Major record labels change royalty structures in response to sector pressures

Moves by two recording industry giants to overhaul their royalty structures will likely be followed by the three remaining labels, experts suggest, as the sector struggles to make its offerings more attractive to recording artists and the public alike. In recent weeks, both Universal and BMG have announced the elimination of certain charges withheld from artists and higher royalty rates for downloaded music in an apparent effort to reduce bureaucratic overhead and become perceived as more artist friendly. On November 20, BMG announced worldwide changes to its royalty accounting policies to take effect next year. Among other changes, the company plans to change its royalty rate from one based on retail prices to wholesale prices but eliminate charges such as packaging, freebies and the CD/new technology charge. Online royalty rates will no longer be subject to deduction and will now be calculated based on the artist’s album rate and not the lower singles royalty rate. A media release from BMG states: "By establishing a more clear cut accounting process for online revenue, BMG hopes to encourage its artists to value our participation in legitimate online services and in the industry’s continued efforts against online piracy. The online policy will be adaptable in a number of ways to accommodate the evolving online market place." BMG’s announcement comes hot on the heels of a similar announcement on October 17 that Universal Music Canada is following the lead of its U.S. parent company to increase by about 25 per cent the amount it pays artists for downloads (CNM, Oct. 30/02). Universal is also eliminating its standard new technology/media charge – a 20 per cent reduction – as well as a 25 per cent packaging charge. The company says some of its artists could see royalties almost double as a result of the changes, which are retroactive to January 1. The remaining big three labels are tight-lipped on their own plans, but experts suggest they will follow suit in overhauling their royalty systems. Brian Robertson, president of the Canadian Recording Industry Association, tells Canadian NEW MEDIA that changes in the marketplace will move the other labels in the direction of BMG and Universal. "Universal was the first of the five to announce the changes," Robertson says. "Obviously, the others will follow. There has to be a zero-based look at the levels of compensation that are being paid and how they are paid. You’ve got a totally different delivery system. You’ve got a totally different method of being compensated than traditional bricks-and-mortar retail." Though he has no specific knowledge of changes at the other major labels, Robertson says he assumes that any re-negotiation of artists’ contracts is taking the new environment into account. "They’re fine-tuning a model which has been in place for several decades and it’s being, obviously, motivated by new methods of digital delivery." Other observers agree. While the major labels are making no comment to CNM, the heads of smaller record labels say the changes are a long overdue recognition that many of the charges in standard record contracts – many of which date back to the shift from vinyl to CD – are outdated and pose a risk to the labels’ reputations. Janie Duquette, president of Montreal-based DKD D, Donald K. Donald’s record label, says public lawsuits by artists such as the Dixie Chicks, Courtney Love and LeAnn Rimes against their labels are tarnishing the companies’ reputations and labels are being forced to change their perception with both musicians and the general public. "There were some obvious deductions that couldn’t hold," Duquette says. "The old story of ‘this is how the business is and shut up’ – I don’t think it works anymore." She cites packaging charges as a key example. But, she notes, labels have also had to be cautious in the digital environment until they knew what new models would look like. "I believe that the clauses with respect to Internet distribution were made…very, very complicated and full of deductions because nobody knew what it was going to look like…You don’t know what you can get and you don’t know what you can give…The worst thing that can happen is you have to pay more money than you receive. If that happens with tons and tons of contracts, and if Internet distribution becomes the norm, well, would be fucked." She says DKD D has always been committed to more transparent contracts and that agreements have been subject to re-negotiation every two years to take into account an evolving marketplace. She notes, as a counterpoint to the artists’ desire for greater royalties as overhead is reduced, that labels are also subject to new changes that have to be taken into account, such as the cost of maintaining ecom web sites. Bernie Finklestein, president of True North Records, agrees that the situation is not as black-and-white as the standard perception of the industry is. "There is a lot of pressure on the record industry to get more artist-friendly due to all kinds of pressures out there," he says of lobbying by groups such as the U.S. Recording Artists Coalition. "I think the record companies are responding in kind. I don’t think it’s a very black and white picture. I think there’s a tendency for people to want to find good guys and bad guys, so the record companies are all wearing the black hats and the artists are all wearing the white hats." He says he applauds Universal’s move (Universal is True North’s distributor) to eliminate several out-of-date charges. "What it was creating was a need for lawyers – at a costly amount of money – to negotiate something that was rather foolish…I think that’s positive on their part…I think what it really is is that people can see there are changes coming. Nobody really knows what those changes are going to be and I think they just want to get ahead of the curve a little bit. "It also makes sense. Any smart person in a business full of contentious issues – why fight stupid ones?" Like Duquette, Finklestein says the moves by BMG and Universal bring those large labels closer in line with how independent labels have negotiated their contracts all along. Copyright lawyer Mark Hayes says digital distribution is posing both a threat and an opportunity to artists, something the labels have to respond to if they’re to continue to fulfill their traditional role. "One of the alternatives that is becoming increasingly available to artists is to do their own digital distribution. To the extent that digital distribution is competing with distribution by the labels, if you make it more attractive to the artist to do it through the labels then you’re possibly responding to that competition," Hayes tells CNM. "The second thing is this has been a dispute that has been going on for years and years. A lot of the charges that have been in the standard recording contracts in North America for a generation or so are really vinyl-related… "It’s all part of increasing pressure from the artists to get with the times and revamp the standard contracts to reflect the current technology. It’s also partly, I would think, a reaction to the Internet menace: the P2P and free downloads that are out there. They’ve got to be able to convince their artists that they continue to be relevant as a distribution mechanism and part of that has got to be having a fair and reasonable royalty rate." Hayes says he expects further changes. "There is an ongoing process by all the labels of reassessing how digital delivery is going to be handled. Whether it’s a matter of changing how the artists are remunerated or a change in the way the delivery systems are done, I think this is just one relatively small step in the much larger process of reforming the way that music is going.

Major record labels change royalty structures in response to sector pressures

Broadcast | November 28, 2002

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