At the second day of Eminem’s trial in downtown Los Angeles, Universal Music Group (UMG) executives came under fire on the witness stand over whether they really own the music that they sell.
“I don’t know what ownership of a digital file means,” Michael Ostroff, general counsel and executive VP of business and legal affairs of UMG worldwide, said under questioning by lawyers representing the rapper’s production company, F.B.T. Productions. “The zeroes and the ones are probably on their servers.”
The “zeroes and ones” are exactly what’s at stake in this lawsuit, as they are what music becomes when it is converted into a digital file. At the trial, the music companies were trying to demonstrate that they still have significant costs related to selling music at a time when the music is reduced to digital bits rather than CDs and records, and the expenses of distributing the music that existed a decade ago have evaporated.
The lawsuit, filed two years ago by F.B.T., is unusual in that it has actually gone to trial. It claims that the world’s largest music company owes Eminem more money for the music it sells via third-party distributors like Apple’s iTunes or phone companies who offer musical ringtones.
F.B.T. argued that all UMG is providing to the online retailer is a digital file – with no costs incurred from things like jewel cases, liner notes, sales teams or in-store displays.
Universal executives, meanwhile, maintained that regardless of whether music is in a digital or physical format, it is still a product that they own.
The courtroom was also filled with legal minutiae and wrangling over how to interpret the language of the contract between the two parties. At one point, questioning focused on whether the use of an artist’s music in a download pact is a licensing agreement or a distribution deal.
Under licensing agreements, the artist splits royalties 50-50 with the record company. Under Eminem’s current distribution arrangement, the rapper may only be receiving around 20 cents for every iTunes purchase of his music. If the licensing agreement were extended to include digital downloads, that sum could be upped to around 35 cents per purchase.
UMG considers online stores like iTunes to be music retailers just like Best Buy or Walmart – and consequently, in their view, a record sale is the same no matter where it occurs. F.T.P. is trying to emphasize that a digital download is different from a record purchased at a physical store because a legal download is licensed. There are limitations on transferring digital downloads from one MP3 player to another, whereas you can do – legally – what you want with a CD purchased at a store – give it as a gift, for example.
The music industry is watching the trial – which began Tuesday and is only expected to last about a week – for clues about the direction the music business will take as the digital era moves forward. The courtroom has already heard testimony from Jimmy Iovine, a founder of UMG and its distribution label Interscope Records and the Bass Brothers, the Detroit producers behind F.B.T., responsible for Eminem’s best original song Oscar in 2003.
In important ways, Eminem and his publishing company are the first to take a legal stand over digital royalties, which have caused tension between artists and record companies as the success of online retailers has heavily contributed to the demise of record stores. If F.B.T. emerges victorious, there could be vast repercussions throughout the music world for artists with older contracts who may seek similar types of compensation for digital downloads of their songs.
Richard S. Busch, the lead attorney for F.B.T., spent much of the afternoon grilling the former head of UMG’s e-commerce arm, eLabs, over what costs the company incurs from digital downloads.
“Universal provided two digital files to the download companies – a master recording and a metadata guide setting forth a procedure for getting the music on their system,” Busch said. “With the digital download agreements – Universal has no manufacturing costs connected with that, correct?”
“Generally, that’s true,” answered attorney Lawrence Kenswil, who is no longer with the company. “But it has costs. You don’t call them manufacturing costs the way that term has been used traditionally. Manufacturing costs are for physical costs, and that has gone away.”
“And with respect to that digital file, isn’t it correct that the digital download companies are responsible for paying for the digital file they receive?” Busch continued.
“We asked them to pay a service charge for that, but we didn’t always manage to collect it…” Kenswil said.
Rand Hoffman, SVP of Business Affairs at Universal Music Group and head of Business and Legal Affairs at Interscope Geffen A&M Records, is scheduled to testify on Wednesday. Eminem himself is not expected to appear.