Ljs: Behind the music: Why Eminem could spell major trouble for the major labels

The question of whether a digital download counts as a straight sale or a licence threatens to cost Universal Music millions

Last year, global revenues from recorded music fell by 8.4%. A Universal Music Group insider recently told me that its owner, French media group Vivendi, has ordered the label to cut costs by $100m this year, meaning we're likely to see more redundancies. No wonder the label is trying to downplay the implications of a recent US supreme court decision to turn down its appeal of a verdict stating that Eminem and the producers who helped him achieve success should get 50% of all revenue from iTunes downloads ? around three times more than what the label has paid them so far.

The manager of FBT Productions, who first signed Eminem and continues to collect royalties on his music, told the New York Times that this means Universal owes the company $17-20m in back-payments. Considering that downloads of music Eminem (who was not party of the suit but stands to earn millions from it) keep selling, it could cost the label an extra $40-50m in the next five to 10 years. But it doesn't look like Universal's headache will end there. The estate of the late funkster Rick James has already filed a federal class action against the label, inviting other artists to join in, claiming that it should also have been paid 50% of all sales of digital downloads and ringtones.

At the centre of these lawsuits is the question of whether a download is a licence or a sale. A normal record deal today would usually give an artist 12-20% of revenue from sales depending on how successful they are at the point of signing (only the bigger artists get anything close to 20%). But if a song is licensed to be played in, say, a TV show or a film, they receive 50% of revenue. Buying a download on iTunes may make you feel like you own it, but the fact is that you've just bought the rights to play it. And so the court agreed with FBT that the Eminem downloads counted as licences.

Universal argues that it was simply the wording of Eminem's specific contract that resulted in them losing the case, and it's true that standard contracts have changed since the advent of iTunes and now clearly state that download sales count as sales. But thousands of artists signed their deals way before iTunes. If they did so before 1980, chances are they're on a sales royalty rate that is lower than 10% ? some artists from the 60s and 70s were on 4%, minus packaging deductions ? which means they can up their digital royalty rate more than tenfold. It's common that bigger artists, who are still signed to the same label, renegotiate their deals throughout their careers. Those artists will most likely have a clause about digital downloads in their contracts.

FBT is not the first to take a major label to court over digital royalties but, as far as I know, this is the first case not to be settled out of court with the claimants signing a non-disclosure agreement (NDA) to prevent them talking about it. In 2006, the Allman Brothers Band and Cheap Trick filed a lawsuit against Sony BMG arguing that their download royalty rates were insufficient. According to this suit the bands were at the time only being paid 4.5 cents per 99-cent sale. The parties settled. When asked about the details of the settlement a member of Cheap Trick, according to a source, said: "I'm not allowed to say anything about it, but I'm smiling."

Part of Pink Floyd's recent lawsuit against EMI had to do with the royalty rate of downloads. While it was widely reported that the band won the case against the label not having the right to unbundle individual tracks and sell them, EMI insisted the court hearing about royalties be held in private, citing commercial confidentiality requirements. More likely, they wished to avoid setting a precedent for other EMI artists who may have been thinking of taking the label to court.

Some haven't even had to go to court. One artist, who had worldwide hits in the 80s, had a look at his old record contract and discovered that any of his music distributed through "wireless telephony" was considered a licence and so would command a 50% royalty rate. He approached the major label he'd been signed to during his heyday and they didn't even contest it. They paid him ? and made him sign an NDA.

The advice I get from the managers I've spoken to is for artists to check their contracts. Taking a label to court is a costly endeavour, however. In the UK we don't have class actions like the one Rick James's estate is filing and artists with different contracts would have to be considered separately in court, but some UK managers are talking about pulling together to foot the bill for a court action. A series of successful claims could spell a much bigger problem for Universal than cutting $100m out of their budget: it could feasibly bankrupt every record label.

Helienne Lindvall

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