Last Saturday I interviewed David Frey, the manager of Cheap Trick for my Internet radio show, the “Future of the Music Business” at myrealbroadcast.com.
The topic was the lawsuit filed by his band and the Allman Brothers on April 27, 2006 against Sony BMG. The complaint alleges that the Sony Music division is underpaying artists on income derived from digital music distribution. The issue is whether downloads of digital singles and albums are a “sale” or a “license.” This distinction is significant because under the standard recording agreement artists receive 50% of income from “licenses” after a small deduction for the mechanical royalty payable to owners of the underlying songs. But if the same transaction is deemed to be a “sale” the royalty is equal to the artist’s royalty rate and the artist’s royalty rate for record sales is generally only 10% to 15% of retail. In addition, there are a slew of deductions that apply to record sales including a packaging deduction, “Net Sales” deduction, and in many cases an “Audiophile” deduction of up to 50%.
The complaint alleges that the bands should be getting over 30 cents for every 99 cent download. For each 99 cent download the labels currently receive 70 cents. After the labels pay a small mechanical royalty to the music publishers, in excess of 60 cents remains in their hands. The plaintiffs maintain that the artists should get half of that amount. But instead, the complaint alleges, Sony treats downloads as record sales even though the label does not sell anything to the digital download services including iTunes. Rather, the complaint alleges, Sony is “licensing” their masters, including those by Cheap Trick and the Allman Brothers, to download services in exchange for a royalty of 70 cents. Due to the fact that Sony treats each download as a sale, instead of a license, the following deductions apply: 20% packaging (even though there is actually no packaging involved in digital transmission), 15% “Net Sales” deduction (which originally protected labels from paying on broken records although there is no “breakage” on digital services) and a 50% “Audiophile” deduction (originally created to compensate the labels for the cost of developing new technology). On top of all these deductions, the lower royalty rate is applied instead of the 50% licensing formula. The result is that the artist is credited with only several cents for each 99 cent download.
This lawsuit is significant because, as everyone knows by now, digital music income is growing dramatically while CD sales continue to decline. Last year, according to RIAA, income from digital sales of singles in the U.S. alone was $366 million, a 163% increase from the year before, and sales of digital albums were $135 million, an increase of 198%.
One of the most interesting aspects of the case is that it is a class action and any Sony artist with a contract pre-dating 2002 is invited to join. Dave Frey said we can expect other artists to join in the suit soon, and some of them may be household names. If you would like to learn more about this case, go to www.myrealbroadcast.com, and click on The Future of the Music Business.