Waits challenges download royalties based on physical product sales

July 2005

Music Publishers, Internet, Record Labels

Third Story Music, a Los Angeles-based music publishing firm and the successor to the production company that managed singer-songwriter Tom Waits early in his career, has filed a federal suit against Warner Music Group, alleging that Waits has been shortchanged on the sale of digital downloads. The action, filed in U.S. District Court for the Central District of California in Los Angeles stems from 1972 and 1977 contracts signed by Third Story principal Herb Cohen and Warner-owned Asylum Records regarding Waits’ services. According to the suit, under the terms of the two contracts, Waits was entitled to royalties of either 25% or 50% from revenues derived from third-party licenses. Third Story maintains that digital music downloads constitute a form of third-party license, and that Waits is entitled to payment at that level. Wait’s 2003 and 2004 royalty statements to Third Story from WMG computed royalties from Waits’ digital download sales at the same (and much lower) rate as royalties from the sale of physical product. – on those calculations Waits would be entitled to either 9% or 13% of the 67 cents received by WMG from each 99-cent download. Third Story seeks a declaration that compensation for downloads is governed by the third-party license provisions of the Asylum agreements, and damages in an amount to be determined.

See: http://abcnews.go.com/Entertainment/wireStory?id=811817
COMMENT : This could be a very important case and highlights the inequity of applying a standard physical product royalty to a download. Clearly physical product royalties were/are calculated to take into account the cost of manufacture of the physical carrier (CD, DVD, cassette) along with artwork and packaging. These are not present with a download giving the label a far larger profit margin – a far bigger ‘share of the pie’. The royalty on physical product also take into account distribution costs – again not present with downloads (or at least marginal, perhaps the cost of digitisation) again increasing the label’s profit share. The difference between a 15% royalty and a 50% royalty on a dealer price is substantial and most artists would want to fight this sort of label practice to achieve the latter!

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