The Court Decision That May Change The Music Business

There's just been a decision by the United States Supreme Court that may have major financial implications on the major record labels that could very well push some of them over the edge into insolvency. I've been reporting on the legal battle between Universal Music Group (UMG) and Eminem's FBT Productions for a couple of years, and it now looks like the case has finally been decided in Eminem's favor. Here's the gist of the decision and why it's important.

FBT brought the suit against UMG stating that a download sale shouldn't be treated like it is in a normal record agreement, but as part of a license deal. The difference is that in a record deal, the record label manufacturers the product (CDs) and pays the artist a royalty of anywhere between 12 and 20% of the wholesale price. In a licensing deal, the record label provides the licensee (such as a distributor in another country producing CDs) with a master, and they in turn manufacture the product. The record label and the artist split the proceeds from the license deal 50/50.

FBT contended that since UMG was only providing a master to an online distributor like iTunes or Amazon, and the distributor was manufacturing the product (in this case making a copy of a digital music file), all online sales are in fact license deals and should be paid as such - at a 50% rate instead of 12% in FBT's case.

You can see the financial implications here. If FBT won, not only would UMG owe them a ton of money, but every other artist at every other label would then sue for more money using the case as a precedent. The entire major label economy would be rocked!

UMG won the first round of the case, but FBT appealed and had the ruling overturned. Then UMG essentially appealed the appeal and took the case to the US Supreme Court for a ruling. The Supreme's refused to hear the case though, and sent it back to the 9th Circuit Court of Appeals to determine the damages.

There's some speculation that this is at least a $50 million decision for Eminem and FBT, and every other major artist will now go back to their record labels with their palms open wide. Lady Gaga and newer artist's will not have this ability however, as labels have since tightened up their contract language regarding downloads, but anyone with an older agreement can probably expect some dough.

The reactions from the industry over the next week or so should be very interesting.

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