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Important Court Decision Will Reward Artists


Important Court Decision Will Reward Artists


Many artists have felt the way iTunes royalties have been distributed is an unjust throwback to the questionable accounting practices of record companies in the past.

There has been a decision in a court case the music industry has been following on this issue. Eminem’s production company challenged Universal Music Group in the way that artists and labels split the money generated by iTunes transactions and they won an initial ruling in their favor. Universal Music Group appealed but this week it 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 (which has jurisdiction over the western states) decided last month that all royalties made by the record label from such sales must be shared in higher proportions with producers.

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

This move paved the way for Apple to become the dominant company in the music business and one of the most valuable brands world-wide  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

Now it is 2010 and the Eminem lawsuit 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 could 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.

The is just one more example of how 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.  Many companies will not survive the changes but forward looking companies will be able to prevail.

— matt



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