Is a Music Download a License or a Sale?

A relatively modern agreement (2006) with Universal Records as a licensee includes the following language to define downloads, in any form, so that a specific royalty rate payable to the artist and his or her production company can be applied.

"Electronic Transmission" -- any transmission to the consumer, whether sound alone, sound coupled with an image, or sound coupled with data, in any form, analog or digital, now known or later developed (including, but not limited to, Limited Downloads, Permanent Downloads, Streams, Masters made available through portable subscription services, Mobiletones, "cybercasts", "webcasts", "streaming audio", "streaming audio/video", "digital downloads", direct broadcast satellite, point-to-multipoint satellite, multipoint distribution service, point-to-point distribution service, cable system, telephone system, broadcast station, and any other forms of transmission now known or hereafter devised) whether or not such transmission is made on-demand or near on-demand, whether or not a direct or indirect charge is made to receive the transmission and whether or not such transmission results in a specifically identifiable reproduction by or for any transmission recipient. All references in this Agreement to the "distribution" of Records, unless expressly provided otherwise, shall be understood to include the distribution of Masters by way of Electronic Transmission thereof (ktMine).

But what of music contracts that existed prior to iTunes and iPods? That’s what F.B.T. Productions and rapper Eminem asked the courts to decide, and last month, when the U.S. Supreme Court decided not to review the 9th Circuit’s reversal of a trial court’s ruling that they were sales, the royalty spigots on these old agreements appears to have opened up.

A pre-iTunes record agreement would typically top out at 20% of net recording sales for the artist, but include a healthy 50% royalty if the music is licensed out, say as a theme for a TV commercial. What the Supreme Court has stamped its approval on is that the calculation of royalties on downloads (not specifically addressed in agreements) needs to be at the “license” rate, not the heretofore used “sales” rate.

What’s it mean?  F.B.T. told the NY Times the ruling means Universal owes nearly $20M in back payments, and might owe up to $50M in future payments.

So, the answer to the question posed is, unless otherwise defined, a music download is a license. Certainly facilitators from whom consumers purchase downloads consider it a license, require consumers to agree to the license terms, and govern and audit their use. This points out the prudence of continually reviewing existing licenses through a new technology filter to minimize risk.

In a related area, RIAA (Recording Industry of America) v. Limewire damages trial was to begin yesterday in New York.  Limewire and its owner/founder Mark Gorton are facing more than $1B in damages, after having been found guilty of copyright infringement by U.S. District Judge Kimba Wood. See earlier blog about Limewire’s shuttering here.