"Checking for your record when it's selling
When it ain't, that's the end, no laughs
No friends, no girl" --Eminem
"You can't outrun the long arm of the law" --Kenny Rogers
Lawsuits can make for strange bedfellows. Witness country crooner Kenny Rogers, who in February sued record label EMI Group Ltd. for underpayment of royalties. Rogers followed Eminem, whose royalties case against Universal Music Group Inc. went all the way to the 9th Circuit U.S. Court of Appeals before the foul-mouthed rapper could rhyme "victory" with "money." (The U.S. Supreme Court refused to hear the case, which goes back to a district court to figure out just exactly how much Universal owes Eminem.)
While the suits strike at label duplicity and dubious accounting practices (shock! horror!), both underscore the much weightier issue of royalty rates. In these particular cases, the labels maintain that a digital download constitutes a sale, while the musicians claim it as a license.
The semantic difference is substantial: a 50-50 revenue split for a license versus the 5%-20% an artist gets for a sale. In addition, record companies have proved adept at deducting from sales-related royalties such expenses as packaging costs, even if there's no packaging in a download. Since The Gambler and Slim Shady began to record their music before Napster -- not to mention Facebook Inc. or Spotify Ltd. -- was even a gleam in Sean Parker's gimlet eye, many of their record contracts didn't explicitly address the digital universe.
The same holds true for the contracts of The Temptations, Peter Frampton and The Knack's Bruce Gary, who have filed similar suits.
Lawyers caution that each case is "fact specific," which means they each come down to the actual language of the contracts. However, the precedent for a more equitable cut has ramifications that extend across the music landscape. "If the courts say that labels should pay higher rates, and retroactively, that's enormous," says Don Gorder, the chair of the music business/management department at Berklee College of Music in Boston.
These lawsuits illustrate a particularly vexing issue: While the music industry is more than a decade into the digital era, many of the rules governing revenue sharing substantially lag behind how tunes are being sold, distributed and consumed. Rates remain confusing, extraordinarily murky and often contradictory.
In an e-mail exchange, Dina LaPolt, a Los Angeles-based entertainment lawyer, points out that the labels themselves sometimes term digital downloads "licenses." She cites a lawsuit by EMI against a "used digital download" store called ReDigi Inc. "Labels are kind of chasing their tails here, claiming that digital downloads are sales when they want them to be -- like when they're paying artists -- or licenses when they want them to be, like when fans try to resell their digital downloads."
What's clear is that the attempt by labels to recast rights occurs in ways that are almost always detrimental to musicians. This should come as a surprise to no one, and artists are demanding something be done. "There's blood in the water," Parker told a gathering at the SXSW conclave, according to industry reports. "There's a war coming," he continued, pitting musicians against their labels over Internet royalties.
Of course, bad blood -- spilled or otherwise -- between artists and labels predates vinyl. Lawyers litigating their way through the morass of the music business is about as commonplace as a Justin Bieber tweet.
What makes this round of legal head butting noteworthy is that major labels and digital services work hard to keep rates secret and musicians in a state of perpetual uncertainty. "There's no transparency," says Jeff Price, CEO of TuneCore Inc., a startup that distributes music to digital outlets and collects royalties on behalf of musicians. "It's like throwing darts in the dark."
If anything, music-related economics and the licenses that support it seem to be getting more bogged down in cyber-mud as the technology races ahead. "It's got to the point where disruptive technology is happening so regularly and so often, [music businesses] seem always to be a step or two behind," says Ken Sanney, a law professor at Central Michigan University and a former Nashville entertainment lawyer. Copyright, always a sticking point, becomes even more problematic. Royalties "are the most frustrating thing I've ever dealt with," says Sanney. "It's like trying to nail Jell-O to the wall."
Licensing issues represent one of the biggest reasons why the music industry, from streaming services to the labels themselves, is facing such uncertainty. Putting a price tag on music-related assets remains iffy, and rights uncertainty is a stumbling block.
"They make for difficult investment decisions," says Cheryl Hodgson, a Los Angeles trademark and copyright lawyer. "The fundamental problem is getting a really accurate valuation."
That's most obvious when it comes to digital-streaming services, which have in aggregate attracted hundreds of millions of dollars' worth of venture capital. In many cases, their business models are conjecture. They are expected to experience a major shakeout in the months ahead. Rumors now swirl around the possible sale of MOG Inc., a streaming service comparable to Spotify. Last month, digital-distribution companies the Independent Online Distribution Alliance and Orchard Enterprises Inc. merged. The companies didn't reveal financial details.
However, even in more traditional fields of recorded music and music publishing, consolidation continues apace, and M&A may, if anything, accelerate. This includes not just marquee deals such as the multibillion-dollar sale of EMI last year (see story, page 42) but smaller ones. In January, Spirit Music Group, a private equity-owned independent music publisher, announced it had acquired the music catalog of legendary rocker Pete Townshend for an undisclosed amount.
"There are earthshaking changes taking place in this industry. Corollary things are going to happen, one of which will be a lot of sales of recording companies and music-publishing catalogs," says Les Watkins, senior vice president at Music Reports Inc., a music-rights administrator. "There are a lot of fundamental issues that affect valuations and make these transactions extremely risky in a lot of respects."
Watkins cites another set of copyright-related lawsuits making their way through the courts. These center on a complicated part of the 1976 Copyright Act governing "works made for hire." Usually, the creator of a work owns the copyright. The exception is if an employee creates a work under the auspices of an employer. The labels, no surprise, maintain a whole slew of songs were written this way. Musicians and their lawyers disagree.
There are enormous consequences. If these are not works made for hire, artists and composers can reclaim the rights. "That should have a huge impact on the valuation of companies that are engaged in the distribution of recordings or compositions," Watkins adds.
Licensing rights call into question the legal foundation of an artist's craft, the copyright. The Copyright Act was written in 1909, at a time when AM radio was cutting edge. The act was substantially revised in 1976, still several years away from the compact disc.
Since then, there have been more than 20 amendments, making some already complicated passages even more difficult to decipher.
Watkins is one of a small but growing number of industry players and academics who believe copyright law itself is being pushed aside by technology and must be completely rewritten. "You really have an incoherent rights landscape," he says. "You're going to see these rights articulated in the previous copyright act described differently going forward. Some of these distinctions that existed previously may not exist in the future."
Don't expect something overnight. An overhaul of copyright is probably a 10-year process. Given rancor in Congress, competing business interests and powerful lobbies representing not just record labels or radio stations, but technology and telecommunications giants, this will be no easy task.
"As enthusiastic as I am about copyright reform, I am not so naïve as to think that there is any realistic chance that a copyright reform effort will be undertaken in the next decade by the Copyright Office, the U.S. Congress, or any other organized group," wrote Pamela Samuelson, a professor at University of California, Berkeley's Boalt Hall School of Law and a pioneer in digital-copyright law.
In many ways, copyright becomes a surrogate for broader industry fights. It triggers seemingly endless and sometimes vicious debate. At the recent Digital Music Forum East conference in New York, for example, participants spent the better part of a day jousting over issues related to rights, throwing elbows at each other and at the industry.
"We all have to acknowledge the game has changed," said Michael Drexler, executive director of business development for BMI New Media, part of the rights management group, in a moment of civility during one panel discussion. "Millions of people realize they have a stake in IP law. It's a new world we live in."
What even the staunchest defenders of copyright law admit is that music in the U.S. is governed by a patchwork of licenses that divide the spoils in ways not seen in any other country. In the U.S., a recorded song is divided into two: the composition and the recording itself. Different rules apply to each. Mechanical rights govern the recording of a song that someone else composed. Master rights cover a specific recording. Performance rights come into play for live renditions.
Another set of rules governs a song's use in such lucrative endeavors as television, movies and advertising, known as synchronization rights.
Some rights, notably mechanical, are compulsory: The copyright holder is compelled by law to grant performance permission to anyone who pays.
Some rights are blanket. Obtain one license, and you're covered for all works administered by a rights organization such as Ascap, BMI or Sesac, the smallest of the three, which is right now being shopped for sale.
"You've got a very balkanized rights landscape," admits Watkins.
If anything, the world of digital downloads and streaming media is even more complicated. Many critical licenses must be individually negotiated. So, for example, Apple Inc. had to obtain permission from every artist or label to carry songs in iTunes. (The fact that iTunes charges a standard 99 cent rate for each track is a reflection of Apple's market clout rather than anything proscribed in law.)
In 2006, some legislators and their supporters attempted to extend blanket license status provisions in copyright law to mechanical and synchronization rights for digital-music service providers. That failed. So, too, did efforts by the labels to require radio stations to pay royalties to recording rights holders.
The most serious attempt at reform came in 1998, when Congress enacted the Digital Millennium Copyright Act, or DMCA. This was ostensibly an attempt to protect copyright on the Internet. More than a decade later, however, it turns out the most important provision is one not of protection, but of safe harbor. Internet services aren't responsible for monitoring unlicensed content as long as they didn't load the offending work themselves.
A few well-publicized court cases will tackle just how far these services can go without running afoul of the law. Most notably, in January, at the request of the U.S. government, New Zealand police stormed a palatial estate in Auckland and arrested Kim Dotcom (aka Kim Schmidt), a former hacker who headed a file-sharing service called Megaupload Ltd. The Justice Department alleges Megaupload is a criminal conspiracy designed to systematically ignore copyrighted music and film, making hundreds of millions of dollars in the process. Dotcom maintains his innocence.
"I'm no copyright infringer," Dotcom told New Zealand television, with a straight face and his usual bravado. "The government of the United States is protecting an outdated monopolistic business model that doesn't work anymore in the age of the Internet."
The DMCA didn't add more statutory license rates, with one big exception: digital radio. In traditional, terrestrial radio, stations pay those who hold the publishing copyright, either the composer or the company that obtained the copyright, but not the rights of the recording itself, which are usually held by a record label.
Under the DMCA, Congress mandated that new forms of radio pay both kinds of rights holders. Pandora Media Inc., Sirius XM Radio Inc. and other so-called pure-play services -- where listeners don't have the ability to call up particular songs at will -- pay royalties at rates determined by the Copyright Royalty Board. Even background musicians share in the spoils.
"Both the rate itself and the way those monies are distributed are all mandated by law," says Tim Westergren, Pandora's founder. He explains the details: Artists and labels share equally in either a fraction of a penny per song or 25% of gross revenue, whichever is greater. Pandora pays the money into a clearinghouse known as SoundExchange, which is responsible for collecting and distributing the funds.
"It's a big number, however you splice it," says Westergren.
Both Pandora and Sirius XM are publicly traded. So the amount they pay out (at least in the aggregate) is public knowledge. Pandora, for example, paid $148.7 million in the fiscal year ended Jan. 31 for what it called "content acquisition." That equaled a whopping 54% of revenue.
Although musicians and labels were skeptical of the service's intent when it got under way, Pandora is becoming a major income source for artists, Westergren asserts. "It's been hard to convince the industry that we really are an ally," he says. "I think over time that will be increasingly clear."
The relative transparency of Pandora and Sirius XM stands in stark contrast with streaming services such as Spotify and smaller competitors such as MOG and Rdio Inc., which offer listeners the ability to punch up any one of millions of songs at any time. Because they are not pure radio, these services don't fall under either the DMCA or compulsory licenses. Instead, licensing rates are negotiated between the services and record labels and are almost always subject to nondisclosure agreements. It's impossible for individual artists to know how much they are entitled to get.
"You need the lawsuit and subpoena power to get to the bottom of it," says Richard Busch, a Nashville-based partner with King & Ballow, when asked how to penetrate the veil. Busch represents both Eminem and Rogers.
The case of Stockholm-based Spotify is even more complicated because it's owned in part by some of the major labels themselves. (Like most aspects of this company, exact shareholdings aren't disclosed.) The company proudly proclaims that it has paid a total $250 million in royalties, but refuses to say more.
"We understand it's an issue," says Sachin Doshi, who goes by the title of Spotify's "content and distribution guru," but who declined to impart further details. "We are working to address it."
Techno-skeptics see less and less money for artists with each new turn in music delivery.
"Technology is frustrating because it is seen to facilitate plummeting revenue," says Corey Field, a Los Angeles-based IP and entertainment lawyer with Ballard Spahr LLP and president of the Copyright Society of the USA. "Payments to copyright owners vary tremendously."
Field and others assert, however, that it is a mistake to assume copyright is overwhelmed by technology at every turn. "When the system works, everyone wins. That's the way it's supposed to be," says Field, who authored "Entertainment Law: Forms and Analysis." "It's a fantastically cool system when it functions at its best."
Parts of copyright law have held up to the onslaught of technology better than others. "It's a much clearer situation when it comes to performance and mechanical rights," says Todd Brabec. Publishing rights "guarantees 9.1 cents for every digital download. It's completely straightforward," chimes in Todd's twin brother, Jeffrey.
The Brabecs are music lawyers and co-authors of the 500-plus-page tome "Music, Money and Success." Todd Brabec spent almost 40 years with Ascap. Jeff is the business affairs vice president with BMG Chrysalis, one of the biggest independent music publishers.
According to popular wisdom, nine out of 10 online music services fail. That explains why labels usually and unrepentantly demand stiff up-front fees for licensing rights.
But even those that survive aren't expected to rake in money. The musician is lucky to get the dregs. "There's not that much left over for the artist," Todd Brabec says. "It's a fact of life."
However, both Brabecs are self-proclaimed optimists when it comes to revenue and copyright's ability to govern this brave new world. "The digital realm has created new sources of income, new ways to make money," says Jeff. "There's still enough in the copyright to make it a very valid document."
Jeff quickly adds: "It's a world that has dramatically changed. You have distribution deals that weren't thought of. Newer agreements are very complex, very sophisticated."
TuneCore's Price is about as outspoken a critic of current rights management as one can find. Yet he believes technological advances actually can provide the verification tools necessary for a more equitable royalty share.
"In the old world, when it came to how many CDs were sold, 'nobody knows' was the mantra. People could screw you left and right, and you wouldn't know. You had no idea what the royalties were," Price begins. "Now it's a choice as opposed to a fait accompli. Pandora audits itself. YouTube audits itself. The most important metric, how many times played, that exists in databases."
The various entrenched interests just need to be pried loose, he continues. "That's why startup companies like mine can come in and kick their butts," says Price, with just a trace of self-interest.