[This post is by FMC contributor Daniel Eno]

The issue of musician compensation is so important and complex that we could write volumes about it.  Although artists face tremendous challenges earning a living, there is an ever-expanding array of revenue streams to take into account when considering how artists make money.

Of course, technology has a way of disrupting long held assumptions about how musicians and performers get paid. Take, for instance, label contracts and royalties. One particularly thorny issue is the countless still-binding contracts tied to so-called “legacy artists,” many of which are bound by legal language and conditions formulated long before iTunes — and in some cases the internet — ever existed.

The Hollywood Reporter recently reported on a legal dispute that perfectly exemplifies the difficulties now facing many legacy artists. Sister Sledge, the chart-topping disco sensations best known for their 1979 release and single “We Are Family,” filed a class action lawsuit alleging that Warner Music Group incorrectly classified digital music purchases of their recordings while calculating royalty payments, and has paid out far less to the sisters than they are due.

The issue is not entirely new, and stems from a distinction made by WMG — and other major record companies — that digital music purchases should be defined as “sales” rather than “licenses.” The term “sale,” in the language of recording contracts, has historically been reserved for physical copies of a record or single, which have significantly lower royalty rates than “licenses.” The labels traditionally justified a lower rate for music sales, in part because of the costs they incurred in manufacturing physical media — a cost that is clearly non-existent in a digital retail setting. Sister Sledge now join artists such as Eminem and Rob Zombie in challenging the labels’ postion.

Sister Sledge et al. contend that, because record labels now distribute their catalog to online retailers such as iTunes under a license, they should in turn honor “license” royalty rates to artists. They also suggest that the apparent double-standard in defining royalties extends far beyond their own contracts, and is an intentional scheme on the part of the record label.

It should be noted that labels have recently been fairly consistent in classifying download purchases of albums and singles as sales. This is most likely because, had they not, it would have made the transition to digital financially untenable due to a nearly universal increase in royalty rates due to artists that a “license” rate would have entailed. It’s also worth mentioning that new artist contracts almost always include language that explicitly deems download purchases as “sales.”

You might be wondering just how large the gap between the sale and license royalty rate we’re talking about is. The answer is uncharacteristically straightforward: very. If Sister Sledge is successful in their suit against WMG, they could be entitled to more than double their previous royalty rate.

This particular dispute, and the surge of similar cases many expect to follow, is yet another example of how difficult the transition to a digital marketplace has been, and may continue to be.