License vs. Sales
Recently Dave Kusek, VP at Berklee College of Music, posted to his blog, Future of Music, an article entitled: Are iTunes downloads actually "licenses" rather than "sales"? The article reports that Eminem's production company sued Universal Music Group for royalties on downloaded music. Labels have been using the same contracts and royalty rates on digital music distribution that they have historically used for physical distribution mediums such as CDs. A purchase on iTunes is not considered a sale, but a purchase of a license to use the music with specific limitations. Eminem's company argues that the royalties paid should be 50%, which is the traditional royalty rate for the licensing of "masters."
What Kusek's article does not delve into is the financial breakdown of the contracts being used. The language of digital contracts have been known to resemble the traditional contracts even though some of the financial items are outdated. For example, the traditional costs of producing and manufacturing physical CDs have been left in some contracts, even though the process is not involved in digital distribution. It is a loop-hole that some labels have exploited to increase profits on digital distribution while reducing the royalties paid to artists.
For the past two decades, a copyright debate has raged over the issue of ownership of music. The recording industry has argued that consumers purchasing music do not own the music, but license its use. This has been the industries base in their fight against digital music sharing and illegal downloads. Companies were hesitant to allow their music on the Internet until retailers, such as iTunes, were able to implement Digital Rights Management on audio files, dictating the use of music by the end-user. It appears now that the industry could be shooting itself in the foot with this argument. If consumers are indeed only licensing the use of music, then artists and composers should receive their traditional share of the license, which is a 50/50 split.
As Kusek states, in the end this could produce great benefits for artists and composers. I feel that it may mutually benefit both artists and fans by reducing the tendency of labels to be overactive in signing artists. Traditionally labels have pressured their A&R departments to be focused on quantity of artists as opposed to quality. A label will budget to break even on unsuccessful acts, while the artist is cut from the roster, usually without realizing a profit from their work. With royalties based on licensing, artists might be able to receive income on unsuccessful projects and labels will focus on making each artist a success in order to make a profit or break even. This will affect fans in that they will receive a better quality of music coming from the industry.
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