What's next?

The California Senate Select Committee on the Entertainment Industry's two hearings on recording industry practices, held jointly with the California Senate Judiciary Committee, focused on record company accounting practices. There was testimony from Artists, their lawyers and managers, and the RIAA, as well as representatives from each of the five major record companies: Bertlesmann Music Group (BMG), EMI Record Group (EMI), Sony Music Group (SONY), Universal Music Group (UMG), and Warner Music Group (WMG).

The accounting practices controversy has a number of sub-categories which include: the basic structure of contracts, recoupment or not, the lack of penalties for underpayment of royalties to artists, restrictions on the right to audit, and royalty provisions that are purposefully vague and subject to biased interpretation.

As a direct result of the hearings, two of the "big five" companies have stated they will revise their accounting practices. UMG announced it would eliminate deductions for royalties on downloaded music, while opting to pay the higher album rate instead of the single rate as an incentive for artists to become more involved in online sales. It was also rumored that UMG will double the size of its audit support staff in order to reduce the time required to complete an audit and be more responsive to issues raised by audits. They will hold "royalty workshops" for interested artists and their reps to help them understand UMG royalty statements. (Incomprehensible royalty reports were a major complaint at September's hearing.) Additionally, they will allow auditors access to manufacturing records.

Directly addressing additional complaints heard at the hearings, UMG will waive previous restrictions on the audit process, including the hiring of auditors on a contingency basis, permitting simultaneous audits by the same auditing firm, permitting royalty documents to be copied and used outside UMG offices, and giving all artists the right to audit royalty records, even if there is no audit provision in certain contracts. Additionally, it is in the process of converting to an upgraded royalty system for all of the labels.

BMG announced it will simplify its royalty system, eliminating deductions for packaging, free goods, and new technology across the board, and moving to a wholesale-based model rather than one based on the suggested retail price.

We are expecting concrete details on these anticipated changes and will notify our members when we know more.