You Be Illin', Universal Music Group
A two-year-old lawsuit against Universal Music Group over digital music royalties finally landed in court this week and its outcome could have a profound effect on the digital music business. Filed by rapper Eminem’s former production company, FBT Productions, the suit accuses Universal of underpaying artists for sales of their work through online services like iTunes, and seeks about $1.3 million in unpaid royalties.
At issue here is whether the sale of digital music downloads falls under the “distribution” agreements that cover physical releases like CDs. FBT says they do not, arguing that the label incurs none of the costs typically associated with them–things like CD jewel cases and inserts and in-store displays. Instead, the production company says that downloads should be covered by “licensing” agreements that do not include such expenses. And the difference between the two is significant: Under distribution deals, artists typically take a 30 percent split of royalties earned. Under licensing deals, they take 50 percent. “If you give the music to a third party without cost to you, like manufacturing or packaging, that’s the same as a licensing agreement,” a source close to the case told The Wrap. “[Universal] are characterising it as something else.”
Universal, of course, disagrees. It claims the sale of a digital download is no different from the sale of a CD. But it seems to be having a tough time supporting that argument in court. To wit, this exchange between FBT attorney Richard S. Busch and Lawrence Kenswil, the former head of UMG’s e-commerce arm, eLabs.
Busch: “Universal provided two digital files to the download companies–a master recording and a metadata guide setting forth a procedure for getting the music on their system. With the digital download agreements–Universal has no manufacturing costs connected with that, correct?”
Kenswil: “Generally, that’s true. But it has costs. You don’t call them manufacturing costs the way that term has been used traditionally. Manufacturing costs are for physical costs, and that has gone away.”