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.
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.