Sales, Streams, and Settlements: The History Behind the Enrique Iglesias Breach of Contract Suit

Jan 26, 2018

Enrique Iglesias Sues Universal Music Group For Breach of Contract, Underpaying On Streaming (Billboard)

Benom’s Take:

Our leading story this week is a throwback to the genesis of digital music consumption. Apparently, the early struggles between artists and their labels over how digital music royalties are shared is still going strong. Before the public, the government, and the music business could really grasp this whole “internet” and “streaming” thing, artist royalty provisions in record contracts were virtually silent, or at best confusing, regarding digital music royalties.

So naturally, the Enrique Iglesias lawsuit is not the first such suit regarding label payments for streaming. Some watershed moments include the FBT v. Aftermath case involving Eminem’s royalties, and a 2015 class action lawsuit including Chuck D, Rick James, Whitesnake, and others.

Without getting into deep legal waters, the primary contractual issue there is still under debate, and it goes something like this:

How are royalty rates split between income generated from “sales” and income generated from “licenses?”  The contractual definition of “sales” and “licenses” could be the difference in millions of dollars.

A common provision found in record contracts states that the artist will receive a lower royalty share for “sales” (usually averaging in the ballpark of 15%, inclusive of the producer royalties), while “licenses” would earn the artist a much larger 50% share. “Sales” are usually defined as sales of private, permanent copies of sound recordings, like physical albums. “Licenses” could be something where users or companies pay actual licensing and royalty fees, to essentially “rent out” the sound recording.

The most common example of a “license” is a TV/Film use where the record label’s sound recording is synced up to a particular scene. After the FBT case, the major labels changed their accounting terms to deem digital downloads as “licenses,” earning artists a 50% share for permanent downloads. The Enrique Iglesias lawsuit states that his renegotiated deal in 2010 did not address streaming royalties. He also claims that up until 2016, Universal was paying the 50% digital download rate for streaming, before changing to the lower rate.

It’s important to point out that record labels have “licensed” their entire catalogs to Spotify, iTunes, etc. They have signed Non-Disclosure licensing agreements on the books and have received millions in upfront royalty advances. The viewpoint amongst many of my peers and colleagues, (myself included), is that interactive streaming has always been a “license” requiring a higher royalty payment.

Interactive streaming is licensed catalog-wide, and receives an ongoing royalty (like “rent”), somewhere in the range of $3 to $7 per 1,000 interactive streams. So if it walks like a duck and talks like a duck…

But it appears that some labels have tried to be sneaky and pay out the lower “sales” royalty rate for streaming uses. As Enrique’s attorney is quoted in the article:

...Universal has wrongly insisted that artists like Enrique be paid for streams in the same manner as they are paid for physical records despite the fact that none of the attendant costs (production, distribution, inventory, losses) actually exist in the digital world. This is not what Enrique’s contract, or the contracts of many other artists, call for…” and "...improper accounting has resulted in a shortfall of millions of dollars..."

Without knowing the fine, gritty details of Enrique’s contracts or the “inside” royalty accounting practices at Universal, it’s difficult to say exactly where this is headed.

According to the lawsuit, his contract omitted entirely any mention of streaming. It further claims this contract omission was “not an oversight.”

So if there’s any lesson here, it’s for artists to make sure their legal representatives insist on specific streaming royalty language in their contracts. Having some forethought in mind during the negotiation process specific to the potential of new formats and models (like streaming in 2010), is essential.

And now for this week’s other headlines:

Benom Plumb, Assistant Professor of Music Industry Studies at the University of Colorado Denver, reviews the biggest stories of the week affecting music royalties. He is a music industry professional, not an attorney. For more info about Benom, visit his website at www.professorplumbmusic.com.