Column How much can artists expect to benefit from Microsoft's Zune MP3 player?

Microsoft recently agreed to pay a royalty to Universal Music, which with acts like U2 and Jay-Z is the world's most successful label, of more than $1 for each sale of each Zune sold.

Universal promised it would "pay half of what it receives on the devices to its artists." But is that really going to happen? Given my experience, I'm skeptical.

Record companies pay royalties on record sales, and licensing. Generally the royalty for sales of records is 10 to 15 per cent of the retail price, but it can be higher for established stars. Traditionally, the split on licensing is 50-50. Licensing applies to transactions for the use of musical recordings that do not involve sales, such as the use of masters in television and movies.

For digital music distribution, iTunes pays the labels approximately 70 cents.

Although you might think iTunes is a licensing-type deal - because unlike sales to traditional retailers such as Wal-Mart, the labels do not sell individual units to iTunes - they license the catalog. Yet the labels treat income from iTunes as sales. The significance of this is that instead of a fifty per cent spilt, they only pay artists the 10 to 15 per cent royalty. Plus they take standard deductions from this amount including packaging deductions of up to 35 per cent, even though iTunes does not sell packaging with downloads.

(This is actually the basis for a lawsuit against Sony BMG at the moment)

Moreover, most artists don't even receive this amount because most Artists never "recoup" their recording costs. So for the same reason that most artists never receive royalties from CD sales, they don't generally receive digital royalties either.

Although this pattern of not paying artists for digital music sales is dreadful, the chances of artists seeing anything from the royalty placed on Zune is even worse. There is nothing in the standard recording agreement that says the labels must share income derived from licensing digital devices. Labels are only responsible for paying for exploitation of music, not licensing electronic devices. So why would the labels share anything with the artists when they already disregard clauses in the recording agreements that would benefit the artists?

As a matter of fact, in the United States there is a federal law, the home recording act, which imposes a royalty on "digital audio recording devices" and "digital audio recording media to be paid to copyright owners - including the record labels and artists.

In exchange for the royalty, consumers are exempt from copyright liability for personal recording. But the law only applies to a limited range of digital tape recorders and blank digital media - the recording industry never tried to extend the Act to personal computers, CD burners or MP3 players because they were afraid that people would copy so much music that CD sales would be dramatically reduced.

Under the AHRA, royalties collected by the Copyright Office on devices and media are divided into two separate funds: the Musical Works Fund and the Sound Recordings Fund. One third of the royalties goes to the Musical Works Fund, which splits its cut 50:50 between writers and music publishers. These parties receive royalties according to the extent to which their recordings were distributed or broadcast.

The remaining two thirds of the royalties are placed in the Sound Recordings Fund. Four percent of these funds are taken off the top for non-featured musicians and vocalists. What remains is split 60:40 between featured record companies and artists, respectively.

These parties receive royalties through the Alliance of Artists and Recording Companies according to the extent to which their recordings were distributed, as calculated by SoundScan. (Canada, German, Finland and Australia also have similar levies on digital tape recorders). Under the AHRA, both the songwriter and the Artists are assured of a payment instead of paying the record companies on the artists behalf.

However, AHRA won't see any royalties from Zune because MP3 players aren't covered (and for good measure, the agreement was privately negotiated).

I'm personally in favor of making MP3 players subject to the AHRA so that both the artists and the songwriters are assured of sharing in these revenues.

I think that if Universal is serious about crediting the artists' accounts with half of the Zune royalty, that would be terrific. And it would be even better if they actually paid the artists whether or not they are recouped. But based on how the label are treating artists already, I doubt that this will happen.®

Steve Gordon is an entertainment attorney and consultant in New York, and the author of The Future Of The Music Business. He was Director of Business Affairs, TV and Video at Sony Music for ten years. His website is at www.stevegordonlaw.com.