Warner Rolls Out Royalty Reforms

Meeting with legislators behind closed doors in Sacramento, Warner Music Group officials on Wednesday disclosed an overhaul of its royalty accounting process – a move the company hopes will quell mounting claims that record labels shortchange artists.

The action comes as California lawmakers consider a bill to address questionable accounting practices in the music industry. Introduced by state Sen. Kevin Murray (D-Culver City), the proposal follows hearings last year in which Don Henley, the Dixie Chicks, Sam Moore and other stars testified that labels cheated them out of royalties by obfuscating earnings.

Warner, home to such acts as Lil’ Kim and Linkin Park, is the third major record firm to promise accounting reform.

Bertelsmann Music Group and Universal Music Group announced similar changes in November, though both have been slow to implement their plans. Sony Music and EMI Group are the only major record corporations that have not jumped on the reform bandwagon.

In private sessions Wednesday, Warner executives spent hours telling legislators from both parties about accounting practice changes they contend will put “teeth” into the company’s commitment to reporting accurate royalties.

For the most part, Warner’s revisions – to be included soon in a new, shortened contract for its Warner Bros., Elektra and Atlantic labels – aren’t expected to increase royalty rates. But they will simplify royalty calculations and make it easier for acts to determine what they are owed. In the end, that could put more money in artists’ pockets.

Under the new contract, sources said, Warner would stop computing royalties based on the suggested retail price of a CD and begin paying artists a percentage of the wholesale price actually received from retailers. In addition, Warner’s new contract would eliminate outdated provisions devised during the vinyl era, including a 25% “container” deduction and a 25% “new media” deduction.

In a major change, the AOL Time Warner Inc. unit said it would provide auditors access to all manufacturing documents – not merely accountings of CDs sold, as it has previously done. Record labels long have barred artists from examining such records, limiting audits to royalty statements only.

Warner is promising to go further than its rivals by paying interest at prime rates to artists on unpaid royalties found in an audit. In another first, it will reimburse acts for costs of any audit that reveals under-crediting of royalties exceeding 10%.

The company also plans to pay artists a higher royalty for songs downloaded online, while scrapping archaic methods for calculating Internet sales.

Despite promises to clean up its accounting, the industry remains embroiled in a bitter legal battle with some of the nation’s biggest soul stars, who have accused the Big Five of underpaying royalties for decades.

Attorneys for Mary Wells, Jackie Wilson, Lester Chambers, Moore and others contend that the companies have failed to accurately report royalty earnings or to make required contributions to pension funds. In December, a federal judge in Atlanta sided with the artists and denied motions by the Big Five to dismiss their decade-old suit.