SonyBMG challenged over digital artist royalty rates

June 2006

Record labels, artists, internet

Members of the Allman Brothers Band and Cheap Trick have filed a class action lawsuit alleging that Sony BMG has underpaid artists for digital music transactions. At issue in the action, filed April 27 in U.S. District Court in New York by Labaton Sucharow & Rudoff and Probstein & Weiner, is whether the label’s deal with online services for downloads is a license or a sale. Sony BMG labels consider that their deals with the services are for sales of records rather than licenses for the recordings. But the suit alleges that Sony BMG is violating contractual obligations to share 50% of the net licensing revenue from digital music transactions with artists. The two bands claim that from 99-cent downloads, they receive only about 4.5 cents, rather than the 30 cents per track they believe they are owed. For years, artists have complained that royalties are further cut; many contracts permit a 50% reduction in royalties for music sold through a new technology, as well as a packaging deduction. Many artists say these clauses only made sense in the physical world, when music migrated to CDs from cassettes. The suit concerns royalties received for master ringtones and digital downloads through at least nine services, including Apple’s iTunes. The parties are seeking in excess of $25 million in damages. The artists allege that there are about 2,500 other acts in similar situations from the Sony BMG-affiliated labels. The suit, which still has to be certified in federal court as a class action case, follows a similar suit filed by Tom Waits’ Third Story Music against Warner Music Group. Nielsen SoundScan reports more than 350 million digital tracks and 16 million digital albums were sold in 2005. If downloading is found to be a licensing activity, such a shift in the business model could see labels renegotiating artists’ deals or refusing to provide certain recordings for digital delivery.

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