Jessica Northey | June 15, 2012

In Practicum 4 | Cecilia Estrada, JD

Music Business Law & Contract Negotiations

In Practicum 4

This course’s lecture thus far has gone over a few points that have come up in the report

by Senator Kevin Murray, who at the time of this report was the Senator of California in the 26th

District. The record companies and artists in the report can be compared to the marketplace and

consumers. The record company’s representatives should be required to automatically have a

fiduciary duty with the artists they enter into contracts with as their apparent agency. In addition,

the record companies have unified their accounting practices, which is similar to having a

monopoly in the marketplace.

Senator Murray reported on the findings of the music part of the Entertainment Industry.

As a Chair in the Senate Select Committee, he held hearings to cover the topic of the recording

industry practices. In the end, a final agreement was not established, therefore; the bill was put

on hold. The meetings also covered issues of the accounting practices of the record companies.

The hearings had testimonies from the Artists themselves along with their lawyers and managers,

including the RIAA, as well as the representatives from the top five major record companies.

The five major record companies include: “Bertlesmann Music Group (BMG), EMI Record

Group (EMI), Sony Music Group (SONY), Universal Music Group (UMG) and Warner Music

Group (WMG).”

The relationship between an Artist and the record company has a history of being like a

marriage, the type of equal partnership that is built on trust. The hearings discussed how Artists

do not trust record companies because of the system they have each put into place has major

faults, as well as having confusing practices in the contract because it is out dated. The

technology has changed over the years, yet the language and deal of the royalty charges from the

artists are based on things that no longer exist today, such as vinyl and the cost to manufacture a

CD has gone down significantly.

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In Practicum 4

“A compact disc actually costs less than $1.00 to manufacture. Assuming

a relatively low $15.00 suggested retail price and a 15% deduction, the artist is

being charged $2.25 for the manufacture of a CD that costs $1.00 to make. In

addition to paying for the recording and marketing of the CD, the artist is

actually paying for its manufacture and providing a tidy profit to the record

company in the process.”

Now, the marriage has turned into a partnership of spite, by being indebted to an ongoing

“criminal enterprise” of the record companies entrapment of their Artists.

In essence, the record companies have market power, which is the ability to affect market

price. In my opinion, the record companies have achieved monopolization by practicing the same

operations between the five major record companies; they conduct as one unit by having the

same “accounting practices” that override the contract, against any artist who goes into contract

with a record company. This has the intent to control payments the Artists receives from their

royalties and destroys competition between small record companies and between the top five

record companies, since all of the contracts are the same and have non-negotiable contract

clauses for their accounting practices. This type of business and accounting practice is predatory

conduct and has achieved success in operating this way for many years.

Having competition in the marketplace is important because it protects the consumers; in

this case the Artists are much like the consumers. They would like to enjoy the benefits of lower

prices on the amounts being deducted from their earnings from royalties as well as having better

quality of customer services from the record company representatives having fiduciary duty. The

Artists should also expect that there is the possibility of having a greater choice of which record

company they chose to have a contract with. The average artist cannot afford the audit to check

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In Practicum 4

their record company’s accounting practices to see if they are getting the correct amount of their

royalty payments so that if they are not, they have the choice to work with a record company

who will treat their artists as a true partnership. This is the only way to truly prosper by taking

care of the person who produces the creative content.

Another complaint in the report was about the contract protects the record company when

they decide to not pay the full amount owed to the Artist, regarding their royalty statements

being under reported. The record companies have denied any wrongdoing, yet their accounting

practices supersede those of the contract between the artists just for the sake of ease of business

practices for the record companies. They claim they are the true victims because so many of their

investments in artists do not turn out to be successful. The record companies still expect the

marriage to operate as a partnership and artists should be fighting with them against piracy more,

but they first care more about the money being lost is being taken away from their own partner

and secondly, the digital piracy issues is taken away. The record companies have forgotten that

without the Artist’s talents they would not have a product to make money from. It is a fair and

moral practice to provide the monetary benefits of what is rightfully their work.

The report suggests that if the record companies have a fiduciary duty to the artists under

contract would rebuild trust. According to a class lecture, fiduciary duty is a duty to act in the

best interest of another. It arises automatically due to the relationship between the parties of the

contract. The relationship involves special trust, confidence, or reliance. A person working for an

agency has a fiduciary duty because they are an apparent agency. In my opinion, the record

companies should be held liable for the same regulations regarding the artists because the

representatives appear to have the artist’s best interest in mind.

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In Practicum 4

The UMG announced intent to “both streamline royalties and eliminate audit

restrictions,” but it has not been confirmed that the changes had actually been implemented. A

new trend from the record companies is that they are taking money from other revenue streams

that the Artist has of earning an income, such as “demanding interests in the artist’s

management, publishing, and merchandising as a condition of obtaining a record contract”.

Logically, the situation does not create a trusting partnership between the person who is doing

the creating and the other who is doing all of the taking. This continues to be an ongoing concern

for the future of the music industry.

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