—and if there is no motivation to create something new of quality, especially the kind of creation that only comes through the ability to focus on and be a professional creator, there will be nothing new to fill that void.

    From the book … Starving The Artist
    by WILLIAM F. AICHER’S
    http://www.starvingtheartist.com/

  15. Piers says:

    What I believe we have been dropped into, is primarily a time when we MUST shout out for and demand quality. The fact that the internet has allowed a generation of both disinterested and talentless people and visionary and future oriented mavericks to dismantle a fire breathing soul sucking empire like the music business of the latter twentieth century, is one that must be thought of indeed quite carefully. Does this mean it is harder to display quality work and get it appreciated by a warm, fresh, responsive audience. Yes. But it could be argued that this has always been the plight of the artist. This new system of formatting and delivery really comes down to presentation and work in the end. There will be the masses who accept poor quality work for massive amounts of collective cash spent, but this has always been the case. It is all relative. And as Nick stated, this is a unique time in which ‘middle class’ artists can enjoy the ability to share their craft and musings with the world. There will always be those who strive for more, those who are content with their form, and those who will blissfully undershoot the mark and yet pull out ahead. If we are discussing short term gain? Most brilliant artists of the Renaissance only came into full appreciation after their deaths; likewise, lasting art may be difficult (seemingly) to find whilst it is being created and distributed. However all of this supersaturation of the medium will lead to the same thing: artists that were lucrative if unimaginative, artists that were inventive if unknown, and artists that strove for quality and enjoyed enough success to fully ‘stick’. It’s all beautiful and constant, and will continue as long as we value making artistic works.

Trackbacks & Pingbacks

  1. […] artists argue that they are “licenses” (higher rate of 50 percent). Taking from Dave Kusek’s blog, “When consumers purchase a download from iTunes, they are actually “licensing” the song for […]

  2. […] For years I have been arguing that iTunes digital music distribution was a license of music, not a sale. When Steve Jobs and his team negotiated the original iTunes deal with the major labels, the economics gave iTunes roughly 30% of each download, like a distributor/ retailer of CDs would receive and the remaining 70% would flow to the labels and presumably be split as with a traditional CD sale. […]

  3. […] For years I have been arguing which iTunes digital strain placement was a permit of music, not a sale. When Steve Jobs and his group negotiated the strange iTunes understanding with the vital labels, the economics gave iTunes rounded off 30% of each download, similar to a distributor/ tradesman of CDs would embrace and the superfluous 70% would upsurge to the labels and as if be separate as with a normal CD sale. […]

  4. […] For years I have been arguing that iTunes digital music distribution was a license of music, not a sale. When Steve Jobs and his team negotiated the original iTunes deal with the major labels, the economics gave iTunes roughly 30% of each download, like a distributor/ retailer of CDs would receive and the remaining 70% would flow to the labels and presumably be split as with a traditional CD sale. […]

  5. […] Kusek, VP at Berklee College of Music, posted to his blog, Future of Music, an article entitled: Are iTunes downloads actually “licenses” rather than “sales”? The article reports that Eminem’s production company sued Universal Music Group for royalties […]

  6. […] I commented on this issue in an earlier post, one of my readers wrote “if Eminem eventually prevails it will be the end of discovering an […]

  7. […] you used to buy. They won this point at trial. F.B.T. argued these are actually licenses to “masters,” no different in fact from the recording masters previously used to make those old records […]

  8. […] you used to buy. They won this point at trial. F.B.T. argued these are actually licenses to “masters,” no different in fact from the recording masters previously used to make those old records […]

  9. […] Are iTunes downloads actually “licenses” rather than “sales”? | Future Of Music “There is, in general, a problem with postminimalist opera. I keep hearing new operas that, […]

  10. […] Are iTunes downloads actually “licenses” rather than “sales”? | Future Of Music "This is a potentially HUGE change from how the recorded music industry’s business model works." David Kusak (tags: music_business money musician marketing) […]

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