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iTunes Download: Sale or License? The Multi-Million Dollar Question

05-14-2012  |  By: Ben Edmonds |  (0) Post comment »  |  Read comments »

If youíre a Sony Music recording artist, there is a good chance that youíve recently received notice of two pending class action lawsuits challenging the calculation of royalty payments for sales of permanent digital downloads and ringtones or recordings under the artist contracts.  The issue at the core of these lawsuits, as well as a number of similar suits that have been filed in recent years, is whether or not a download of an album, track or ringtone through iTunes constitutes a sale or a license.  In addition to Sony, there is similar legal action pending against both Universal Music Group and Warner Music Group.  This matter could cost the record companies millions of dollars in back royalties. 

The method record companies use to calculate royalties for music sales is vastly different to the way in which music license fees are calculated.  Typically, in contracts that predate the digital age - the Sony Music settlements cover contracts dated between January 1, 1976 and December 31, 2001 - the artist is entitled to a flat 25% - 50% of the labelís net receipts for master recordings which are leased or licensed to third parties.  Sales, including digital sales, are accounted to the artist based on the royalty rate established in their agreement with the label, which vary from artist-to-artist, but generally land somewhere between 12% - 20%, depending on the artistís status at the time of signing their contract.  The artist royalty on sales is further reduced by deductions for packaging, reserves for returns, and deductions for free goods.    

Depending on the artistís royalty rate, if an album download through iTunes were applied to the artistís royalty statement as a license, the artist could expect to receive upwards of 3 - 4 times the amount they would otherwise receive for a sale.

Consumers generally assume that because they pay for an album download on iTunes that they own that download - at least until their hard-drive crashes Ė and it constitutes a sale.  The record companies are hoping that the courts will look upon downloads in a similar fashion.  However, in a case in which the production company that co-wrote and produced a number of Eminemís biggest hits sued Aftermath Records over the issue of underpayment of digital royalties, the United States Court of Appeals found that the agreements between record companies and iTunes are, in fact, licenses.  In essence, the record labels provide iTunes with a single master recording, and enter into a licensing agreement which allows iTunes to duplicate and distribute digital copies of that master for a fee.

As with many of these issues, it may be some time before there is a definitive ruling on the matter at hand.  However, as the Sony settlements and the ruling of the Court of Appeals indicate, the overall outcome may well favor the artists.  As such, artists should be ready to act, which at a minimum should include you or your representative being familiar with the language of your contract and how you may be impacted.

If you have any questions or comments about the Sony settlements or anything else contained herein, please feel free to contact our firm.