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Eminem’s Big Win in Court Could Mean Big Money for Musicians

March 30, 2011

When I first heard that Eminem was in court, I immediately thought that it was another typical Eminem case involving drugs, slander, assault and battery, or a domestic dispute.  To my surprise and delight, it had nothing to do with any of those issues but rather the way royalties are computed for digital music.  Eminem ultimately won the case and a large sum of money.  After the decision was handed down, however, many questions involving the case’s scope, reach, and impact on other musicians, and the digital music industry as a whole, remained unanswered.

Case History and Decision

The case began four years ago when the producers who discovered the controversial yet iconic rapper Eminem sued his record label, the Universal Music Group.  A federal jury ruled in favor of Universal in 2009, but this decision was overturned on appeal last year.  The decision hinged on the issue of whether the record companies’ arrangements with digital retailers resembled a license as opposed to a sale of a CD.

The appellate court ruled that digital music should not be treated as a sale, but rather a license.  A sale entitles the musician to only 12%, while a license gives the musician 50%.  This is because the labels furnish the seller with a single master recording that is then duplicated for customers.  In these types of licensing agreements there are less overhead and incremental costs than that of a sale due to digital rather than hard copy duplication.  The musician should reap the benefits of this type of license just as much as the digital music retailer, 50/50 rather than 88/12, due to the minimal additional costs.  The label then petitioned the case to the Supreme Court, which declined to take the case, thus resulting in a win for Eminem, and perhaps many other musicians.

The “Aftermath” for Eminem and Other Musicians

The “aftermath” will be huge for Eminem as he stands to make $17 to $20 million from the decision immediately, and much more in the future with estimates of up to $50 million.  Universal, however, said the implications of the decision were limited due to the unique language in Eminem’s agreement.  They urge that the ruling currently has “no bearing on any other recording agreement and does not create any legal precedent.”  While this may be true for more recent recordings, older recordings will, most likely, benefit from this decision.

Cases Overall Worth and Impact on Older Musicians

Last year alone, there were 648.5 million downloads of “catalog” singles, which are songs over 18 months old.  Current track downloads totaled 523 million, which is over 125 million less than catalog singles.  Labels make tens of millions of dollars a year from catalogs without paying a penny in production costs.  Clearly, the size, popularity, and cheap production make catalog music attractive to digital music companies.  This may end up hurting digital music companies and helping musicians of these songs, however, as “anybody who ended their recording career before 1978 and probably before 1992,” may be included in this decision due to the language in pre-technology boom contracts.

In the past, licenses of music between musicians and record labels to movies, television, or other third parties, gave artists 50% share because the third party was bearing the relevant costs.  Today, royalty rates vary, but most are between 10% and 15% of the artists net music sales, minus packaging and other deductions.  In the early days of music production, the potential impact of technology on music sales were not very well recognized by music labels who, thus, failed to portray the magnitude of this impact in recording contracts.  The record companies were making deals that favored them at the time, but ended up favoring artists later on due to the digital revolution.

At first, digital media hurt both musicians and record labels through CD burning, Internet piracy, and illegal downloading.  Then the music industry began to adapt by selling digital copies of their music for 99 cents per song, charging more for concerts and less for CDs, and taking advantage of the fashionable allure of mix tapes and illegal downloading as a means for trendy, “underground,” and hip free advertising.  Now, musicians are going to benefit from the enormous and largely unpredictable impact of technology on music to the detriment of record labels.

Conclusion

It will be interesting to see how this case ultimately plays out.  Clearly, contracts will have to continue to be altered in order to take this definition of digital music licensing into account.  Additionally, this case could potentially set a precedent for future cases and/or open the floodgates against record labels and digital media retailers.  The Allmans Brothers have sued Universal and Sony BMG Music Entertainment over a similar contractual issue.  The suit, which turned into a class action, reached a settlement earlier this month.  Nevertheless, this decision effects artists ranging from one hit wonders to global icons, from the beginnings of recorded music until today, as every musician who has been effected by digital media now have legitimate claims that their sales should be treated as licenses resulting in hundreds of millions of dollars.

– Michael

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