Way back in the early eighties, a revolution happened. Giddy with the power of new technology, motion picture studios rushed to release their back catalogs on the new-fangled videocassettes (and some on laser discs, but that’s a story for another day). They knew full well that this was a foolhardy decision, but with dollar signs in their eyes, how could they resist this new revenue stream?

Why foolhardy? Because the existing agreements with talent, from a participations and residuals perspective, didn’t cover this new distribution channel. With residuals, somehow the studios won and were allowed to continue to calculate payments as a percentage of a 20% royalty calculation. As I noted earlier this week, the guilds aren’t likely to take this forever.

When it came to participations, everyone started out at the 20% level, and those who spent the money on audits (or who held sufficient negotiating clout) saw their royalty amount edge up. The costs the studios money in interest and litigation, but since most people don’t audit and/or sue, the foolhardy risk paid off. The next battle for those who don’t have agreements that contemplate new media will be downloads, but, again, another story for another day.

This leads us to the music industry. While the formats have changed, the actual process hasn’t. Until a few years ago, people continued to purchase a physical item and play it on a player. In other words, the royalty agreements between talent and labels didn’t contemplate the rapid-fire change to services like iTunes.

Bringing us to the first major lawsuit, filed by The Allman Brothers and Cheap Trick against Sony. Sony (or any other label) receives about 70 cents per song, the artists a percentage of that. The artist stakes are big: 30 cents for every downloaded song versus about 4.5 cents (you really do have to love music royalties). But there’s even more at stake. The suits hinge on definitions: are digital downloads via iTunes considered “licensed music” (the thirty-cent option) or are they on par with singles or CDs sold the traditional way (the 4.5 cent option).

It gets a little more exciting from here (honest!). Under the licensed music definition, the artist gets a flat percentage of what the labels get. Under the royalty calculation, the labels also get to discuss a myriad of “distribution” expenses. You know, freight, manufacturing, other costs. Many of these are calculated automatically, though I will be more than happy to lose a dollop of cynicism if modern royalty systems are able to differentiate between regular revenue and iTunes-type revenue and avoid irrelevant automatic charges.

So anyway, not only are these two major artists (and by major I mean, all costs recouped and pure profit coming from catalog sales) suing, but they’re seeking to have their suit declared a class action, covering all Sony artists who entered into agreements from 1962 to 2002. Expect to see other labels added to the class or additional suits. Music may be a nickel-and-dime industry, but those dimes add up to major money.

I know what you’re thinking — Sony’s gonna settle. Fast. Possibly, but there are thousands of artists out there waiting to step up to the bar (sorry, bad puns are cheap, but fun). It’s going to be interesting to see how the labels negotiate this argument. On one hand, downloads are just another distribution channel; on the other, as they’ve made clear, they want to change their licensing agreements with iTunes because the 99 cent price set by Steve Jobs limits their ability to make even bigger oodles of money. The two MSNBC articles linked below specifically discuss the labels’ license agreements with iTunes. This is a very different business structure than the one they have with your local Tower Records, and it may prove to be the linchpin the Allman/Cheap Trick lawsuit.

• Allmans, Cheap Trick sue Son
• Cheap Trick, Allman Brothers Sue Sony
• iTunes and Lawsuits: The labels still don’t get it
• Selling Songs for a Song: Record labels want a bigger cut of digital music profits.

Technorati Tags: Sony, iTunes, Allman Brothers, Cheap Trick, music industry, lawsuits, class action suits

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