Sony and UMG actions could re-shape the digital pie

April 2015


Recorded music, artistes, streaming



Sony Music has failed to have a wide-ranging lawsuit filed by Simon Fuller’s 19 Entertainment a year ago dismissed, though some elements of the case have been thrown out. The federal lawsuit alleges that Sony Music Entertainment cheated 19 out of more than $7 million in royalties for “American Idol. Sony Music had traditionally signed ‘Idol’ winners. The suit claimed that it had found “systemically incorrect calculations” on two separate audits of royalty payments made by the major. It then added that the record company had failed to allow 19’s auditors access all the data they required to do a full audit. 19 Roster includes Kelly Clarkson, Clay Aiken, Carrie Underwood, Chris Daughtry, Kellie Pickler, Jordin Sparks, David Archuleta and David Cook,
Sony responded a few months later with a motion to dismiss, countering the various allegations made by the management company. U.S. District Judge Ronnie Abrams commented that the companies set up a “highly complex royalty structure” and said that four of 19’s eight claims in lawsuit should be allowed to proceed to court. 19’s claims includes the argument that digital income should count as ‘licensing’ or ‘sales’ income with artist contracts that don’t specifically mention downloads and/or streams. The claim also focuses on the way labels can confuse accountings when money moves between global subsidiaries, (here in relation to radio and TV advertising spend). 19 accuses Sony of using “sleight of hand” tactics to reduce its royalty obligations to its artists. There was enough confusion here to justify proper court consideration, said the judge ruled. A further claim is in relation to the under-reporting of record club income survives.
19’s claim that it should have received at least $1 million from Sony Music’s various file-sharing legal settlements (such as that with LimeWire) was dismissed by the Court,


And the Universal Music Group is close to submitting a settlement, resolving claims that it has wrongly accounted to recording artists of royalties from digital downloads. Readers will remember UMG lost the F.B.T. Productions v. Aftermath litigation against Eminen’s producers FBT who successfully argued on appeal that digital income should be shared between the label and the artiste as a ‘licence’ rather than treated as a ‘sale’ (akin to physical product) with a much lower royalty.


The class action from artists including Chuck D. of Public Enemy, Rick James (by way of trust), Dave Mason of Traffic, Whitesnake, Andres Titus of Black Sheep and Ron Tyson of The Temptations, among others, alleges that record labels should be treating digital download income off of venues like Apple’s iTunes as “licenses” rather than “sales.”  UMG’s current accounting means that the artists get about 15 percent of collected income rather than 50 percent they allege is due.
Attorneys for UMG and the recording artists have been directed by U.S. District Judge Susan Illston to submit a motion to approve a settlement by April 10. The judge terminated UMG’s summary judgment motions that presented various arguments against the claims including that the recording artists were on notice about how it was calculating royalties since 2002. The settlement will also include EMI Music’s recorded music division which UMG acquired in 2012.
The move follows settlements by Warner Music and Sony: In the main the settlements have proposed upped royalty rates for  paying heritage artists – usually just a few percent more on downloads than CDs (but NOT a 50/50 split though), usually with some provision for back-pay on downloads sold to date. As the digital moves towards streaming as download sales drop, it will be interesting to see how the major labels treat streaming revenues (and indeed equity stakes in streaming companies such as Spotify). Figures from the U.S. show the increasing importance of streaming for the recorded music sector as the shift from physical to digital, and from download to stream continues.  2014 figures from the Recording Industry Association Of America (RIAA) show revenues getting ever closer to being split three ways between physical, downloads and streams:  27% of US recorded music revenues now come from streaming services. download sales represent 37% of the recorded music, while CD and vinyl sales accounted for 32% of income. With 19’s claim against Sony, the judge refused to reject claims that Sony breached agreements and good faith dealing with 19 by allegedly mischaracterising income from streaming services as as “sales” or “distributions” rather than as “broadcasts” or “transmissions.”

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