Saturday, March 17, 2012

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, 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'

1 comment:

Michael W. Perry said...

Perhaps what copyright law needs is something resembling the Jubilee year of ancient Jewish law. Under that law, every half-century land returned to the family that owned it originally. Leviticus 25:10 described it this way:

"Consecrate the fiftieth year and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee for you; each one of you is to return to his family property and each to his own clan."

Given the mess that music and book contracts are in thanks to the new technologies, it makes sense to have a period, perhaps spread over several years, in which every contract older than about five years returns to its original creator or his heirs. They could then negotiate new terms that'd include the digital rights. The result would be fair, clear and unambiguous.

And that'd be a heck of a lot better than engaging in a long series of costly, contradictory, and inconclusive court disputes.