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For the past 5 years I have been delivering presentations, in a wide variety of contexts including Digital Music Forum, AES, Billboard, IEBA, Music Hack Day, NAMM, Digital Hollywood and at many, many other private consulting gigs.   The essence of the presentation I have been making since 2006 is shown below with a couple of updates, roughly based on the Top 10 Truths described in our Future of Music book.  All along I have been advocating for artists, songwriters and publishers to challenge the way iTunes transactions were accounted for by the labels on the legitimacy of the splits.  The way iTunes royalties have been distributed is just wrong, a scam and a holdover from the accounting practices of the record companies past.

http://static.slidesharecdn.com/swf/ssplayer2.swf?doc=kusekkeynote-101024210138-phpapp01&stripped_title=kusek-keynote&userName=davekusek

Kusek keynote

Finally someone (Eminem’s production company), challenged Universal Music Group in the way that artists and labels split the money generated by iTunes transactions and won an initial ruling in their favor.  Just this past week Universal Music Group’s inevitable appeal was rejected meaning that the industry giant may now have to split its digital music royalties from money earned from ringtone sales and iTunes.

San Francisco’s US 9th Circuit Court of Appeals decided last month that all royalties made by the record label from such sales must be shared in higher proportions with producers. The recent court rejection will result in this case proceeding in a lower level court which will then determine exactly how much Universal owes Eminem and his producers, taking into account both damages and royalties.

This could be a very significant development for the entire recorded music industry.  When Steve Jobs and his team negotiated the original iTunes deal with the major labels, the economics of what iTunes would receive from transactions was roughly 35% of each download, a similar number as a  distributor/retailer of CDs would receive and the remaining 65% would flow to the labels and be split as with a traditional CD sale.

This was a masterful negotiation by Apple, effectively granting itself amnesty from claims of copyright infringement or inducement to infringe copyright on the part of the major labels and publishers in exchange for the promise of digital cash flow, potentially reigniting the recorded music business for the labels.  Even if most of the music contained on iPods was pirated, now the labels would have a new revenue stream and Apple would be safe from litigation.  This move paved the way for Apple to become the dominant company in the music business and one of the most valuable brands on the planet.  A transformational revenue shift was underway whereby Apple would effectively eat the labels lunch.  The ultimate iCon.

But what artists and writers failed to question at the time, was the way the 65% label share would be split.  The labels assumed that these downloads were “sales” of copies of the songs and that artists would receive their royalties based on traditional accounting practices.  In the early days of payments from iTunes, labels often continued to deduct fees from the artists share for “packaging” and “marketing” and “coop” often when there were no actual costs being incurred.  No one questioned whether iTunes downloads were “licenses” versus “sales” which would have tipped the accounting in favor of the artists.  Indeed Steve Jobs himself referred to his deal with the labels as a “license” in his rare and open “Thoughts on Music” letter posted February 6, 2007.

Now fast forward to 2010.  Although not directly listed in the UMG suit, Eminem could benefit from the results, as he could get a much larger share of the payments. The case is being touted as a landmark decision for the music industry as it could determine a precedent that could see 90 per cent of contracts signed before 2000 change for the benefit of the artists and songwriters.  If this ruling holds up and is widely interpreted, it will destroy the traditional record labels.

The ruling will hinge on the standard record deal contract, which predates the digital era and changes that have come with it. New rulings will most likely govern how digital royalties will be accounted for.

In the most recent decision the court has defined record companies’ deals with such firms as Verizon and iTunes as ‘licensing’ contracts as opposed to music sales, meaning the 50/50 split would apply.  This will be devastating for the labels and great for artists.

When 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 and nurturing new talent by record companies and will throw the music scene into more disarray that P2P ever did.”  While this may be true, I am completely convinced that the old record company model must change, will change, and will eventually be replaced by something more clearly aligned with the times and the new digital reality.  There is no doubt that these times are truly wrenching for the music industry – but music will prevail and the interests will realign into something sustainable.

Read more here and stay tuned to see how this all turns out.

Photo credit: http://bit.ly/18lnuFf

Photo credit: http://bit.ly/18lnuFf

Former Pink Floyd and T Rex manager Peter Jenner, now emeritus president of the International Music Managers’ Forum, talks online music, copyright and the future of the music industry.  It is very satisfying to see the ideas expressed in our Future of Music book becoming mainstream concepts in the industry.

>As physical sales decrease, how should the music industry be monetising its content?

Record companies believe that music is about selling bits of stuff to people in a retail environment. They always looked on the internet as a potentially huge retail environment and it’s actually a service environment. The record companies should be working out what services they can provide.

They should also be talking to ISPs instead of fighting them. The key thing is people are going to want music as part of what they get on their digital connections. The ISPs are going to have to invest more and more to develop better services, and in that context they will have to start charging for content, whether they charge for content directly with a meter or whether they bundle it or use advertising or sponsorship.

Another way to go would be to look at statutory licensing for different types of usage. It would be incredibly bureaucratic but it would be one way. So let people access whatever music they like and pay a set rate. The same with commercial businesses.

>Do record labels still have a role to play in the music industry?

Yes absolutely, particularly for investment and promotion and marketing. And they could become very good at licensing, at helping artists to develop their website. But they have to get away from this idea of control and instead become partners of the artists. Many of the record and film companies are very enamoured with the idea of control because it’s how their model has always worked, with in-house lawyers and copyright advisors. There is huge inertia in the way the industry licenses and administers content. We have to fight this.

>How have the sources of revenue in the music industry changed?

Until the CD came along I think artists overall got a better deal and more control and a better bite of the money. After they invented the CD the record companies increasingly fought back, decreasing artists’ revenue share and increasing their control. That’s just got worse with the advent of the internet because there is less money available. You used to be able to sell 5,000 albums, now that is incredibly hard so the industry has to look at digital options, but a lot of web services don’t pay properly. Google will pay you a share of the revenue you generate for them, but if you don’t make them money you don’t get money.

>Has social media changed the way bands are marketed and content is discovered?

Yes, but it has huge potential to do more. At the moment, because it isn’t licensable, it isn’t doing the job that it ought to be doing. But what it can do is alter the value chain. With less money available in the music business we have to instead look at what we do have. And what we have is lots of data on music fans. Marketing has always traditionally been more expensive than recording but we can cut these costs by using social sites and viral links. And maybe we can cut out advertising costs because acts can just directly email their fans.

>Can music-streaming services support the music industry?

They are good, but they don’t have all the music. I manage Billy Bragg and there are a hundred versions of his tracks online. I can get a recorded version but a lot of the times on these services there are no live versions. And globally there are billions of tracks so the problem remains of how people find a particular piece of music or if they like something how they find similar bands. People aren’t just looking to buy the music, they are looking to buy a service which is personal and recommends music and enables discovery and which saves them time. I’m not sure anyone is really offering this yet.

>Is there a future for physical music?

Yes, but its role in the industry will become less. Probably physical music, like CDs, will become very expensive and luxurious and they will be like hardback coffee table books and people will only buy maybe one or two a year. The music industry’s job is to make as much money as it can from a track or album, and that includes physical sales alongside digital sales, access services and anything else they can come up with.

>What do you think the music industry will look like in 10 years?

Probably very similar. But what we might look on as broadcasting income will hugely increase. Most revenues will come from users paying to access the content. You won’t notice that you are paying for recorded music so much.

I think the artists ought to be much more powerful, whether they will get it together is another matter. There will be record labels, but whether they will be labels that own content or just be agents I don’t know. They might be more like the Performing Rights Society and less like Universal.

Read the whole interview here from Sara Vizard at Strategy Eye