End recording industry’s corporate loophole that strangles artists
What do hip-hop stars Megan Thee Stallion and Ms. Lauryn Hill have in common? The first things that come to mind may be their platinum albums, multiple Grammy Awards (12 between them), and the fact that they are the only two female rappers in history to have been named “Best New Artist of the Year” by the Recording Academy.
Less known is their outspoken criticism of how the Big 3 music labels treat artists and – as iconic these women are – how they struggled to negotiate a fair contract with a recording industry that has seen massive consolidation and record profits.
Behind the glitzy scenes and highly anticipated track drops rests an uncomfortable truth: Recording artists labor under an anti-worker exemption to California employment law that the labels wrote themselves.
In 1987, the Recording Industry Association of American (RIAA) created a special-interest corporate loophole to carve out musicians from the protection of California’s Labor Code 2855, the section known as the “seven-year rule.” The seven-year rule limits personal services contracts for all California workers for seven years.
With the newfound success of digital streaming services, the revenue imbalance progressively disfavors the artists that create the music.
As a result, this exemption allows the record label conglomerates to force artists into contracts well beyond the standard for every other worker in California, putting artists at the mercy of the labels.
Even successful recording artists such as Taylor Swift, Kanye West, LeAnn Rimes, Prince, and others have labored under these restraints and have publicly complained about the negative effects the exemption has had on their work and their ability to create music for their fans.
Given the massively consolidated nature of the recording industry, record labels hold significant bargaining leverage over artists, particularly when artists begin their careers and are eager to spread their wings. Smaller, less well-known acts or those artists just starting out can hardly afford to self-fund their own lawsuits and PR battles. Individual artists can hardly negotiate on a level playing field while the exemption to California labor law remains in place.
Even later in their careers, while an artist may choose to try and go elsewhere to obtain better royalty payments, the power imbalance is perpetuated for past albums; the artist can gain a modicum of control only over future albums. Labels generally own the copyrights in an artist’s albums; only by staying with its original label can the artist renegotiate royalties covering the prior albums. As a result, the artists remain “locked-in” with respect to albums already created for the record label.
Further, an artist’s production over seven years offers a sufficient period for the recording label to recoup any investment, particularly given the fact that the label can continue profiting from these recordings after this period. After all, the Beatles created their entire catalog over only seven years.
With the newfound success of digital streaming services, which represents the largest source of music revenues and record profits for labels, the revenue imbalance progressively disfavors the artists that create the music.
It’s easy to see why RIAA and the Big 3 music labels (Sony BMG, Universal Music Group and Warner Music Group) have spent millions on lobbyists in Sacramento.
This brings us to the key topic to which economists refer as “wage share”: artists and songwriters only keep around 20 percent of digital revenue. Streaming companies and labels keep the majority of the remaining 80 percent. By contrast, in a market with collective bargaining like the NBA, athletes share approaches 50 percent. Such wage share differences reflect the power imbalance in favor of record labels.
It’s easy to see why RIAA and the Big 3 music labels (Sony BMG, Universal Music Group and Warner Music Group) have spent millions on lobbyists in Sacramento and Washington, D.C . to protect this market advantage.
Sacramento lawmakers are set to hold hearings on Assembly Bill 983 by Assembly member Ash Kahlra, D-San Jose, which will close this corporate loophole. We strongly encourage them to question the market power the Big 3 Music Labels wield, end this exploitative exemption of California labor law, and free musicians to express their creative talents to the benefit of fans everywhere.
(This op-ed is based on the authors’ white paper titled “An Economic Analysis in Support of California’s Proposed Assembly Bill AB-983.” Funding for the paper was provided by the CA Fair Act Coalition, which includes The Music Artists’ Coalition, The Screen Actors Guild – American Federation of Television and Radio Artists, The Black Music Coalition, The Songwriters of North America, The Future Music Coalition, and The Recording Academy. For more information see https://cafairact.com/.)
Editor’s Note: Hal Singer is Managing Director of Econ One and Adjunct Professor at Georgetown’s McDonough School of Business. Ted Tatos is a quantitative economist affiliated with Econ One and Associate Economics Editor of the Antitrust Bulletin.
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