This could lead to a figure around $2 billion that the labels may need to pay out to artists, and the artists are noticing. The initial eye opening event was when Eminem's publisher won the lawsuit it had against Universal Music. The lawsuit was all over how to account for iTunes royalties and the disbursements of those funds. This may cause an overwhelming similar litigation, which may be possibly enough to seriously cripple the world's largest record company. Universal Music would insist that Eminem's deal was unique and the case was a one of one. However, more and more musicians are understanding the implications of the ruling, and filing similar lawsuits. The simple question that would later be addressed is whether or not an iTunes sale was a "sale" or if it was a license. Universal claimed that when you "buy" a song at iTunes it's just a license. That would actual prove to be UMG's undoing here, due to the drastically different terms for royalties on "sales" and "licenses" in many of its old contracts with artists. Previously "pre-iTunes" sales were of things like CDs, which Universal had relatively higher production, storage and distribution costs. So the royalty to the artist was lower for the sale of CDs. Licenses referred to things like licensing a song for a movie or television commercial. With this option the labels were willing to share higher royalties with the artist, and for good reason. The costs to the label for such licenses were minimal, and licensing was always a relatively miniscule part of the business. But, of course, iTunes makes for a unique situation. The label wanted to act as if it's the same thing as selling a CD, and is the reason they have been paying the lower rate. The basic legal claim from musicians is that for iTunes sales, they deserve the much higher royalty rate, which is closer to 50%, rather than the 10% for sales currently being paid out. The court in the Eminem/FBT case said that iTunes songs were licenses and that the higher rates actually applied. In the Chuck D lawsuit, he notes that the sold equation includes a ton of additional deductions compared to the licensed equation. This includes a container charge and a audiophile deduction. Because of those significant other deductions that only are used on "sales," the claim is the amount owed is even larger than just the discrepancy in royalty rates. Chuck D also points out that the "container charge" is officially for the physical packaging of a CD, it seems ridiculous that UMF has been applying the container charge to digital licenses like iTunes. There are various deductions in the old way of accounting for sales that are ridiculous. There is a net sales deduction, which simply deletes 15% of sales from the equation. Then the "container charge" takes out another 25%. This means on 1,000 units which would bring UMG $700 they would only have to pay Chuck D $80.33 per 1,000 units. Despite a royalty rate of 24%, the real royalty rate for Chuck D would actually be more like 11%, rather than the 24% agreed upon in the contract. The lawsuit notes, the proper way to account for digital royalties would show a significantly higher number of $315.85 for every 1,000 units sold. This new total would disregard all of the irrelevant deductions previously taken out by UMG. The company is still using a 100-year-old business model despite it venturing into the digital age where ringtone sales are included as well. Ringtone royalties paid out by UMG for 1,000 ringtones sold is currently $49.89 per thousand. The actual number for the same amount should be more like $660 paid out to the artist. This is just the first is what would seem to be a wave of upcoming lawsuits against the big music labels. Chuck D has actually been one of the artists on the forefront of embracing the Internet and what it allows all the way back to 2000. This should prove as a warning to artist read the fine print and pay attention to the new forms of media being used.
http://www.techdirt.com/articles/20111104/04202416631/fight-power-chuck-d-sues-universal-music-hundreds-millions-unpaid-royalties.shtml