On 24 January 2018 the Latin superstar Enrique Iglesias filed a lawsuit against Universal International Music for “systematically underpaying streaming royalties” (complaint, Enrique Iglesias vs. Universal International Music, January 24, 2018). The lawyers of Iglesias argue that Universal Music should have paid 50 percent of the net revenue from the streaming services. Instead Iglesias was paid just a fraction of the royalties according to the rate agreed for physical and download albums. This remarkable case sheds light into the contractual practices in the recorded music industry and helps to explain, why artists contracted to record labels does not really benefit from the music streaming economy yet.
Artists in the Music Stream – A Case Study
Enrique Iglesias was one of the most successful superstars of the past two decades. He started his career with the album “Enrique Iglesias” that was released by the independent record label Fonovisa Records in 1995. The debut album sold more than six million copies and went platinum in the US and in Spain. He made two further albums – “Vivir” (1997) and “Cosas Del Amor” (1998) for Fonovisa, each selling more than five million copies worldwide. Iglesias also contributed the song “Bailamos” to the film soundtrack “Wild Wild West” by Will Smith, which topped the Billboard Top 100 list.
The Universal-Iglesias Deal
When the three-album deal with Fonovisa expired in 1999, Iglesias was one of the hottest artists on the market. In a bidding war Universal Music and its affiliate label Interscope were successful to sign Enrique Iglesias for two parallel recording contracts. In the Universal contract Iglesias committed to deliver at least two Spanish-language albums and three new singles for a Greatest Hits compilation. With Interscope Iglesias agreed to do the same number of albums and singles in English. The complaint highlights that “[t]he 1999 Agreements were intertwined in several material ways, permitting for cross-collateralization and conditioning the satisfaction of Iglesias’ contractual obligations upon the delivery of a total number of albums under the two 1999 Agreements.” (complaint, p. 5). Cross-collateralization means that all recordings costs including the non-returnable advances of the record label are recouped from the artist’s royalties as long as the record project is not break-even (see Tschmuck 2017: 195). In Iglesias’ case all four albums and six singles have to be break-even before the artist earns any royalties as stipulated in the contracts. When the contracts were signed, media reported that Universal and Interscope paid Enrique Iglesias an advance of US $40m for all four albums and three singles.[1]
Commercial Success
The artist released the first album “Enrique” on Interscope on 23 November 1999. It sold over 10 million copies worldwide to date and is still one of the most successful albums ever. It was certified platinum in the US and in six further countries – in Canada even 5 times platinum for more the 500,000 copies sold and in Spain 4 times platinum for more than 400,000 copies sold.[2] The second English-language album “Escape” was released on 30 October 2001. Again more than 10 million copies were sold worldwide and the single “Hero” became a chart topper in several countries. “Escape” was certified 5 times platinum in Canada as well as in Australia, 4 times platinum in the UK, 3 times platinum in the US and in Switzerland, 2 times platinum in Sweden and platinum in further five countries.[3]
On 17 September 2002, Iglesias released the first Spanish-language album “Quizás” on Universal Music Latino. The album was a big hit in the Latin music US-charts and gained platinum in Spain and Argentine.[4] Iglesias seventh studio album – programmatically named “7” – was released as third English-language album for Interscope on 25 November 2003. Compared to its predecessors, “7” was a modest commercial success. The album reached just number 31 on the US album charts and was awarded platinum just in Canada and Australia.[5] With a time lag of four years, Enrique Iglesias released “Insomniac”, the fourth English-speaking album on Interscope on 11 June 2007. The album was awarded 6 times platinum in Russia and platinum in Poland as well as in Ireland. It reached #3 in the UK album charts and #17 in the US album charts, but had a medium chart performance in most of the other relevant markets.[6]
After delivering 4 English-language and 1 Spanish-language albums plus a “Greatest Hits” album, an amendment to the 1999 contracts of May 2010 acknowledged Iglesias’ fulfilment of his contractual commitment to Interscope (complaint, p. 10). The lawyers argue that the contractual amendment of 2010 does not alter the initial stipulations in Article I: “In exchange for his commitment to record and deliver the musical works, Iglesias received from Universal recording budgets, recoupable advances, and the right to receive royalty payments for the monetization of his musical works. The precise amount of the royalty depended upon the specific geographic territory in which his recordings were sold (…) and the manner which his recordings were sold.” The lawyers also outlined that in Article I, Universal agreed to pay an undisclosed rate for all physical copies and downloads sold that is significantly lower than 50 percent. However, “[i]f [Universal] authorizes the use of any Master Recording made under this Agreement on a flat fee basis, royalty rate or cent rate basis for any type of use not specifically covered else in this Article 1 (…) it will credit your royalty account with an amount equal to fifty percent (50%) of its net receipts attributable directly to that use” as the lawyers cited in the complaint on page 7. Therefore, Iglesias sued Universal for never paying the full 50 percent of the revenue from streaming services. Instead Universal paid the lower rate applicable to physical and download sales. Thus, the artist’s account highlights un-recouped millions of dollars even though Iglesias has generated massive record sales as well as billions of streams on all music streaming services worldwide. Due to this “underpayment” of streams, Iglesias never earned any income from royalties as stipulated in the contracts complaint (p. 1-2).
The 2010 Amendment and Further Commercial Success
The 2010 amendment obligated the artist to deliver two additional albums to Universal, altered the delivery schedule, changed the advances to be paid to Iglesias, and revised other deal terms. It also stipulated that all digital downloads after 1 July 2010 should be paid at the same royalty rate as the album royalty rate. The lawyers, however, point out that the amendment “(…) did not prescribe a royalty to the streaming of Iglesias’ works” (see complaint, p. 10-11). Therefore, they conclude “streams remained payable at a fifty percent (50%) royalty” (ibid.).
Iglesias’ ninth studio album “Euphoria”, released on Universal’s imprint Republic on 2 July 2010, was a big commercial success. It entered the top 10 of the US album charts and sold more than 4 million copies worldwide.[7] On 14 March 2014 Iglesias fulfilled the additional contractual obligations by releasing the tenth studio album “Sex and Love” on Universal Republic. It reached #8 in the US top 200 album charts and topped the Latin Pop Album charts for weeks. The album was credited 5 times platinum in Spain, 3 times platinum in Peru, Ecuador, Chile and India as well as platinum in further six countries. “Sex and Love” was also the seventh most-streamed album worldwide on Spotify in 2014 (complaint, p. 13). The singles performed also well in several countries, especially in the US Latin charts.[8] The music video of “Bailando” currently has almost 2.5 billion view on Vevo, making it one of the most viewed YouTube videos ever.[9]
Nevertheless Universal claimed that due to cross-collateralization Iglesias’ seven albums and his Greatest Hit compilation for Universal remained un-recouped. The artist’s lawyers explain this discrepancy “by Universal’s improper crediting of streams at the incorrect Album Royalty Rate, which is less than a fraction of the Fifty Percent Streaming Royalty established by Paragraph 1.05 of Exhibit A to the 1999 Agreements.” (complaint, p. 14). In a footnote the lawyers clarify that Interscope properly recognized and credited Iglesias’ streaming royalties at fifty percent (50%) until 2016. After “receiving a directive from Universal, Interscope – without consulting or otherwise notifying Iglesias – began crediting streams at the incorrect, lower Record royalty rate” (complaint, footnote 6 on p. 14). In addition, the lawyers also claim that Enrique Iglesias’ demand to audit Universal’s books and sales records, as stipulated in the contracts, was never responded by Universal.
Thus, the artist requests the court to “[e]nter a decree granting Iglesias access to Universal’s books and records” and “to award actual and compensatory damages for Universal’s wrongdoing in an amount to be established at trial” (complaint, p. 16).
Conclusions
There is no reason to have pity on the Latin music superstar, who earned non-refundable advances of at least US $40 million from Universal. I am sure he will find a way to settle with Universal Music outside the court for a compensation. Iglesias already signed a new deal with Sony Music Entertainment in 2015 and we can assume that the non-refundable (but undisclosed) advance is again considerably high. However, the Iglesias lawsuit sheds light into the practices of new music streaming economy. It highlights that even superstars, who are contracted to record companies, do not earn a considerable income form music streaming due to cross-collateralization clauses in the contracts and modest royalty rates for streaming. It seems to be usual and consistent with music industry standards crediting of a 50 percent royalty rate on streams in new contracts. In contrast, older contracts compensate streams at a much lower royalty rate – usually in the range of 13-18 percent in the standard recording contracts (see Hull et al. 2010: 538). In the CD era this rate generated a solid income for average successfully artists and even millions of dollars for superstars, but in the music streaming economy such a royalty rate is not sufficient to earn an artist’s living. Even if a 50 percent royalty rate for digital sales is granted in recording contracts, the revenues are still modest and an artist needs billions of streams to compensate for former CD sales. The problem is that artists do not benefit from large catalogues that can be monetized on music streaming platforms as the major companies do. Thus, the struggle for the allocation of music streaming revenue between artists and record labels will continue and the Iglesias’ case is just the beginning.
Sources:
Hull G. P., T. Hutchison and R. Strasser, 2010, The Music Business and Recording Industry: Delivering Music in the 21st Century, 3rd edition. New York: Routledge.
Tschmuck, P., 2017, The Economics of Music, Newcastle-upon-Tyne: Agenda Publishing.
Endnotes
[1] Variety, “Iglesias, U in Tune. Latin singer to ink $40 mil, multi-disc pact”, July 10, 1999 (retrieved January 29, 2018).
[2] Wikipedia, “Enrique (album)”, (retrieved January 29, 2018).
[3] Wikipedia, “Escape (album)”, (retrieved January 29, 2018).
[4] Wikipedia, “Quizás”, (retrieved January 29, 2018).
[5] Wikipedia, “7”, (retrieved January 29, 2018).
[6] Wikipedia, “Insomniac”, (retrieved January 29, 2018).
[7] Wikipedia, “Euphoria”, (retrieved January 30, 2018).
[8] Wikipedia, “Sex and Love”, (retrieved January 30, 2018).
[9] “Bailando” on YouTube: https://www.youtube.com/watch?v=NUsoVlDFqZg (retrieved January 30, 2018).
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