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Up Against the Paywall

by Paul Rapp on April 6, 2011

Last year I reported on a lawsuit in which Eminem’s production company had successfully argued that it was entitled to 50 percent of record label revenues from the sale of digital downloads, instead of the usual 12 percent (or so) royalty it had been receiving. The theory of the case was that download sales were “licensed sales” by the label; the label did little but hand off a single digital file to each of the various digital stores (like iTunes and Amazon) and then wait for the checks to roll in. Contrast that to CD or album sales, where there is a physical thing that is manufactured, packaged, stored, shipped, etc. In most record contracts, the revenue from a licensed sale is split 50-50 between the label and the artist, while with CD sales the artist typically gets somewhere between 10 and 15 percent of the retail price of the CD. All the major labels have been treating downloads like CD sales, and lots of artists felt they were getting reamed.

In September, a federal appeals court, reversing the trial court, agreed with Eminem and ruled that download sales were licensed sales, and Eminem was entitled to a 50-percent cut. The record company, Universal, jumped up and down and said it was going to take the case to the Supreme Court. I observed at the time that the high court wouldn’t be interested in the case, which was in essence a simple garden-variety case of contractual interpretation that the trial court had gotten horribly wrong and the appellate court right.

May I gloat? Thank you, I will. Last week the Supreme Court declined to hear the case. Eminem is in for a big payday, as he’s been stiffed big time on a couple of his biggest albums. A few commentators have mentioned that the labels may now be facing billions of dollars of payments to legacy artists who have all been hideously underpaid for digital download sales.

Meanwhile, Universal is still jumping up and down. This time it’s saying that the effects of the ruling are limited to Eminem, and that everyone else’s recording contracts are somehow different and immune. Bullshit.

It never ceases to amaze me how big corporations feel that their free speech rights allow them to brazenly lie whenever it suits them, whenever it might protect “shareholder value,” if only for a few days. Here Universal is lying to protect shareholder value by lying to its shareholders so they won’t do the only rational thing there is to do here, and that’s to dump Universal (and any other major-label) stock plenty chop chop.

The language of Eminem’s contract was typical across the industry, and so it didn’t take long for the other shoe to drop. This week the estate of Rick James brought a class-action lawsuit against Universal on behalf of it and all “similarly situated” recording artists. They all want some of that sweet, sweet Eminem money. Expect similar suits against the other major labels soon.

Karma’s a bitch, bitch.

In other news, you may have heard that The New York Times is now trying to charge money for online access to the ol’ gray lady. Well, sort of. The paywall only clicks in when you want to see your 21st article in a month. The first 20 are free and then it’s kind of a half-assed paywall. I’ve read if you click on an outside link to an article, like a Twitter link, it will bypass the paywall. Somebody’s posted a widget, based on four lines of code, that you can use that disables the paywall entirely. Techdirt’s Mike Masnick proclaimed it “the Emperor’s New Paywall.”

Even more confounding is the fact that the Times paid a reported $40 million for this thing that is business-stupid (paywalls don’t pay, just ask Newsday or The London Times) and doesn’t even function well. Imagine what kind of journalism 40 mill could buy. You know, maybe Frank Rich and Bob Herbert could have been persuaded to stick around.

I can’t help but wonder if the Times is taking some wild, post-postmodern, Derrida-meets-Harvard-MBA leap into the digi-stential void here. Maybe it’s been watching the Radiohead and Trent Reznor tip-jar experiments. Maybe it’s banking that a number of its well-heeled, highly-educated loyal readers (and if one publication in the world has them, it’s the Times) might feel a twinge of guilt when the pathetic little paywall goes up. Maybe it’s banking on a few of these people deciding to pony up their Amex Gold Card numbers in a gently-coerced gesture of goodwill.

In other words, maybe the Times knows that rigid paywalls are a commercial disaster, but that a well-played guilt trip might just work. If they’re right and it works—and who the hell knows these days until you try—I’m in awe of them. But it’s a helluva $40-million gamble.