PART 4 - In addition to increased competition, label defections pose the greatest threat to eMusic's future. In recent weeks Victory, Urge, Red House, Silva America, and Tzadik and others have either left or are considering an exit.
The underlying reason for these defections is a dissatisfaction with the size and accounting of eMusic's per track payouts which by all accounts are much smaller than those paid by any other major download service. eMusic refused our request to confirm exactly how their payments are calculated claiming corporate privacy and contractual obligations; so we went to several eMusic label clients to try to understand how unravel how their payment system works.
The calculation that determines what eMusic pays labels begins with total subscription revenue for the month. Then it appears to get a bit murky with a varying 15-25% deducted off the top for marketing, affiliate fees, bandwidth, mp3 patent fees and other costs of doing business. Net income is then divided on a per track basis and split 50-60% with the labels depending on the individual deal.
According to various sources, this has usually meant per track net payouts ranging of from 19 to 29 cents with the higher payouts in recent months. This would make eMusic payments to labels 50% to 75% smaller than iTunes and other download stores who pay labels 60-65 cents per track.
But who decreed that 99 cent tracks and 60-65 cent payouts have to be the norm? It's a powerful argument that variable pricing and lower average prices are just what is needed to get consumers back into the habit of paying for music. But eMusic is part of a larger industry with thousands of existing contracts, statutory obligations, and practices.
One eMusic payment statement that I reviewed offered a base per track payout of 22 cents. Many artists and labels enter the eMusic system via a digital distributor who then also takes 10-30%. At 15% this would reduce the effective payments to a label to just under 18.7 cents per track. Most artist/label contracts** also require payments at a statutory rate of 9.1 cents per track to the songwriter leaving the effective amount for the label to split with the artist at between 9 and 10 cents.***
The underlying question haunting eMusic is can labels meet adequately market a track, meet their contractual and moral obligations to their artists and make a reasonable profit on 9 - 10 cents per track?
Some labels believe that the can. The overall checks from eMusic are usually second only to 
iTune's and
often represent revenue from deep catalog and obscure tracks. One indie musician blogging on DigitalAudioInsider calculated that his payments from eMusic are greater than the per track net profits from a CD sale on Amazon.
But the answer at least from the labels leaving eMusic and those that have never signed on is resounding no. As CW Frymire, the VP of Operations at Red House Records told us, "...after paying artist and publisher royalties, the per track payouts from eMusic result in a net loss for us. Perhaps because we pay our Artists more than some others, or with a more Artist friendly royalty structure, in any case, we cannot support pricing structures that low and continue to stay in business."
Footnotes and sources after the jump.
Read Part 1, 2, and 3 of our exclusive eMusic Series
Later This Week: Free Music At eMusic.
Upcoming: Industry And eMusic's reaction.
Footnotes:
** Some indie labels we contact for this article contractually wrap
mechanicals into an artists overall payouts in a partnership like
arrangement and some others negotiate reduced mechanical rates.
*** Interestingly, eMusic appears to pay and deduct the statutory fee on some artists and others it passes it on to the label We were unable to determine if eMusic pays the statutory fee; does it come off the top reducing the leftover pool for all labels?
Sources:
The majority of the background for this series of commentaries on eMusic come from both on and off the record interviews. But previous stories by other bloggers deserve credit for laying down the crumbs that I followed. Particular thanks goes to Digital Audio Insider and IndieHQ for their articles.
