Lawsuits took center stage last week in the music industry as an audit shed light on the problems major labels are facing, and performing rights organization SESAC struggled with an anti-trust lawsuit. Also, the co-chairmen of Columbia Records talked to the Los Angeles Times about the secrets to their label’s success.

What is at Stake for Major Record Labels?

The music industry has been buzzing with lawsuits stating that major labels have been substantially under-paying digital royalties to artists including Kenny Rogers, Sister Sledge and Rob Zombie. These artists have continued to claim that this has happened because music companies have been falsely identifying online music purchases as “sales” – which bring artists only 10-20 percent of total revenue – instead of “licenses” – which are supposed to give them 50 percent.

Up to this point, the courts have had no answers for either artists or labels about how to prevent this miscalculation of revenue from happening and what fair distribution of profit should be. But solutions could be coming as soon as April, according to an article in The Hollywood Reporter.

In 2010, a groundbreaking case was filed by Eminem’s producers, FBT Productions against Aftermath Records, a subsidiary of Universal Music Group that first introduced this problem to the public. (And we got the inside scoop on this case last summer on the Musician Coaching site from entertainment lawyer Patti Jones, Esq.) An audit report leaked to The Hollywood Reporter, that was prepared by the plaintiff’s accountant and will be critical to the appeal case – a jury trial – when it begins on April 4, showed that millions of dollars that should have gone to FBT have been claimed by Aftermath already. It also provides insight into the many other methods record labels use to keep income from their artists, including exaggerating the costs associated with TV advertising.

The audit report covered the period between July 1, 2005 and December 31, 2009, the time period when iTunes first became a major source of income for the industry. It showed $3,810,256 in licensing fees were lost by the artist and his production team. Aside from digital income, the audit also explored underreported income in other areas, including vinyl sales of more than four of Eminem’s albums, units sold at U.S. military bases, proceeds from litigation wins against Kazaa Napster and YouTube and royalty miscalculations on tracks that used samples or contributions from other artists. And Aftermath also allegedly kept $2 million in order to pay for legal costs attached to the upcoming trial during that 2005-2009 period. Audits have also been prepared for the years 2002-2005 and 2010-2011.

U.S. District Judge Philip Gutierrez responded to the original case in October stating that the 50-percent royalty amount was just an amount applied to the general issue of how to handle digital income that did not apply across the board and had to be determined on a case-by-case basis. He said, “The 9th Circuit only determined that the Masters Licensed provision dictates the royalty rate for proceeds from permanent downloads and mastertones. Under the Masters Licensed provision, FBT and Eminem are generally due royalties of 50 percent. It remains to be determined what figure that 50 percent is applied to.” Gutierrez added that the language of the agreement regarding medium and container deductions was ambiguous, but that there was evidence that record labels knew it could only be applied to audio tapes and CDs, not digital downloads.

The judge ruled in the original case in favor of the record label in one area – Eminem’s side projects. He stated that these should not be included in the 50-percent royalty calculation rate. However, Aftermath now wants the judge to reject the audit report in the upcoming trial.
Regardless of the outcome of the case, it does provide proof that millions of dollars could be at stake for just one artist. And hundreds of millions of dollars are likely to be at stake across the entire label system when all the other artists missing digital royalties are considered.

Sale of SESAC Hindered by Anti-Trust Suit

An anti-trust lawsuit filed against Nashville-based performing rights organization (PRO) SESAC continues to inhibit its sale, according to the New York Post. Owners – including investment bank Allen & Co. and hedge fund Och-Ziff – hired Goldman Sachs to shop it for $500 million in mid February.

The anti-trust suit was filed against SESAC by over 1,000 television broadcasters who license songs for jingles and theme songs in a Manhattan federal court in November 2009 and alleged that SESAC was practicing anti-competitive tactics. The broadcasters claim that SESAC continues to enforce a blanket annual fee for all its music, which makes the process of negotiating with individual artists for song rights difficult. They also claim that SESAC charges much higher fees than other PROs – BMI and ASCAP.

SESAC, the only for-profit PRO defended itself stating that it could not gain monopoly power because it is much smaller than the other PROs. The company attempted unsuccessfully to get the suit dismissed and has failed to get parties to reach a settlement.

A prospective buyer stated that the suit was “troubling” and could definitely break SESAC’s business model if lost. The source added, “Part of SESAC’s sales pitch is that they have a lot more flexibility on pricing [than competitors].”

Another potential buyer stated that the sales book did not make reference to the law suit, though the company has been openly discussing the issue in sales meetings. SESAC has not issued an official statement.

Co-Chairmen, on the Secret of Columbia Records’ Success

Rob Stringer and Steve Barnett, co-chairmen of Columbia Records have attributed the success of the label to their dedication to collaborative decision making, said a piece in the Los Angeles Times published on March 2.

Of course, their success has also been bolstered by its artists, which include Adele. The Grammy winner’s album 21 has spent 22 non-consecutive weeks at #1 on the Billboard 200 list. It has also sold 7.6 million units, and has helped bring Columbia to the point where it represents almost 10% of sales of all current releases in the U.S., according to a recent Nielsen SoundScan report, figures which have brought it from fourth to first place in the past year.

Adele herself said it was CEO Stringer and COO Barnett and their passion for music that drew her to Columbia:  “They’re still huge fans of music. I haven’t met many record company execs of huge labels who still feel like that.”
Headquartered in New York but born in England, the executives insist on making all decisions for the label together, speaking nearly 40 times per day. And like an old married couple, they have been known to complete each others’ sentences. Stringer said, “I know it sounds like some bloody Disney thing, but we don’t argue.”

Barnett moved to the U.S. in 1986, and came to Columbia in 2005 from Epic Records, a subsidiary of Sony. Nine months later, Stringer –who is the younger brother of Sony president and CEO Howard Stringer – came on board after relocating from London, where he ran Sony Music for Britain and Ireland, where he worked for 20 years.

And Columbia has been thriving. The music industry had its first positive sales year in 2011. While many other long-standing record companies are losing artists and fading into obscurity, Stringer and Barnett have been able to resign legendary artists such as Barbra Streisand and have also add new artists like Foster the People, the Shins and Jack White. Columbia has been around for 125 years, and has 94 artists such as Tony Bennett, Bob Dylan, Bruce Springsteen, Neil Diamond and Beyonce.

Stringer and Barnett admitted that they had a difficult time rejuvenating the label when they first arrived. Barnett dropped Jonas Brothers, Katy Perry and several acts that went onto become platinum artists at major labels. But they decided to start again, because, as Stringer said, “I thought we needed a revolution.” They managed to attract major producer Rick Rubin as the label’s “creative guru,” who was co-chairman of the label as it was restructured until 2011 and produced five tracks for 21.

Stringer and Barnett also branched out into television, which helped Columbia advance even further. In 2007, they joined forces with Nickelodeon to co-produce tween shows Victorious and Big Time Rush alongside companion albums. And in 2009, when Barnett showed him a scene from an upcoming TV series Glee, Stringer flewto L.A. and met with the show’s co-creator. Every Tuesday, Columbia puts songs from the each new episode on iTunes and releases Glee compilations. The label has sold 6.9 million of these albums and over 33 million song downloads. The co-chairmen intend to launch a similar campaign with NBC’s new show Smash.

And Columbia has also branched out into branding, attaching itself to Wal-Mart – which sold 784,000 copies of the 2008 AC/DC record Black Ice in the first week. Columbia also attached to QVC with Susan Boyle, who sold 36,000 albums on the channel in the first 13 minutes.

Ian Montone – owner of the company that manages artists including Jack White and Foster the People – said the label succeeds because of its flexibility and artist friendliness. Columbia let White keep his masters and use his own label, Third Man, in partnership with Columbia to manage a release:  “They don’t get too penned in to any one structure … If there’s an artist they want, they will make it happen.”

Stringer and Barnett are currently working hard on Columbia’s 125^th anniversary. The celebration will last one year, starting in the Fall with the coffee table book 360 Sound:  The Columbia Records Story.” The deluxe version will provide the stories of 263 important releases, including John Philip Sousa’s “Washington Post March” and will also have a USB flash drive of all the songs.

Neeta Ragoowansi is the Director of Artist-Label Relations for SoundExchange.  She is also an attorney, a keyboard player and the singer for an eight piece group called the Oxymorons.  Her experience as a musician, as the Assistant General Counsel for the Kennedy Center and The National Symphony Orchestra and as an advocate in the music industry were what landed her in her current position.  She explains her job educating and helping to find the thousands of artists and labels that are owed SoundExchange royalties

Music Consultant:

Tell me how SoundExchange differs from the other Performance Rights Organizations (PROs) like ASCAP, BMI and SESAC.

NR:

We are a performance rights organization, but we represent the performers and recording artists- that is, we protect the performers who go into the studio and put down the sounds- instruments or voice – onto a track. ASCAP, BMI and SESAC collect for songwriters and composer of the underlying musical work – the notes and lyrics on paper. So if you’re a songwriter or composer, sign-up with one of those. If you’re a recording artist, and put your talent down in a sound recording, sign up with SoundExchange. You can be a member of one of the three songwriter PROs AND SoundExchange – and you probably should be. It’s in no way a conflict. PROs help to collect and distribute the royalties that accrue when others publicly perform your copyrighted work. When you talk about music, you have two copyrights involved: the songwriter’s right to the music and lyrics on the page, and the musician or artist’s right to the sounds on a track – they may be the same person, but there are still two different rights. SoundExchange is the PRO that administrates the rights that come under the public performance of the sound recording. 50% of the royalty on each track goes to the performers or artists on the sound recording – 45% to the main recording artist and 5% to the session musicians and back up singers on that track, through RARoyalties.org.  The other 50% of the royalties on each track goes to the owner of the master recording, which might be a record label or an independent musician.

Music Consultant:

Does SoundExchange cover all different kinds of mediums, or are there specific types of mediums that you cover?

NR:

SoundExchange collects royalties when sound recordings are used on satellite radio (like SIRIUS-XM) , Internet radio (like Pandora), on cable TV music channels, and certain other streaming services. SoundExchange DOES NOT collect for digital downloads (like iTunes or “podcasting”) or “on-demand” and “interactive” services like YouTube or MySpace, where a user can select and immediately play the song she wants to hear. SoundExchange also does not collect for the streaming of any audiovisual work, including music videos. We also don’t collect for sound recordings used on radio, because radio doesn’t pay artists for using their work – yet.

SoundExchange is hoping that will change, and we’ve teamed up with lots of organizations and artist advocates to support a bill in Congress called the Performance Rights Act (PRA). If it passes, PRA would mean that for the first time, corporate radio would have to start paying a royalty to artists and labels for the use of their sound recordings. Radio makes almost fifteen billion dollars a year in ad revenue from music stations alone, and they don’t share any of it with the artists who create the music. They do pay composers and publishers via ASCAP, BMI and SESAC; but because of a loophole in copyright law, the creators and copyright owners of the sound recordings are not getting paid. In the rest of the world, almost every single country pays their artists this way – the US’s only company on this is China, Rwanda, North Korea, Iran. That’s not good company to be in which it comes to protecting rights. Using an artist’s work to make money and not paying them a royalty is just wrong. We’re trying to get that loophole changed, so artists and rights owners can be paid fairly.

Music Consultant:

There was no SoundExchange until ten years ago?

NR:

SoundExchange began in 2000, and became an independent nonprofit in 2003. Legislation passed in 1995 (The Digital Performance Right in Sound Recordings Act of 1995) and in 1998 (The Digital Millennium Copyright Act) finally recognized the rights of artists and copyright holders to be compensated when others use their work, and the laws set up a stream of royalties for the recording artist and sound recording copyright owner. After some negotiations to decide what those royalties would look like, SoundExchange started collecting, and made its first distribution in 2001. We distributed $4 million that year. In 2009 we distributed $147 million.

Music Consultant:

There’s a ton of money that’s unclaimed by artists. Can you estimate how much outstanding money is owed?

NR:

There are millions of dollars owed to thousands of recording artists who’ve not yet registered with SoundExchange. Because SoundExchange and the performance right are relatively young, a lot of artists don’t know they’re owed this money, or they just haven’t signed the forms. Remember, unlike ASCAP, BMI, and SESAC, who collect only for their members, SoundExchange collects royalties for everyone who’s getting played, whether they’ve ever heard of us or not. Then we have to try to track down those artists and rights holders and get them to register so we know where to send the check. We regularly partner with industry associations, services and companies like ReverbNation, CD Baby, iLike, Sonicbids, The Blues Foundation, The Folk Alliance, The Vocal Group Hall of Fame and lots of others, to help get the word out about this right and these royalties. We match their member lists against the lists of artists we have money for, and then have them send an e-mail or a letter to that unclaimed recording artist and/or indie record label. In 2009 alone, we notified more than 15,000 artists, owed more than $9 million in all. If you think there’s even a chance you might be owed money, register at SoundExchange.com. It’s always 100% free.  

Music Consultant:

So, a lot of your job right now is just an awareness campaign.

NR:

Yes, it’s a huge awareness and marketing campaign and it’s mostly about educating – outreach and education. Through conference panel, doing things exactly like this interview, talking one-on-one to artists at festivals, and making sure we get the word out every way we can. Maybe finally getting paid for their work just sounds too good to be true – sometimes artists think we’re an email scam. We find that even when artists have received emails from trusted sources (like their manager, their booking service, whatever) saying, “Hey, SoundExchange has money for you,” they don’t always believe it or do anything about it. But then they go to CMJ as a showcasing artist, for example, and get an email from CMJ saying we have money for them, and see our trade booth and see a poster with their name on it, that they finally remember the name SoundExchange and realize that this really means money for them. Sometimes it takes 3 and 4 and 5 contacts before people recognize that SoundExchange is legit, and sometimes a few more before they fill out the forms. People are just naturally skeptical, and this sounds like ‘free money,’ so it must be too good to be true. But it’s not ‘free money’ – it’s better – it’s money they’ve already earned. All an artist has to do is register with SoundExchange, and they can get paid when they get played.

Music Consultant:

At what point would you sign up for SoundExchange as an artist?

NR:

When you go into the studio to record and you come out with a recording that you release. As soon as you start sending out your recordings, you should sign up with SoundExchange. But I tell artists, anyone that’s even planning to do a recording, should go ahead and register. It usually only takes 10 to 20 minutes, and it’s free. We just need to know you exist, where you are and where we would properly send a check. In terms of recording artists, anyone that is a member of a band or featured artist in general should register with SoundExchange. There are certain housekeeping things that a musician needs to do and registering with SoundExchange is definitely one of them!

Music Consultant:

Is there any pre-requisite to sign up?

NR: There is no prerequisite other than that you are a performer on a commercially released sound recording and/or you’re the owner of the sound recording copyright (sessions musicians and back up singers on sound recordings are entitled to a royalty as well and they should go to www.raroyalties.org to claim theirs). The copyright in the sound recording is automatic, as soon as the original creative work (like the sounds made on your instrument) is fixed to a tangible medium (a CD, a digital track, MP3). You don’t have to go to the Copyright Office and register in order to claim royalties from SoundExchange.

Music Consultant: Where does this money come from?

NR:

At SoundExchange we administer the public performance royalty that derives from the non-interactive, digital transmissions of commercially released sound recordings. So when a streaming service like the ones we talked about before use a track, it generates a small royalty. At the end of the month, those services that use your track total up all the royalties they owe, and give that money to SoundExchange. They are also required to provide us with reports of use (playlists in a sense) so we know what they’ve played, and how to divide up that lump payment.   This is very different from what’s happened historically with other performance rights organizations, where they tend to pay out based on sample data – a few weeks a year to represent all of what they play.  SoundExchange strives to get what’s called census data – that is, the exact tracks they are playing, every time they play them. That’s the fairest way to pay, and so far, 95% of the royalties SoundExchange distributes have this track-level census data. How much each service pays for a track is determined by the kind of service they are, and how many listeners hear the track, under rules set by the Copyright Royalty Board at the Library of Congress. For the most part, artists get paid more the more people hear their tracks. So if you can get played on more stations, to more people, or even on SIRIUS-XM, or cable TV music channels (not the video channels, but the high-numbered radio-like channels), you’ll get paid more.

Music Consultant:

Do you have any general advice for artists?

NR:

Know all the places you can generate income from, know about all the special payment funds available to you out there, know your licensing rights/copyrights and educate yourself. Knowing licensing is the number one thing that artists can do for themselves. If you’re going to make a living, you have to know the income you can generate from various sources. Once you send a creation out into the world, it generates different streams of revenue – but it’s your responsibility to make sure they lead back to you. So, keep creating, know your licensing, go collect on that licensing and push your stuff out there in areas where you’re going to see income, such as the digital streaming of your music and recordings. And register with SoundExchange, so you can get paid when you get played!

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