Record Labels' Answer to Napster Still Has Artists Feeling Bypassed
By NEIL STRAUSS
In their bitter battles against Napster and other free music downloading services, record company executives have wielded one moral argument that has placed their position beyond self-interest: the fans take the music without proper permission and don't pay the artists a dime.
Last December, the major record labels responded with two Internet services of their own where fans pay monthly fees to download songs. Under this arrangement, however, the performers still don't get a dime: for each song downloaded, they stand to get only a fraction of a cent, according to the calculations of disgruntled managers and lawyers.
And, artists and their managers say, the labels, like Napster, aren't putting the music online with proper permission either.
"I'm not an opponent of artists' music being included in these services," said Gary Stiffelman, who represents Eminem, Aerosmith and TLC. "I'm just an opponent of their revenue not being shared."
Because the sites are new, no payments have been made yet, but the payment plan has so infuriated scores of best-selling pop acts, including No Doubt, the Dixie Chicks and Dr. Dre, that their lawyers have demanded their clients' music be removed from the sites, with some even sending cease-and-desist orders. Only in some cases have the major record companies complied.
Since Napster was born on college campuses in the late 1990's, peer-to- peer file sharing services have become the bane of the established music business, with, at their peak, some 60 million Napster users sharing nearly 40 million songs illicitly. Even after a federal district court shut Napster down, other free services proliferated, with Kazaa and Morpheus attracting an ever-growing base of users sharing not just music but movies and software as well.
In December, the music business responded with Pressplay and MusicNet, both pay-to-use subscription services where users can listen to or download a specified number of songs each month. Pressplay is a joint venture between Universal and Sony Music, and MusicNet teams BMG, EMI and AOL Time Warner (news/quote) with Real Networks.
"All of my clients had their attorneys advise the labels that if they did use my clients' music on Pressplay or MusicNet, they would be in breach of contract," said Simon Renshaw, who manages the Dixie Chicks, Mary J. Blige and others. "Some artists they took off, but some they didn't. It's becoming very obvious to me and my peers that we're becoming victims of what is a huge conspiracy."
Representatives of the five major record labels would not talk on the record about the payment system or their rights to use the music. But in comments not for attribution, several executives at labels and their subscription services did not dispute the accusations regarding the payment plan. They said their first priority was to make the services attractive to consumers and that the details of compensation could be worked out afterward.
In a letter responding to a lawyer who is trying to remove an artist from Pressplay, the head of business affairs for several Universal labels, Rand Hoffman, set out a company position. It is a view shared by other record executives, who say they are investing heavily to fight piracy and develop a fair compensation system for artists who are ungrateful.
"We are now spending tens of millions of dollars to help launch Pressplay in the hope that a legitimate response to the illegitimate services will provide an attractive alternative to consumers," Mr. Hoffman wrote in the letter. "Pressplay is committed to making music available on the Internet in a manner that is legal and that ensures that artists and publishers will be paid. This is truly a time for artists and record companies to be working together."
He added that it was "beyond logic" that artists would choose to leave their music off Pressplay and "effectively encourage the use of illegal services."
Though the two new services don't appear to be widely used, what worries artists and managers is that a precedent is being set, so that if the labels finally come up with a viable online music subscription service, they won't have to share a significant portion of the proceeds with artists and can claim that this is the way business has always been done.
The crux of the debate over artists' compensation involves whether they should get a licensing fee or a royalty payment.
When their music is used in movies, in commercials and on Internet sites, artists are paid a licensing fee, which, after payments to the producer and the publisher, is split 50-50 between artist and label. Although Pressplay and MusicNet license the music, the bands are not paid a licensing fee. Instead, the labels pay their artists a standard royalty for each song accessed by a fan, as they would for a CD sold.
This means that the artist gets on average less than 15 percent instead of 50 percent. But, out of that, 35 to 45 percent is deducted for standard CD expenses like packaging and promotional copies — expenses that obviously don't exist in the online world.
As one rock manager computes it, if a consumer buys the standard Gold Plan on Pressplay, paying $19.95 for 75 songs downloaded to a hard drive and 750 streamed so that they can be heard only once, an artist, after these deductions, gets $.0023 per song downloaded. To earn a penny, more than four songs must be downloaded.
"I did the math with several other managers and lawyers, and the labels and Pressplay get just under 91 percent after they've paid all the artists for all the downloads," said Jim Guerinot, who manages No Doubt, Offspring, Beck and Chris Cornell. Other managers come up with other figures that they say are even worse for the artists.
The artists' managers and lawyers say the record companies have not committed their payment system to writing.
Representatives for Pressplay and MusicNet said that the payment schedule was a decision made by the labels. "Pressplay licenses its content from record labels and in turn packages the music on our service," said Seth Oster, a spokesman for the company. "The compensation of artists takes place at the label level."
"Pressplay was developed as a legitimate service to make sure artists' rights were respected and artists were compensated," he added.
A spokeswoman for MusicNet said, "We are deeply committed to artists' rights and to ensuring that copyright holders are compensated."
Another irritant for the artists, several lawyers and managers say, is the distribution of the $170 million settlement from MP3.com, an Internet company that offered a music storage service in violation of copyright law.
The labels were to share that money with artists whose music was put online without authorization, but several artists' representatives said nothing had been distributed.
Spokesmen for Sony (news/quote) and BMG said those companies were arranging to distribute the money. According to Warner Brothers and Universal Music, the money has been distributed, although it may not have been spelled out exactly in the accounting statements artists received. EMI did not call with a comment.
For many acts, suddenly there appears to be little difference between the illicit file-sharing system and record-label services.
The arguments the labels are using, said Jill Berliner, a leading music lawyer, are exactly the ones Napster made. "And, from our perspective, if the technology is going to be out there and the artist isn't really going to make money, we'd prefer that our fans just get it for free," she said.
Another complaint is that the labels are licensing music to the subscription services without seeking permission from the musicians.
"All of a sudden this thing launches," Mr. Guerinot said, "and myself and a lot of other managers and lawyers had never even been asked about it. We have coupling rights in our contract, which means they can't just take our music and put it wherever they please. When I try to talk to them, they say that they don't have to discuss this."
Mr. Guerinot said he sent cease- and-desist letters on behalf of Offspring, Beck and No Doubt. As a result, he said, music from No Doubt and Offspring was removed from Pressplay, but not the music of Beck.
One manager of million-selling acts, speaking on condition of anonymity, said: "We've written them letters and put them on notice up front, as did most managers and lawyers, saying, `Don't put our artists' music up.' But they'll do it anyway. They're so arrogant. They're taking the position of: `We don't care. Let's just do it without asking.' They're ignoring their contracts. It's ridiculous. Obviously it will be litigated."
Some managers, however, said that they felt bullied into including their music on the services and were powerless to do anything about it. "Of course we're upset about it," said the manager of one male artist. "But he hasn't even turned in his record yet, so what leg do we really have to stand on?"
To try to avoid future protests, most major labels have added a clause to their standard recording contracts allowing the label to sell an act's songs on the Internet, including all subscription and pay-per-use services. It is very difficult, said Mr. Stiffelman, for a new band to have enough leverage to remove this clause from its contract.
