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Jason Schmitt

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Detroit Shakes Up the Music Industry

Posted: 07/07/11 07:28 PM ET

An avalanche may be starting here in Detroit, a big one. Quite possibly, billions of dollars may be shifting from record labels' pockets into the artists' hands. Mega stars and one-hit wonders all may have a shot at a piece of the lucrative pie. Welcome to the wonderful world of digital. If you are a musician who in fact gets a check, you can address your thank-you letter to Eminem.

The core idea that brought this game changer to fruition was spurred in the Motor City. Eminem's bulldog lawyers, possessing the eagle eyes that they do, saw a discrepancy in 2006 as to how his digitally downloaded songs, and the associated payment structures, were being handled by Universal Music Group. They went toe to toe with Universal Music about the discrepancy. Our well-oiled legal system finally spit out the conclusive verdict about a month ago, after the case trickled all the way up to the U.S. Supreme Court. The top court in the land let the lower court's (Ninth Circuit Court of Appeals) ruling stand that entitled Eminem's empire to a much larger piece of the digital download pie.

Joel Martin, manager of F.B.T. Production in Detroit, talks about first seeing the initial discrepancy that stemmed into the high-profile case by saying, "We had an audit that was conducted in 2006. It went back three years. So starting in 2006, it potentially covered the first time that digital royalties appeared on any kind of statement. When we got the audit royalty report, it was obvious that they were paying us under the records-sold provision as opposed to the license provision. We made a claim -- to Universal Music -- that we had an issue with it."

What ultimately was in question with Martin's claim was whether a digital download off a service like iTunes more resembles a music license or a record sold. There is quite a bit at stake regarding the classification. Adam Parness, Director of Music Licensing at Rhapsody.com, described to me the monetary difference between the delineation of a record sale and license by saying, "If it is records sold, the artist usually gets between 12 to 15 percent or higher, depending on the artist's clout, versus if it is licensed master, which has traditionally meant licensed for a soundtrack or TV show, that has been a 50/50 split."

A License Or A Sale? A Primer

As Parness said, a music license has been thought of historically as one master copy handed over, often for incorporation into a movie soundtrack or television show. Because it is "handed over," the percentage yield of royalties is usually higher for the artist due to the lack of other manufacturing and distribution cost: hence the 50/50 split. Susan Brown, music attorney and Executive Editor and Publisher for Musical Confidential, talks of the longstanding tradition of the music license split by saying, "For as far back as I can remember, this is pre-digital distribution, that for licenses there would be a 50/50 split." In contrast, a sale is more like selling a CD or vinyl record, which usually has other fees associated for manufacturing and distribution, hence the artist usually receiving in the ballpark of 12-percent royalties.

The big shake-up occurred when trying to define the digital download classification. If the label sends a master recording over to iTunes, who then, off of their servers, duplicates that digital file to thousands of fans for a $0.99 download fee, how are the payments divided? As the money has historically been sorted out, iTunes keeps about 29 cents and the labels get 70 cents. Until recently, the labels have kept roughly 88 percent of that 70-cent figure -- and sent the remaining 12 percent to the artist. Then along came Detroit's F.B.T., who, upon more detailed inspection, discovered that the master copy given to iTunes looked pretty darn similar to a master copy given to an entity like a movie soundtrack.

Martin of F.B.T. speaks of the miscalibration of digital sales by saying, "Who in their right mind would say you could apply packaging deductions to digital downloads? There are no packaging deductions. But this is part of the formula. Breakages, container charges, all these crazy things... there was no justification for taking all these deductions when they truly had no costs as it related to manufacturing -- there were none."

Although the case seems fairly clear-cut and it seems that anyone would agree with Martin's sentiments of it being ludicrous to have packaging deductions for digital downloads, F.B.T.'s lawyers had their hands full in trying to bring a layman jury up to speed about the delineation between a license and a sale. Martin says, "[Universal] constructed this scenario where the iTunes store is just that: it's a store. Just like you go into a regular store and you want to buy something. You pay for it, you get it, you listen to it. You can do whatever you want with it. Our position was, it is not exactly like a store where you can physically go buy something that you can resell."

Martin continues to enunciate the fact that fans couldn't resell the items bought, so F.B.T. questioned whether fans, in fact, really owned the song. Because the concept and idea of a license hinged heavily on verbiage, Martin says, "It became really apparent to us that they were doing their best to avoid using the term 'license' in any of their agreements with people like Apple. They would call them 'agreements.' Typically it would be a license -- but they kept referring to it as a wholesale price or a resale agreement -- anything other than using the word 'license.'"

Mary Beth Peters, former Register of Copyrights, commends F.B.T.'s strategic direction for making their case by saying, "The people who argued [the case] were clever enough to not just look at the end product, but look at the relationship. Because typically in a sale, it is an outright sale of the product. I saw that the judge looked at the relationship. When he looked at license relationships and when he looked at sales, this looked more like a licensing relationship." Although Peters agrees with the judge's and jury's decision due to the direction it was in fact argued, she also offers her more copyright-directed assessment by saying, "When I read the case as a pure copyright lawyer, I say a download is a sale." So Peters herself, with all her musical copyright knowledge, is really on the fence about the verdict.

Long story short, the highest court in the land found that iTunes "used" the masters, which directly translated to the license 50/50-split realm. Good for Team Eminem. Martin continues to identify the monetary worth of the verdict for Eminem by saying, "Up to this point it is easily between $15 and $20 million. On a future going basis you could be talking $50 to $60 million in the life of the catalog -- and this is just one catalog."

David Kusek, Vice President of Berklee College of Music, helps to identify the possible severity of the F.B.T. ruling. He set off to figure out the potential difference between what royalty was paid to artists from digital downloads, and what might still be owed to artists. The discrepancy he calculates comes in at $2.15 billion. When millions increase to billions, the stakes are increasingly raised. The labels, online music providers and artists are all watching with bated breath as the ramifications of this ruling play out to the full extent.

Right Time, Right Place

Peters talks about how this digital licensing fervor came to be by saying, "Older contracts never really thought about electronic rights. You are not quite sure how they are going to interpret them." Brown follows Peters' reasoning by saying, "Recording contracts are often very personalized, and a part of often intense negotiations. When I was a music attorney I would go through paragraph by paragraph, line by line, and propose different changes to the contract -- and that is what most music lawyers do. So to look at any particular contract and say that it is going to be the same interpretation as this one had been at the trial is hard to do. It is going to depend on the timing, when that contract was written, who negotiated it. If there is a contract that is very similar in language -- it will just come down to negotiations." Parness agrees with these sentiments by saying, "Just because Eminem was successful doesn't necessarily mean that every artist, future or retroactive, is going to automatically wind up being paid on the license mastered provision."

All the connected industry personnel assured me that in the future, labels are going to write contracts with more clarity and obviously more concern for the digitally changing world. They also collectively assured me they do not foresee checks amounting to anywhere near the estimated $2.15 billion that Kusek estimated.

Martin contradicts the above industry view by saying, "Everyone is going to look at their contracts now. The big problem has been removed by the courts when they said that these are really licenses. They held that it is what they would call 'black letter law'; you can now go into court relying on that. It doesn't automatically change things, but if there are class actions and people contest the accounting provisions, that is exactly what they are going to do. And they will have, to a great degree, law on their side that says these things are licenses. Nobody can argue that now -- which was our hurdle. We had to argue that they were, in fact, licenses -- and get a court to acknowledge that. Luckily, it went all the way up to the Supreme Court, and I don't think anyone is going to undo this act. They are licenses in the eyes of the court at this point."

Rick James Riles The Troops

So Eminem and F.B.T. may have stirred the pot. But now it is the estate of Motown's own Rick James that is setting the stage for larger-scale implications of this movement to play out -- and it didn't take long.

Regardless of how many times Universal Music Group stated that the Eminem ruling did not set a precedent, those reverberations didn't seep deep into the ear drums of the possibly-thousands of musicians who are not nearly as well compensated as Eminem. They now have a path.

David M. Given, a partner at Phillips, Erlewine & Given LLP, represents the newly formed Rick James Class Action Lawsuit. Given breaks down the context of the class action by saying, "Anyone who is a royalty participant on the legacy catalog at Universal may have an interest in our lawsuit." Jeff Jampol, manager of the Rick James estate, said of the suit, "There are thousands of artists who have been paid on iTunes as a sale and not as a license... Some of these estates are talking about thousands, or tens of thousands, or possibly hundreds of thousands of dollars, but to some of these artists and legends, that is everything to them." Jampol continues and says, "How can an artist possibly go up against a huge, monolithic label, especially over $10,000 when the label will just lawyer them to death?"

Jampol felt from both a strategic and a legal point of view that this was an opportunity to take a stand for the less privileged artists. And that is what Jampol, along with Given's firm, has done. Jampol specifically directs the importance of being aware of this case filing by saying, "Some of our treasures, like some of the Motown artists, never had the ability to do royalty audits. So sometimes, for decades, they have been cashing these checks from the labels and never auditing them. And now that fact has put them into the position to join this lawsuit and have their cause fought by a premier litigation firm on their behalf." Given offers praise and admiration for F.B.T. and Joel Martin and says that they laid the ground work for the coming class action suit, and did so "against a very determined legal opposition, which was neither justified or reasonable under the circumstances."

So as this current music business issue unfolds, it looks like the Detroit region plays an important role in both starting, and quite possibly spreading, a larger financial stake between musicians and downloads. Let's hope that a large array of musicians is represented and compensated not just for financial gain, but for respect. And don't forget to send Eminem a thank-you letter.

This article first appeared in DBusiness.

 
 
 

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