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Jessica Northey | June 15, 2012 In Practicum 4 | Cecilia Estrada, JDMusic 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 reportby Senator Kevin Murray, who at the time of this report was the Senator of California in the 26thDistrict. The record companies and artists in the report can be compared to the marketplace andconsumers. The record company’s representatives should be required to automatically have afiduciary 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 amonopoly in the marketplace. Senator Murrayreported 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 recordingindustry practices. In the end, a final agreement was not established, therefore; the bill was puton hold. The meetings also covered issues ofthe 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 RecordGroup (EMI), Sony Music Group (SONY), Universal Music Group (UMG) and Warner MusicGroup (WMG).” The relationship between an Artist and the record company has a history of being like amarriage, the type of equal partnershipthat is built on trust. The hearings discussed how Artistsdo not trust record companiesbecause of the system they have each put into place has majorfaults, as well as having confusing practices in the contract becauseit is out dated. Thetechnology has changed over the years, yet the language and deal of the royalty charges from theartists are based on things that no longer exist today, such as vinyl and the cost to manufacture aCD has gone down significantly. 2
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 marketprice. In my opinion, the record companies have achieved monopolization by practicing the sameoperations between the five major recordcompanies; they conduct as one unit by having the same“accounting practices” that override the contract, against any artist who goes into contract with arecord company. This has the intent to control paymentsthe Artists receives from their royaltiesand destroys competition between small record companies and between the top five recordcompanies, since all of the contracts are the same and have non-negotiable contract clauses fortheir accounting practices. This type of business and accounting practice is predatory conductand has achieved success in operating this way for many years. Having competition in the marketplace is important because it protects the consumers; inthis case the Artists are much like the consumers. They would like to enjoy the benefits of lowerprices on the amounts being deducted from their earnings from royalties as well as having betterquality of customer services from the record company representatives having fiduciary duty. TheArtists should also expect that there is the possibility of having a greater choice of which recordcompany they chose to have a contract with. The average artist cannot afford the audit to check 3
In Practicum 4their record company’s accounting practices to see if they are getting the correct amount of theirroyalty payments so that if they are not, they have the choice to work with a record companywho will treat their artists as a true partnership. This is the only way to truly prosper by takingcare of the person who produces the creative content. Another complaint in the report was about the contract protects the record company whenthey decide to not pay the full amount owed to the Artist, regarding their royalty statementsbeing under reported. The record companies have denied any wrongdoing, yet their accountingpractices supersede those of the contract between the artists just for the sake of ease of businesspractices for the record companies. They claim they are the true victims because so many of theirinvestments in artists do not turn out to be successful. The record companies still expect themarriage 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 partnerand secondly, the digital piracy issuesis taken away. The record companies have forgotten thatwithout the Artist’s talents they would not have a product to make money from. It is a fair andmoral 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 undercontract would rebuild trust. According to a class lecture, fiduciary duty is a duty to act in thebest interest of another. It arises automatically due to the relationship between the parties of thecontract. The relationship involves special trust, confidence, or reliance. A person working for anagency has a fiduciary duty because they are an apparent agency. In my opinion, the recordcompanies should be held liable for the same regulations regarding the artists because therepresentatives appear to have the artist’s best interest in mind. 4
In Practicum 4 The UMG announced intent to “both streamline royalties and eliminate auditrestrictions,” but it has not been confirmed that the changes had actually been implemented.Anew trend from the record companies is that they are taking money from other revenue streamsthat the Artist has of earning an income, such as “demanding interests in the artist’smanagement, 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 doingthe creating and the other who is doing all of the taking. This continues to be an ongoing concernfor the future of the music industry. 5