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February 18, 2002

Record Labels' Answer to Napster Still Has Artists Feeling Bypassed

Related Articles
Record Companies on the Defensive (January 31, 2002)

'Sonic Boom': When Digital Music Went Mainstream (January 27, 2002)

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With Napster Down, Its Audience Fans Out (July 20, 2001)

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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."

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