Napster and MusicNet have agreed to pay an 8 percent royalty rate in a three-year agreement with a British music licensing organization, the companies said Tuesday.

The agreement between the MCPS-PRS (Mechanical-Copyright Protection Society and The Performing Right Society) Alliance and the two United States-based digital download service providers will continue to give composers, writers, and music publishers 8 percent of Napster and MusicNet’s gross revenue, excluding the value-added tax.

“It’s good news for the industry that both parties were able to settle, but it remains unfortunate that this dispute was allowed to escalate the way it did,” said Paul Brindley, managing director of the digital music consulting firm Music Ally.

The two digital music download service providers are just the latest in a string of companies to reach a deal with the Alliance in time to escape a United Kingdom copyright tribunal.

Mobile phone service providers Vodafone, O2, Orange, and T-Mobile, along with Apple’s iTunes, all settled with the Alliance for the same 8 percent rate on September 28.

Music Royalty Switcheroo

The case has been a shocking twist of legal events within the music industry as the digital downloading companies and other music content sellers fought back against the artists and publishers for once.

Eighteen months ago, the MCPS-PRS sought to raise the 8 percent royalty rates paid from music content sellers to artists and publishers up to 12 percent.

The U.K.record industry’s trade association, the British Phonographic Industry, fought back, saying the publishing rates were too high. The BPI filed to take the Alliance to a U.K. Copyright Tribunal when music content sites like iTunes, AOL, MusicNet, Napster, RealNetworks, Sony Connect, and Yahoo all joined in the fight.

“The net impact of this on the market is nothing at all,” said Mr. Brindley. “All [the agreement] is saying is that the rates they’ve been paying for publishing royalties to date was a discounted rate, but it’s the same rate it is now.”

The controversy between the sellers and publishers centered on the fact that royalty rates on physical products were much lower than online sites were going to be charged.

Compact discs had a royalty rate of 6.5 percent of retail and 8.5 percent for wholesale prices; broadcast radio had anywhere from 3 to 5.25 percent of net advertising revenues rates.

A temporary discount was allotted to the music content sellers of 8 percent. Those who have fought to keep the royalty rate at that level have so far won accords with the Alliance.

The three-year agreement also ensures a minimum payment to an artist of £0.04 ($0.07). Other companies involved in the Tribunal like Yahoo, RealNetworks, AOL, and Sony Connect have yet to strike an agreement with the Alliance, as of press time.

The Tribunal, set for last week, will reconvene in November and help define what constitutes gross revenue for content sellers.

“There’s likely to be plenty of room for quantifying what constitutes ‘gross revenue’ from all different sources,” said Mr. Brindley. “That hasn’t even been agreed upon by the BPI, iTunes, or providers. I think it would be strange that a tribunal would start just to define what constitutes gross revenue, though.”

Contact the writer:Editorial@RedHerring.com

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