When is it Sale and When is it a Licence?

All publishing and media sectors are constantly looking over their shoulders at not just the dynamically changing technology, but also the impact of digitisation on other sectors.

The music sector’s contract and reward system is once again being tested by artists who believe that they have not been correctly rewarded in the iTunes digital world. Twenty years ago, lawyers could not have imagined innovations such as the iTunes Music Store, and in certain contracts, it's now unclear which royalty rates apply. The issue is about the definition and associated reward of ‘sales’ versus ‘licences’. The norm is for digital sales to attract between 10 and 20% payment, whereas licence sales can attract higher payments up to 50%.

So the question is what is a sale and what is a licence?

Steve Jobs, once published a piece titled "Thoughts on Music," in which he principally talks about the move to DRM free (worth a read in itself). In the piece he says, ‘Since Apple does not own or control any music itself, it must license the rights to distribute music from others, primarily the 'big four' music companies; Universal, Sony BMG, Warner, and EMI.’ These words are now coming back to be used today against the music companies.

The first legal test case was brought by Eminem’s management FBT Productions who claimed that they were due not the 12% royalty revenue from digital sales paid by Universal Music, but 50%. FBT argued digital sales are not "records sold" but constitute a licensing of master recordings which entitling them to 50% of net receipts. The claim was upheld then rejected by the courts in March 2009, but now has now been overruled on appeal. The court found that the contracts were "unambiguous". The case is now opening up a stream of slimilair claims and legal actions and the FBT's case against Universal alone is worth $17-20 million in disputed royalties and could cost the label twice that over the next decade.

Thousands of artists signed their deals before iTunes. The Allman Brothers and Cheap Trick also filed a lawsuit against Sony BMG which was settled out of court. Pink Floyd's recent lawsuit against EMI also included the issue of the royalty rate of downloads and was settled behind closed doors. Now the Temptations are among a growing number of artists suing Universal Music. The Temptations class action is not just aimed at iTunes revenues but that from others including Amazon.com, Napster, Rhapsody and ringtone providers by such as AT&T, Verizon, Sprint and T-Mobile.

As we move increasingly into the digital world and from outright sale to a digital licence we have to ensure that there is a common understanding of both the associated rights and rewards. In this new world of ‘net receipts’, ‘walled digital gardens’ and often ‘honesty box’ trading, it may not be enough to assume a common understanding exists and like Universal and others, surprises can prove very expensive.

Related posts: March 2009 'Should music contracts reflect Today's Digital World'

April 2007 'Eminems music publisher sues Apple'

Should Music Contracts Reflect Today's World or Yesterday's

The one-week trial between Universal Music Group (UMG) and F.B.T. Productions (Eminem) closed this week with FBT asserting that ‘When a music fan buys a song off of iTunes, the record label hasn’t done very much to get it on their playlist, and thus doesn’t deserve the lion’s share of the profits.’ About $1.6 million is a stake, with Eminem seeking three times the current royalty in the trail and the implications of any outcome on others is obvious.

F.B.T. claimed the download arrangements are similar to the one UMG has with traditional record clubs, and under this licensing agreement, Eminem gets 50% of the profit. When an album is downloaded on iTunes, it falls under the “records sold” provision of the agreement, giving Eminem an 18.23% royalty rate. F.B.T. are claiming that Universal simply grants a license for iTunes to distribute the recordings and by doing so, minimises its manufacturing costs.

Lawyers for UMG countered that they put millions of dollars into building the technology to send music files to digital retailers, and so deserve the royalty they currently receive. UMG, state that because record clubs fall under a separate part of the recording agreement they have with the artist, the situation is not comparable. They point out that the royalty rates are the same (18.23%) for cassettes, vinyl and CDs, even though the manufacturing costs vary considerably. So if a digital download costs less for the record company to manufacture, why should that rate change?

Some artists would say that they lost out when they moved from vinyl to CD's. They are cheaper to manufacture, but the packaging deduction went up from 10% to 25%. They lost when they moved to downloads, since labels would still charge for packaging under existing contracts. How can an artist be held under a contract to not-yet-developed technology in record contract negotiations that took place years ago?

If FBT wins this case, it will have a bigger impact on smaller bands and also bands that are held to contracts signed in the 60s and 70s. Contracts that were signed before digital downloads became prevalent often have a different royalty rate for albums than singles which could seriously be impacted as digital downloads consider all tracks as singles and are paid at the lower rate under these contracts.

Should artists have the right to renegotiate their contracts when new technology emerges to deliver their music? Universal is not only fighting Eminem's F.B.T. in court, but their entire roster, and this again shows the level of the mess that digitisation is heaping on the music producers and why they are haemorraghing artists and some would say trust.

There is a lesson here for all media companies who believe that they can roll old contracts forward with little regard to the spirit in which they were entered into or the fact that things have changed.

Eminem's music publisher sues Apple over downloads

Eminem has filed a federal lawsuit against Apple for allowing music downloads onto iPods without permission. The suit, filed in Detroit by Eight Mile Style and Martin Affiliated, alleges that Apple has not compensated them for 70 to 80 songs, including tracks from the Grammy Award-winning "The Eminem Show” which has sold some 7.6 million copies.

The company seeks more than $75,000 for copyright infringement, unfair competition and a violation of the Michigan consumer protection act. It also asks for damages of up to $150,000 each time a song is downloaded. Apple is reported as repeatedly asking Eight Mile Style for permission to use its copyrighted songs for downloads which has been denied.

But Eight Mile Style attorney Norman Ankers contends that record companies need permission from copyright holders before downloads can be authorized. Universal Music distributes the songs through the Interscope recording company and Apple offers them for download.

The lawsuit says users pay Apple a fixed fee of 99 cents to download a song. Recording companies get about 70 cents of that amount with music copyright holders generally receiving about nine cents for each download.

This becomes a classic case of whose copyright is it with Eight Mile Style being the publisher and Universal the producer. The music publisher sued Apple in 2004 for copyright infringement, alleging that Apple used Eminem's "Lose Yourself" in commercial TV ads for its iTunes music store. The case was settled out of court.

An interesting case to watch and not just for music.