Thinking Outside the Pie: @legrandnetwork Study for GESAC Highlights Streaming Impact on Choking Diversity and Songwriter Royalties

Emmanuel Legrand prepared an excellent and important study for the European Grouping of Societies of Authors and Composers (GESAC) that identifies crucial effects of streaming on culture, creatives and especially songwriters. The study highlights the cultural effects of streaming on the European markets, but it would be easy to extend these harms globally as Emmanuel observes.

For example, consider the core pitch of streaming services that started long ago with the commercial Napster 2.0 pitch of “Own Nothing, Have Everything”. This call-to-serfdom slogan may sound good but having infinite shelf space with no cutouts or localized offering creates its own cultural imperative. And that’s even if you accept the premise the algorithmically programed enterprise playlists on streaming services should not be subject to the same cultural protections for performers and songwriters as broadcast radio–its main competitor.

[This] massive availability of content on [streaming] platforms is overshadowed by the fact that these services are under no positive obligations to ensure visibility and discoverability of more diverse repertoires, particularly European works….[plus]  the initial individual subscription fee of 9.99 (in Euros, US dollars, or British pound) set in 2006, has never increased, despite the exponential growth in the quality, amount of songs, and user-friendliness of music streaming services.

Artists working new recordings, especially in a language other than English, are forced to fight for “shelf space” and “mindshare”–that is, recognition–against every recording ever released. While this was always true theoretically; you never had that same fight the same way at Tower Records.

This is not theoretically true on streaming platforms–it is actually true because these tens of millions of historical recordings are the competition on streaming services. When you look at the global 100 charts for streaming services, almost all of the titles are in English and are largely Anglo-American releases. Yes, we know–Bad Bunny. But this year’s exception proves the rule.

And then Emmanuel notes that it is the back room algorithms–the terribly modern version of the $50 handshake–that support various payola schemes:

The use of algorithms, as well as bottleneck represented by the most popular playlists, exacerbates this. Furthermore, long-standing flaws in the operations of music streaming platforms, such as “streaming fraud”, “ghost/fake artists”, “payola schemes”, “royalty free content” and other coercive practices [not to mention YouTube withholding access to Content ID] worsen the impact on many professional creators….

This report suggests solutions to bring greater transparency in the use of algorithms and invites stakeholders to undertake a review of the economic models of streaming services and evaluate how they currently affect cultural diversity which should be promoted in its various forms — music genres, languages, origin of performers and songwriters, in particular through policy actions.

MTS readers will recall my extensive dives into the hyperefficient market share distribution of streaming royalties known as the “big pool” compared to my “ethical pool” proposal and the “user centric” alternative. As Emmanuel points out, the big pool royalty model belies a cultural imperative–if you are counting streams on a market share basis that results in the rich getting richer based on “stream share” that same stream share almost guarantees that Anglo American repertoire will dominate in every market the big streamers operate.

Emmanuel uses French-Canadian repertoire as an example (a subject I know a fair amount about since I performed and recorded with many vedettes before Quebecoise was cool).

A lot of research has been made in Canada with regards to discoverability, in particular in the context of French-Canadian music, which is subject to quotas for over the air broadcasters which however do not apply to music streaming services. The research shows that while the lists of new releases from Québec studied are present in a large proportion on streaming platforms, they are “not very visible and very little recommended.” 

It further shows that the situation is even worse when it is not about new releases, including hit music, when the presence of titles “drops radically.” It is not very difficult to imagine that if we were to swap Québec in the above sentence with the name of any country from the European Union [or any non-Anglo American country], and even with music from the European Union as a whole, we could find similar results.

In other words, there may be aggregators with repertoire in languages other than English that deliver tracks to streamers in their countries, but–absent localized airplay rules–a Spotify user might never know the tracks were there unless the user already knew about the recording, artist or songwriter. (Speaking of Canada, check the MAPL system.)

This is a prime example of why Professor Feijoo and I proposed streaming remuneration in our WIPO study to allow performers to capture the uncompensated capital markets value to the enterprise driven by these performers. Because of the market share royalty system, revenues and royalties do not compensate all performers, particularly regional or non-featured performers (i.e., session players and singers) who essentially get zero compensation for streaming.

Emmanuel also comments on the imbalance in song royalty payments and invites a re-look at how the streaming system biases against songwriters. I would encourage everyone to stop thinking of a pie to be shared or that Johnny has more apples–when the services refuse to raise prices in order to tell a growth story to Wall Street or The City, measuring royalties by a share of some mythical royalty pie is not ever going to get it done. It will just perpetuate a discriminatory system that fails to value the very people on whose backs it was built be they songwriters or session players.

We must think outside the pie.

What to do with the MLC’s interest “float” on the black box?

MusicTechPolicy readers will have seen my post about the interest rate paid by the MLC on the rather sizable black box of “unmatched” funds sitting at a bank account (rumored to be City National Bank in Nashville).

That rate was modernized in the Music Modernization Act to be a floating rate: The Federal short term interest rate essentially set by the Federal Reserve. In fact, that particular federal rate is one of the lowest interest rates set by the Federal government and is the kind of interest rate you would want to be obligated pay–very low–if you knew you’d be in the business of holding large sums of money that you wanted to earn interest on yourself and make money on the spread, often called “the float.” (The black box is usually free money, so it’s actually an improvement.). For example, the bank prime loan rate is currently 5.5% that may be a good indicator of what you could get in the way of relatively risk free interest for a big lump sum–if not better for a really big lump sum, say $500,000,000.

The MLC is not, after all, the government, however much that fact might be lost on them. Why should the lowball government rate apply to the MLC instead of a competitive bank rate? Particularly when it comes to the substantial unmatched funds that songwriters and publishers are forced by the government to allow the MLC to hold and for which they control distribution–a bit of the old moral hazard there.

Indeed, you could also express that rate of involuntary saving as “prime plus x” where “x” is an additional money factor like 1%, so the rate floats upward to the songwriters’ advantage. Get some inspiration for this by looking at your credit card interest rate.

You probably have heard that the Federal Reserve is increasing the federal funds rate, and therefore all interest rates that are a function of the federal funds rate including the short term rate that the MLC is required by law to pay on the black box. The Federal Reserve is expecting to keep making significant increases in the federal interest rates in an effort to get inflation under control, which means that the MLC’s black box interest rate will also continue to increase significantly.

A quick recap: The MLC’s short term interest rate was 0.44% in January in keeping with then-prevailing Zero Interest Rate Policy (or the “lower bound”) of the Fed for the easy money years since the crash of 2008. But in August 2022 (that is, now) the MLC’s rate has increased to 2.84% monthly. The modern black box holding period in the Music Modernization Act is pretty clear:

Also recall that the black box is to be held for an arbitrarily modern period of time while the MLC attempts to locate the rightful recipients as is their statutory burden under the MMA. Different numbers are thrown around for this holding period, but a three year holding period seems to be popular and has the benefit of having been modernized in the Music Modernization Act itself (see above). Bear in mind that the first tranche of “historical” black box (“historical” means “late” in this context) was $424,384,787 and was paid in February of 2021–nearly 18 months ago.

Also recall that we were not given any information that I am aware of as to when the services paying this rather large sum of other people’s money first accrued the black box. People who line up on the shorter holding period side of the argument generally favor rapid market share distributions which tends to help the majors; people on the longer holding period of time generally favor redoubled efforts to find the people who are actually owed the money.

The third group is that the MLC should simply find who is owed the money, have the money being held earn the highest rate of risk-free interest possible, and pay all of the interest money to the correct people when found and not have this cutesy limitation on the money factor paid out for holding OPM. Their argument goes something like your government takes away my right to negotiate my own rates, tells me how much I can charge, then makes it difficult to find me but easy to use my song and now you also want to take away the money you say I’m owed and give it to rich people I don’t know before I’ve had a change to claim it and pay yourselves to not do your jobs?

So we are at the midpoint of the three year statutory holding period. Although remember that this is a two pronged holding period of the earlier of 3 years after the MLC got the cash or 3 years after the date the service started holding the money that it subsequently transferred–a different holding period which would likely end sooner than the date the money was transferred to the MLC.

Although we know the date that the money was transferred in the aggregate to the MLC we may not know exactly when the money was accrued without auditing (although you would think that the MLC would release those dates since the timing of the accrual is relevant to the MMA calculation).

According to my reading of the statute, the modernized interest rate would likely attach from the time the money was accrued by the service, so should have been transferred to the MLC with accrued interest, if any. This may be in lieu of or in addition to a late fee. Very modern.

This leaves us with a couple questions. Remember that after the holding period, the black box is to be transferred on a market share basis to all the copyright owners who could be identified based on usage, which includes usage under voluntary licenses that are not administered by the MLC.

So this raises some questions:

  1. Why should the black box be divided up amongst copyright owners who have voluntary licenses and who are not administered by the MLC? They presumably have the most accurate books and statements and may have already had a chance to recover.
  2. What happens to the accrued interest at the time of distribution? Why should the market share distribution include interest on money that didn’t belong to the recipients?
  3. The statute takes the position that the MLC must pay the interest rate but is silent on how much interest the MLC can earn from the bank holding the substantial deposit of the unmatched monies. There’s nothing that requires the MLC to pay over all earned interest.

    Here’s a rough justice calculation of 3 years compound interest at current rates with steadily increasing black box. While the holding period started at the .44% rate, I ran the numbers at the 2.84% rate because it was easier–but also left out an estimate of the increase in rates that is surely to come. Since we are at the midpoint of the holding period already, this gives you an idea:

Hypothetical chart of growth rate of unmatched funds (historical and current) over a three year period at 2.84% compounded monthly interest rate

Is Spotify’s “ESG” Fail Bad Enough for an SEC Investigation

“ESG” is a Wall Street acronym that designates a company as suitable for socially conscious investing based on its “Environmental, Social and Governance” business practices–hence “ESG”. See the Upright Net Impact data model on Spotify’s sustainability score. The designation is often attributed to Larry Fink at Blackrock as the originator.

For more background, the MusicAnswers Podcast interviewed me on this subject which was good fun and I think informative. (That’s a great podcast series and I highly recommend it for a subscribe.)

The Securities and Exchange Commission is formalizing ESG disclosures for public companies like Spotify, stating that “[a]s investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach” and has taken many actions to require ESG disclosures. It was only a short step for the government to turn disclosure into violations and then turn violations into enforcement:

The Securities and Exchange Commission today announced the creation of a Climate and ESG Task Force in the Division of Enforcement.  The task force will be led by Kelly L. Gibson, the Acting Deputy Director of Enforcement, who will oversee a Division-wide effort, with 22 members drawn from the SEC’s headquarters, regional offices, and Enforcement specialized units.

Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct.  The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.

So how does streaming music score on the ESG scale? Let’s take Spotify as an example. (This post brings together several others that readers will recognize.). How bad is Spotify’s ESG competence? Seems pretty bad to me, but probably nothing that Spotify bankers at Goldman Sachs and Spotify’s never ending team of revolving door lobbyists and toadies in the Imperial City can’t get them out of with the right amount of campaign contributions.

Spotify has an ESG problem, and a closer look may offer insights into a wider problem in the tech industry as a whole or at least the streaming business that Spotify dominates. (Another 14% of market share and Spotify will hit that Herfindahl-Hirschman Index sweet spot for those keeping score at home–assuming there’s no change in the number of their competitors.)

If the Spotify decade of destroying artist and songwriter revenues isn’t enough to get your attention, maybe the Neil Young and Joe Rogan imbroglio will. But a minute’s analysis shows you that Spotify was already an ESG fail well before Neil Young’s ultimatum. They give a lot of happy talk about “net zero admissions” and their public messaging is full-on Davos as one would expect from a globalist like Daniel Ek, but streaming is their core business and streaming will only get so green. (It’s unlikely that the FAANG companies (Facebook, Apple, Amazon, Netflix and Google) will allow too much to be made out of the dirty data issue because it blows back directly on them. Neither will Senator Ron Wyden from Oregon the data center concierge–wonder why?)

Streaming is an Environmental Fail

I first began posting about streaming as an environmental fail years ago in the YouTube and Google world. While not as existential as Google’s streaming problems, Spotify is equally sanctimonious about how wonderful Spotify is.

It all comes down to this: The Internet in general and streaming in particular are huge electricity hogs.

Like so many other ways that the BIg Tech PR machine glosses over their dependence on cheap energy right through their supply chain from electric cars to cat videos, YouTube did not want to discuss the company as a climate disaster zone. To hear them tell it, YouTube, and indeed the entire Google megalopolis right down to the Google Street View surveillance team was powered by magic elves dancing on appropriate golden flywheels with suitable work rules. Or other culturally appropriate spin from Google’s ham handed PR teams.

Greenpeace first wrote about “dirty data” in 2011–the year Spotify launched in the US. Too bad Spotify ignored the warnings. Harvard Business Review also tells us that 2011 was a demarcation point for environmental issues at Microsoft following that Greenpeace report:

In 2011, Microsoft’s top environmental and sustainability executive, Rob Bernard, asked the company’s risk-assessment team to evaluate the firm’s exposure. It soon concluded that evolving carbon regulations and fluctuating energy costs and availability were significant sources of risk. In response, Microsoft formed a centralized senior energy team to address this newly elevated strategic issue and develop a comprehensive plan to mitigate risk. The team, comprising 14 experts in electricity markets, renewable energy, battery storage, and local generation (or “distributed energy”), was charged by corporate senior leadership with developing and executing the firm’s energy strategy. “Energy has become a C-suite issue,” Bernard says. “The CFO and president are now actively involved in our energy road map.”

If environment is a C-suite issue at Spotify, there’s no real evidence of it in Spotify’s annual report (but then there isn’t at the Mechanical Licensing Collective, either). “Environment” word search reveals that at Spotify, the environment is “economic”, “credit”, and above all “rapidly changing.” Not “dirty”–or “clean” for that matter.

The fact appears to be that Spotify isn’t doing anything special and nobody seems to want to talk about it. But wait, you say–what about the sainted Music Climate Pact? Guess who hasn’t signed up to the MCP? Any streaming service. There is a “Standard Commitment Letter” that participants are supposed to sign up to but I wasn’t able to read it. Want to guess why?

That’s right. You know who wants to know what you’re up to because they are damn sure not signing up.

Spotify’s ESG Fail: Social

I started to write this post in the pre-Neil Young era and I almost feel like I could stop with the title. But there’s a lot more to it, so let’s look at the many ways Spotify is a fail on the Social part of ESG.

Before Spotify’s Joe Rogan problem, Spotify had both an ethical supply chain problem and a “fair wage” problem on the music side of its business, which for this post we will limit to fair compensation to its ultimate vendors being artists and songwriters. In fact, Spotify is an example to music-tech entrepreneurs of how not to conduct their business.

Treatment of Songwriters

On the songwriter side of the house, let’s not fall into the mudslinging that is going on over the appeal by Spotify (among others) of the Copyright Royalty Board’s ruling in the mechanical royalty rate setting proceeding known as Phonorecords III. Yes, it’s true that streaming screws songwriters even worse that artists, but not only because Spotify exercised its right of appeal of the Phonorecords III case that was pending during the extensive negotiations of Title I of the Music Modernization Act. (Title I is the whole debacle of the Mechanical Licensing Collective and the retroactive copyright infringement safe harbor currently being litigated on Constitutional grounds.)

The main reason that Spotify had the right to appeal available to it after passing the MMA was because the negotiators of Title I didn’t get all of the services to give up their appeal right (called a “waiver”) as a condition of getting the substantial giveaways in the MMA. A waiver would have been entirely appropriate given all the goodies that songwriters gave away in the MMA. When did Noah build the Ark? Before the rain. The negotiators might have gotten that message if they had opened the negotiations to a broader group, but they didn’t so now they’ve got the hot potato no matter how much whinging they do.

Having said that, you will notice that Apple took pity on this egregious oversight and did not appeal the Phonorecords III ruling. You don’t always have to take advantage of your vendor’s negotiating failures, particularly when you are printing money and when being generous would help your vendor keep providing songs. And Mom always told me not to mock the afflicted. Plus it’s good business–take Walmart as an example. Walmart drives a hard bargain, but they leave the vendor enough margin to keep making goods, otherwise the vendor will go under soon or run a business solely to service debt only to go under later. And realize that the decision to be generous is pretty much entirely up to Walmart. Spotify could do the same.

Is being cheap unethical? Is leveraging stupidity unethical? Is trying to recover the costs of the MLC by heavily litigating streaming mechanicals unethical (or unexpected)? Maybe. A great man once said failing to be generous is the most expensive mistake you’ll ever make. So yes, I do think it is unethical although that’s a debatable point. Spotify has not made themselves many friends by taking that course. But what is not debatable is Spotify’s unethical treatment of artists.

Treatment of Artists

The entire streaming royalty model confirms what I call “Ek’s Law” which is related to “Moore’s Law”. Instead of chip speed doubling every 18 months in Moore’s Law, royalties are cut in half every 18 months with Ek’s Law. This reduction over time is an inherent part of the algebra of the streaming business model as I’ve discussed in detail in Arithmetic on the Internet as well as the study I co-authored with Dr. Claudio Feijoo for the World Intellectual Property Organization. These writings have caused a good deal of discussion along with the work of Sharky Laguana about the “Big Pool” or what’s come to be called the “market centric” royalty model.

Dissatisfaction with the market centric model has led to a discussion of the “user-centric” model as an alternative so that fans don’t pay for music they don’t listen to. But it’s also possible that there is no solution to the streaming model because everybody whose getting rich (essentially all Spotify employees and owners of big catalogs) has no intention of changing anything voluntarily.

It would be easy to say “fair is where we end up” and write off Ek’s Law as just a function of the free market. But the market centric model was designed to reward a small number of artists and big catalog owners without letting consumers know what was happening to the money they thought they spent to support the music they loved. As Glenn Peoples wrote last year (Fare Play: Could SoundCloud’s User-Centric Streaming Payouts Catch On?,

When Spotify first negotiated its initial licensing deals with labels in the late 2000s, both sides focused more on how much money the service would take in than the best way to divide it. The idea they settled on, which divides artist payouts based on the overall popularity of recordings, regardless of how they map to individuals’ listening habits, was ‘the simplest system to put together at the time,’ recalls Thomas Hesse, a former Sony Music executive who was involved in those conversations.

In other words, the market centric model was designed behind closed doors and then presented to the world’s artists and musicians as a take it or leave it with an overhyped helping of FOMO.

As we wrote in the WIPO study, the market centric model excludes nonfeatured musicians altogether. These studio musicians and vocalists are cut out of the Spotify streaming riches made off their backs except in two countries and then only because their unions fought like dogs to enforce national laws that require streaming platforms to pay nonfeatured performers.

The other Spotify problem is its global dominance and imposition of largely Anglo-American repertoire in other countries. The company does this for one big reason–they tell a growth story to Wall Street to juice their stock price. In fact, Daniel Ek just did this last week on his Groundhog Day earnings call with stock analysts. For example he said:

The number one thing that we’re stretched for at the moment is more inventory. And that’s why you see us introducing things such as fan and other things. And then long-term with a little bit more horizon, it’s obviously international.

Both user-centric and market-centric are focused on allocating a theoretical revenue “pie” which is so tiny for any one artist (or songwriter) who is not in the top 1 or 5 percent this week that it’s obvious the entire model is bankrupt until it includes the value that makes Daniel Ek into a digital munitions investor–the stock.

Debt and Stock Buybacks

Spotify has taken on substantial levels of debt for a company that makes a profit so infrequently you can say Spotify is unprofitable–which it is on a fully diluted basis in any event. According to its most recent balance sheet, Spotify owes approximately $1.3 billion in long term–secured–debt.

You might ask how a company that has never made a profit qualifies to borrow $1.3 billion and you’d have a point there. But understand this: If Spotify should ever go bankrupt, which in their case would probably be a reorganization bankruptcy, those lenders are going to stand in the secured creditors line and they will get paid in full or nearly in full well before Spotify meets any of its obligations to artists, songwriters, labels and music publishers, aka unsecured creditors.

Did Title I of the Music Modernization Act take care of this exposure for songwriters who are forced to license but have virtually no recourse if the licensee fails to pay and goes bankrupt? Apparently not–but then the lobbyists would say if they’d insisted on actual protection and reform there would have been no bill (pka no bonus).

Right. Because “modernization” (whatever that means).

But to our question here–is it ethical for a company that is totally dependent on creator output to be able to take on debt that pushes the royalties owed to those creators to the back of the bankruptcy lines? I think the answer is no.

Spotify has also engaged in a practice that has become increasingly popular in the era of zero interest rates (or lower bound rates anyway) and quantitative easing: stock buy backs.

Stock buy backs were illegal until the Securities and Exchange Commission changed the law in 1982 with the safe harbor Rule 10b-18. (A prime example of unelected bureaucrats creating major changes in the economy, but that’s a story for another day.)

Stock buy backs are when a company uses the shareholders money to buy outstanding shares of their company and reduce the number of shares trading (aka “the float”). Stock buy backs can be accomplished a few ways such as through a tender offer (a public announcement that the company will buy back x shares at $y for z period of time); open market purchases on the exchange; or buying the shares through direct negotiations, usually with holders of larger blocks of stock.

Vox’s Matt Yglesias sums it up nicely:

A stock buyback is basically a secondary offering in reverse — instead of selling new shares of stock to the public to put more cash on the corporate balance sheet, a cash-rich company expends some of its own funds on buying shares of stock from the public.

Why do companies buy back their own stock? To juice their financials by artificially increasing earnings per share.

Spotify has announced two different repurchase programs since going public according to their annual report for 12/31/21:

Share Repurchase Program On August 20, 2021, [Spotify] announced that the board of directors [controlled by Daniel Ek] had approved a program to repurchase up to $1.0 billion of the Company’s ordinary shares. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized at the Company’s general meeting of shareholders on April 21, 2021. The repurchase program will expire on April 21, 2026. The timing and actual number of shares repurchased depends on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program is executed consistent with the Company’s capital allocation strategy of prioritizing investment to grow the business over the long term. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The Company uses current cash and cash equivalents and the cash flow it generates from operations to fund the share repurchase program.

The authorization of the previous share repurchase program, announced on November 5, 2018, expired on April 21, 2021. The total aggregate amount of repurchased shares under that program was 4,366,427 for a total of approximately $572 million.

Is it ethical to take a billion dollars and buy back shares to juice the stock price while fighting over royalties every chance they get and crying poor?

I think not.

Spotify’s ESG Fail: Governance

Spotify has one big governance problem that permeates its governance like a putrid miasma in the abattoir: “Dual-class stock” sometimes referred to as “supervoting” stock. If you’ve never heard the term, buckle up. I wrote an extensive post on this subject for the New York Daily News that you may find interesting.

Dual class stock allows the holders of those shares–invariably the founders of the public company when it was a private company–to control all votes and control all board seats. Frequently this is accomplished by giving the founders a special class of stock that provides 10 votes for every share or something along those lines. The intention is to give the founders dead hand control over their startup in a kind of corporate reproductive right so that no one can interfere with their vision as envoys of innovation sent by the Gods of the Transhuman Singularity. You know, because technology.

Google was one of the first Silicon Valley startups to adopt this capitalization structure and it is consistent with the Silicon Valley venture capital investor belief in infitilism and the Peter Pan syndrome so that the little children may guide us. The problem is that supervoting stock is forever, well after the founders are bald and porky despite their at-home beach volleyball courts and warmed bidets.

Spotify, Facebook and Google each have a problem with “dual class” stock capitalizations.  Because regulators allow these companies to operate with this structure favoring insiders, the already concentrated streaming music industry is largely controlled by Daniel Ek, Sergey Brin, Larry Page and Mark Zuckerberg.  (While Amazon and Apple lack the dual class stock structure, Jeff Bezos has an outsized influence over both streaming and physical carriers.  Apple’s influence is far more muted given their refusal to implement payola-driven algorithmic enterprise playlist placement for selection and rotation of music and their concentration on music playback hardware.)

The voting power of Ek, Brin, Page and Zuckerberg in their respective companies makes shareholder votes candidates for the least suspenseful events in commercial history.  However, based on market share, Spotify essentially controls the music streaming business.  Let’s consider some of the  implications for competition of this disfavored capitalization technique.

Commissioner Robert Jackson, formerly of the U.S. Securities and Exchange Commission, summed up the problem:

“[D]ual class” voting typically involves capitalization structures that contain two or more classes of shares—one of which has significantly more voting power than the other. That’s distinct from the more common single-class structure, which gives shareholders equal equity and voting power. In a dual-class structure, public shareholders receive shares with one vote per share, while insiders receive shares that empower them with multiple votes. And some firms [Snap, Inc. and Google Class B shares] have recently issued shares that give ordinary public investors no vote at all.

For most of the modern history of American equity markets, the New York Stock Exchange did not list companies with dual-class voting. That’s because the Exchange’s commitment to corporate democracy and accountability dates back to before the Great Depression. But in the midst of the takeover battles of the 1980s, corporate insiders “who saw their firms as being vulnerable to takeovers began lobbying [the exchanges] to liberalize their rules on shareholder voting rights.”  Facing pressure from corporate management and fellow exchanges, the NYSE reversed course, and today permits firms to go public with structures that were once prohibited.

Spotify is the dominant streaming firm and the voting power of Spotify stockholders is concentrated in two men:  Daniel Ek and Martin Lorentzon.  Transitively, those two men literally control the music streaming sector through their voting shares, are extending their horizontal reach into the rapidly consolidating podcasting business and aspire soon to enter the audiobooks vertical.  Where do they get the money is a question on every artists lips after hearing the Spotify poormouthing and seeing their royalty statements.

The effects of that control may be subtle; for example, Spotify engages in multi-billion dollar stock buybacks and debt offerings, but has yet makes ever more spectacular losses while refusing to exercise pricing power.  

So yes, Spotify is starting to look like the kind of Potemkin Village that investment bankers love because they see oodles of the one thing that matters: Fees.

On the political side, let’s see what the company’s campaign contributions tell us:

Spotify has also made a habit out of hiring away government regulators like Regan Smith, the former General Counsel and Associate Register of the US Copyright Office who joined Spotify as head of US public policy (a euphemism for bag person) after drafting all of the regulations for the Mechanical Licensing Collective;

Whether this is enough to trip Spotify up on the abuse of political contributions I don’t know, but the revolving door part certainly does call into question Spotify’s ethics.

It does seem that these are the kinds of facts that should be taken into account when determining Spotify’s ESG score.

What about the SEC investigation?

I suppose time will tell how the SEC handles its announced investigations into ESG “violations” whatever those might be (particularly in light of the SCOTUS West Virginia v. EPA holding and other “major questions” rulings recently).

The SEC is accepting whistleblowers and tips here.

Streaming CPI Adjustments: Willing Buyer, Willing Seller or Unwilling Subsidy

When I made the soft call for impending stagflation last October I had no idea that that it would hit the US economy with such force and speed.  The trends were, frankly, obvious and the signs unmistakable.  But it’s the speed with which stagflation struck that I didn’t expect.  We have seen each step of stagflation’s three point play undeniably demonstrated in real life and the result is inflation as far as the eye can see.

Stagflation’s Three Point Play

The return of 1970s style stagflation and the now-confirmed recession along with Federal Reserve “quantitative tightening” could mean policymakers recognize the need to end the easy money policy that has been in place since “quantitative easing” began around 2008. Arguably, the global economy has been in a post-Big Short bubble ever since, with the inevitable growth in the money supply that provided “too much money” that was chasing “too few goods.”

A recession and stagflation call is mitigated by the unemployment rate (which was about triple current rates during the 1970s), which itself is mitigated by the labor participation rate. A ten year view shows that the labor participation rate is still below pre-pandemnic levels even though the unemployment rate has been steady in the recent past. Yet even Y Combinator (that famously wanted to “Kill Hollywood” starting with the unions) warns of investment drying up for startups, but we’re not quite at the point of limited partners refusing to show up for capital calls at major VCs.

Inflation has, of course, been inevitable as has been the commensurate rot of inflation on the buying power of consumers. There is little doubt that inflation has been a long-term trend in the U.S. for quite some time and is likely to be with us for a good long while longer. For songwriters, if you’ve been following the rate increase confirmed in Phonorecords III, imagine what the rates would have been had the rates been indexed in this inflationary environment. We can understand how they missed indexing on Phonorecords III, but they cannot miss it on Phonorecords IV–or give it away as a bargaining chip.

Realize that one accepted method of extinguishing inflation is the “Taylor Rule” implemented by Federal Reserve Chairman Paul Volker in the 1970s for which Presidents Carter and Reagan took tremendous political heat–raise interest rates OVER the inflation rate. (Which is why there was a 21% prime rate–think on that.).

Source: Atlanta Federal Reserve

It was a different country then–America was a creditor nation. No longer true. Of course that’s not likely to happen today because of all the government borrowing during the easy money era. If the government had to pay a rate over the current 8.7% inflation rate, the government would collapse. It is likely that high inflation will be with us for a long time to come.

Being aware of the inflationary economic environment is a critical issue for songwriters in the US who are in the middle of a government rate setting proceeding before the Copyright Royalty Judges at the Copyright Royalty Board in Washington, DC.  Songwriters at least have the opportunity to include a cost of living adjustment in the government’s rate and have asked for it in the streaming proceeding.  Remember, there are two rate proceedings underway:  One for physical mechanicals and downloads and the other for streaming.  Songwriters, publishers and labels are in the physical and downloads proceeding.  Songwriters, publishers and Big Tech are in the streaming proceeding soon to go to trial.

Credit where credit is due, Universal, Sony and Warner labels have included an annual CPI adjustment (or “indexing”) for songwriters in their voluntary agreement to raise the previously frozen mechanical rate for physical and downloads.  The Copyright Royalty Judges also included indexing in the rate for webcasting of sound recordings that they recently decided (Web V). Many of the same Big Tech services were parties to Web V but are now arguing against CPI for songwriters in Phonorecords IV.  Different hearings, true, but a lot of overlap in the parties and their smug little straight faces.

In our stagflationary economy, an agreed-upon inflation adjustment is a fairness making term that doesn’t make songwriters eat all of the inflationary rot from cost increases for “food at home” and force them to predict those price changes five years in advance.  Indexing helps to fix that guess work in what is already a process of educated guessing in the non-existent willing buyer/willing seller folie à deux.

An inflation index is a particularly crucial tool when songwriters are prevented from stepping away from a deal because the government forced a deal upon them, like any statutory rate or in countries where there is a tariff or other compelled agreement.

Failing to use indexing makes the fairly controversial assumption that economically rational songwriters would charge a fixed price regardless of the fluctuations of the cost of energy, food and rent.  By using the government to impose a non-indexed rate, there is a government-mandated implied discount that accrues to the benefit of the services, aka the largest companies in commercial history who just can’t bring themselves to treat songwriters fairly.  

But want to bet these failures will have no impact on the services’ ESG scores on Wall Street?

Take Google for example, flatly rejecting indexing on the streaming side of the CRB proceedings:

“None of Google’s agreements with music publishers contain CPI adjustments for the [Per Subscriber Minimums] contained in those agreements. The Copyright Owners’ proposed CPI adjustment to PSMs is simply unsupported by marketplace evidence.”

Google is, as usual, full of it and is gaslighting the CRB with inapt arguments.  Google is in a rate proceeding where the government—not Google—sets the terms.  I know that line gets a little blurry for Googlers given how much strangulation Google sustains over government through its vast network of lobbyists, revolving door men and women, consultants and on and on and on.  

I also know that Google would love nothing more than to dictate the terms to the government because Google has not-unjustified delusions of grandeur in this regard due to their mind-blowing level of brazen influence peddling.  It’s not just Google, it’s all of the Big Tech oligarchs, the latter day Xerxes who seek to overwhelm creators through lawfare—songwriters are just low hanging fruit because of the ancient compulsory license—Section 115 of the Copyright Act—that is ready made for Big Tech’s copyright abuse.

But Google is not the government. It is the Congress and not Google that created Section 115 to interfere with private contracts and more importantly interfere with the right to privately contract.  That’s a big deal in the US.

So, the issue isn’t what Google may have done in contracts with a totality of vastly different terms in a completely unrelated setting.  It’s whether the government is paying just compensation for taking away rights under the Constitution of the United States.  More specifically the 5th Amendment “takings” clause.

And the government’s compensation to songwriters is not just. It never has been.

Remember that at the heart of this process, the Judges are required to set a price for songs that the Judges believe reflects what a willing buyer would pay a willing seller in a transaction that has been devoid of willing buyers and sellers for over 100 years.  

Google and other Big Tech DSPs in the CRB present the Judges with benchmarks based on prices that are not only distorted by years of abuse to begin with but are permanently disfigured.  Remember, the government set the mechanical rate at 2¢ from 1909 to 1978 and had raised it very slowly ever since while at the same time pretending that the distortion of the 2¢ rate did not exist.

This deep 2¢ hole that songwriters are digging out of may not be the only reason songwriters are so poorly compensated, but this “tuppence” era definitely is a contributing factor.  So whatever value-based rate increase that songwriters can claw out of the Big Tech services must be supported by a cost of living adjustment measured by the CPI just to tread water.  

Price is truth if prices are truthful. And undistorted.

Otherwise, it’s just frozen mechanicals by another name, and Big Tech is simply free riding on the government’s license due to their outsized lobbying influence and government capture. (Need we name names?)

The songwriter is simply subsidizing the biggest corporations in commercial history.

AFL-CIO Backs Artist Play for Radio Play and the American Music Fairness Act #irespectmusic

Really great news, the largest union organization in the US has joined the fight for fairness for the world’s recording artists and session performers!

MusicFirst leader Joe Crowley said:

We applaud the AFL-CIO for standing by artists and music creators and lending the strength of its 12.5 million members to fight for passage of the American Music Fairness Act.

This legislation will benefit artists across the country – including the tens of thousands who are members of SAG-AFTRA, the American Federation of Musicians and other AFL-CIO unions – by correcting a decades-long injustice fueled by corporate greed that has left artists uncompensated for their use of their songs on AM/FM radio.

How to deal with the “controlled compositions”

It looks like the statutory rate for songs on compact discs and vinyl is finally going to get a significant increase starting January 1, 2023 (assuming the Copyright Royalty Board approves the settlement proposed by the major labels and the publishers). We have to acknowledge that there are many independent record companies that have never had to deal with an increase in the mechanical rate–the old 9.1¢ rate has been in effect since 2006. If a label was founded any time after 2006 the issue just hasn’t come up before.

The new rate (which may well change every year of the 2003-2007 rate period due the cost-of-living indexing) will require labels to check their royalty accounting programs to make sure they change the rates as required. It will also become an audit point for artist audits by artist/songwriters or producer audits by producer/songwriters, and of course publisher audits as well.

But there’s also a question of how to address what I call the “controlled comp squeeze” caused by the collision of rate fixing dates with the new rate as applied to outside writers. (I’ve posted a bunch on these topics, so if you don’t immediately recognize what I’m getting at, I refer you to those posts.)

In addition to the controlled comp squeeze, the conversation should include what to do about the entire controlled compositions concept, a contract clause that only applies to the US and Canada and a concept that is anathema to ex-US and Canada songwriters and collecting societies. Because digital recordings are typically paid at the full statutory rate (or should be), controlled compositions clauses are really a feature of physical configurations.

There’s a feeling out there that the entire concept of controlled compositions should be abandoned. Since record companies have come to rely on certain economics when they decide to keep titles in print and not to cut them out, i.e., stop making them available to retailers, it is important to understand what effect that trying to force labels to pay every song at full rate will have on the music economy, especially for independent labels that sell a disproportionate number of vinyl units. Sudden increases in royalty costs could have dire consequences for the people who frequently are the main investors in certain genres of music and have the least ability to lobby for their interests, so we should tread prudent in rebalancing the songwriter economy.

One intermediate step might be to take a cue from a business practice in Canada called the “Mechanical License Agreement” that has worked very well for many years. The “MLA” offers protections from the worst terms of the controlled compositions clause and was a voluntary agreement between the labels and the CMRRA (Canada”s mechanical collecting society).

2011 Interview with David Basskin

The MLA originated with David Basskin, the former head of CMRRA, and David negotiated the MLA with the major and independent labels in Canada. You can listen to my 2011 interview with David on SoundCloud.

The principal terms of the MLA cover the rate (which was no less than 3/4 rate but that dog won’t hunt anymore, plus after 1988 Canada did not have a statutory rate like the US does), free goods limited to 15%, no reduction for outside writers paid at full rate.

1. Full Rate: Songs should be paid at the full applicable rate and should be paid on standard sales plan LP free goods (a common give if the artist/writer is signed to a publisher affiliated with the record company);

2. Cap: Rather than a contract rate of 10 or 11, the MLA pegs the cap at 12;

3. No Rate Fixing Date: The rate not only is full, it also floats so there is no concept of a rate fixing date and should apply retroactively and prospectively; and

4. Floor: The application of the cap cannot result in any song being paid less than 50% of the full rate (which could happen on multiple disc or box sets).

There are other bells and whistles, but these are the main points.

While I understand that a record company would want to cap their mechanical royalty expense, any one of these terms would further that commercial goal. It is the application of all of the controlled comp terms that make the clause so onerous.

While the Copyright Royalty Board can set the rates, I doubt that they have the jurisdiction to address private contracts. Congress could pass legislation, but I think that would be a bitter struggle and I’m not so sure I want Congress to be micromanaging the music business any more than they already do with statutory rates and rate courts.

But there’s nothing stopping a voluntary agreement.

Is There Something Rotten in Sweden? Spoxit continues as Obamas Ankle Spotify

One of the sure signs of a bubble is when those invested in the bubble narrative deny the obvious. Southern California real estate is replete with examples. Another sign is when there are too many people invested in the narrative. The British corporate raider and financier Sir James Goldsmith was asked why he got into all cash the summer before the 1987 stock market crash. The apocryphal story is that it was because he got a stock tip from his barber. Facts, dear readers, facts are stubborn things.

One such fact surfaced this week–the Obamas are exiting their exclusive podcast deal with Spotify according to Yahoo News (citing Bloomberg). Now let us accept as a given that the Obamas as a brand are still one of the strongest personal brands in the world–in a brand shoot out with fellow podcasters on the Big Stream it ain’t even close. Meghan and Harry? Please.

But get a load of the reasons given. First there’s this one:

The former first couple’s media production company, Higher Ground, will split with Spotify after the streaming giant declined to make an offer to renew their deal, Bloomberg reported on Thursday, citing people familiar with negotiations.

Huh? “Declined to make an offer”? The thing about talent is that it doesn’t come around twice. If you were lucky enough to get into business with real stars, you hang on for dear life. Granted that statement sounds a bit like press release BS to keep the Obamas from looking greedy, but it’s not greedy to want the next deal point–it’s just creativity and smart business to keep that talent feeling ike the best place in the universe to work on that creativity is in your house.

High Ground’s departure follows a number of disagreements with Spotify, such as how frequently the Obamas would feature in output, and over exclusivity of shows, including the former president’s podcast with Bruce Springsteen, according to Bloomberg.

Say what? How often do the Obamas “feature in output”? As many times as they want. If you’ll pay $100 million for Joe Rogan (or whatever the 9 figure number actually is), you will understand that the deal is basically about freedom, like this:

The first show under the Obamas’ Spotify deal, “The Michelle Obama Podcast,” was among the platform’s most popular podcasts during its exclusive run, though Spotify later made it available on rival podcast apps. Barack Obama also hosted his own Spotify show called “Renegades: Born in the USA,” alongside musician Bruce Springsteen.

So let’s get this straight–the Spot will pay big bucks for Rogan and the naming rights to the Barcelona football club and their Camp Nou stadium, but turn around and be cheap and petty with Barack and Michelle Obama.


As I told the UK Competition and Markets Authority, do not mistake muscle for genius. Spoxit is on the move.

Spoxit: Has Streaming Jumped the Shark?

Netflix stock tanked to the tune of a loss of $50 billion in market cap. What does that mean–if anything–for streaming as a technology?

If you compare Tesla and Netflix, one big difference difference is marketing spend. Tesla doesn’t exactly let the car sell itself, but kinda. Not so with Netflix. Tesla puts the marketing spend into the product. Still a car company selling cars, but not a streaming company thinking it’s in the ooh-la-la of production. Kind of like Spotify getting into podcast production and the ooh-la-la of having your name plastered on a football stadium.

Most of the promoters of streaming, the true Chamber of Commerce hoorah crowd, have an answer for whatever signal the market may be sending about growth in streaming.

But ask yourself this–do you really think that streaming will go on forever as the configuration of choice for consumers? Has that ever happened before? Not really.

Netflix has actually run its business very well and managed its subscription prices, and yet…

After shares tanked earlier this year because of concerns over its subscriber growth, the streaming leader said that it lost subscribers when it reported first quarter earnings on Tuesday. 

Netflix (NFLX) now has 221.6 million subscribers globally. It shed 200,000 subscribers in the first quarter of 2022, the company reported on Tuesday, adding that it expects to lose another two million in the second quarter. The service was expected to add 2.5 million subscribers in the first three months of the year.

Is it too early to tell if streaming as a configuration is just in a “gully”? Maybe, but it’s time to start drilling down at greater unit economic depth on companies like Spotify than we’ve probably ever seen. Spotify has its own problems and may have already had its Netflix moment as measured by stock performance.

Is it time for everyone feeding at the streaming abattoir to start asking themselves whether they should be thinking about the Next Big Thing? Why is it that Spotify still can’t be profitable yet their top executives are beyond rich? Why do artists and songwriters despise the company so much? Why are there government investigations into the entire streaming ecosystem? How long will Spotify be able to get away with payola before there’s a full blown government investigation into that? And how much longer will TikTok be used to feed underage drivers to cartels in the border states who can barely drive to school much less survive a high speed chase with law enforcement–but the platform bears no responsibility?

There may come a day when artist say they want no part of Silicon Valley’s addiction capitalism and turn to something far more organic as their configuration of choice. Arguably that’s happening right now with vinyl.

So has streaming jumped the shark?


The Central Bank Dilemma and Songwriter Cost of Living Increases

As readers will recall, I’ve been beating the drum about inflation and stagflation coming home to roost for many months, nearly a year now. These posts are in the context of the compelling need for a cost of living adjustment for songwriters’ statutory rates and the absurdity of a frozen mechanical for the booming vinyl and CD configurations which thankfully has now been rejected by the Copyright Royalty Board once and for all.

When you force songwriters to license and also force them into accepting a government rate for mechanical licensing set by a little intellectual elite in a far-distant capitol, the last thing that’s fair or reasonable is to unilaterally freeze those rates when songwriters are staring down the worst inflation in 40 years. This is particularly galling when rampant inflation was all entirely predictable and the smart people and the economists they supposedly consult with just missed the boat.

Why do I say that the current inflation was entirely predictable? I’ve promised a few times to discuss quantitative easing so here it is. As you read this post, remember that both the current story on inflation and the need to index the statutory mechanical rate started in 2008 with the Great Recession and has been coming for at least fourteen years–plenty of time to recognize that the answer to inflationary destruction of a rate songwriters are forced to accept was not to freeze the rate to make the inflationary destruction even worse. Rather, the answer was to index the rates to inflation at a minimum. Indexing would at least preserve purchasing power if the government was not willing to provide an actual increase based on value. The central bank policy known as “quantitative easing” and its corresponding zero interest rate policy guaranteed the rot of inflation was inevitable.

Printing Too Much Money

Start with the definition of inflation we all have probably heard: Too much money chasing too few goods. When you hear this, some people think of the transaction on the consumer level, as in too much consumer money chasing goods in a productivity decline, aggregate inventory mismatch or raw supply shortage.

But that’s not the fundamental question–how do you get “too much money” in the aggregate across the entire economy at the same time? The way you always do; the government increases the money supply by putting too much money into circulation. The old fashioned way of doing this was literally printing paper money, but the terribly modern digital way of doing it is called “quantitative easing” which has the same inflationary effect because it is effectively the same thing as printing paper money. (The powers that be also refer to it as “QE” like it’s a cute little puppy or a Star Wars android. It’s not so we won’t.)

The difference between old school and new school is that instead of printing money that ends up in bank accounts of those guarantors of the full faith and credit of the United States–that guarantor is the person you see in the mirror–the Federal Reserve created digital money and they gave it a Fedspeak name that conveyed no information about what was really going on. They called it “quantitative easing” which is right up there with “Department of Defense” and “late fee program” in Orwellness. It’s quantitative because it digitally creates money on the books of the Federal Reserve and it’s easing because easy money. The Fed also cut interest rates to near zero (the “lower bound”) and some would argue they essentially created negative interest rates, all in the name of financial stimulus that Congress–i.e., elected officials we vote for–didn’t vote for.

This quantitative easing started out in 2008 to be an emergency method of propping up the economy after the last time that Wall Street screwed things up on a grand scale in the 2008 financial crisis.

What was supposed to be a short term fix is still going on to this day 14 years later. So the unelected smart people who deal with the Copyright Royalty Board (also not elected) must have known this was coming and that the last thing you would want to do was freeze rates when the watchword in the general economy was “stimulus”.

The combination of the Fed’s quantitative easing and the Fed’s zero interest rate policy caused one of the greatest asset bubbles in the history of mankind. And when you hear that the Fed is now increasing interest rates and simultaneously “reducing its balance sheet” by selling about $1 trillion of government and corporate bonds, this is what they are talking about. Many think that the only way of getting out of this bubble is to either raise taxes–fat chance–or raise interest rates and reduce the money supply. The truth is, the U.S. has never been in this exact situation before so no one really knows what will work, but we do know what has worked before. And wage and price controls such as freezing the statutory rate does not work (as President Nixon discovered in 1971). Of course if you wanted to fix the problem by properly aligning incentives, songwriters could have told their publishers that for every 1% increase in inflation, they could reduce the salaries of the smart people by 1% until the freeze comes off. That’s called incenting the wrong people to do the right thing. Like that will happen.

So time for charts. Back to the “too much money”, let’s look at the basic money supply often called “M1” and remember–inflation is not a cause of the growth in the money supply, it is a symptom of the government printing too much money. Because you have to have money to chase goods, right? And the money only comes from one place.

As you’ll see in this snapshot of the growth of M1 since 2008, there’s fairly steady growth until it hockey sticks in 2020 and continues after the $1.9 trillion American Rescue Plan passed in March of 2021. More on economist Steve Rattner’s take on that coincidence later.

Remember, the U.S. central bank (called the “Federal Reserve” or “the Fed”) has two tasks in its mission:  Keep inflation and unemployment low.  The Fed historically has two “weapons” to control the economy to accomplish its mission: interest rates (especially a targeted “federal funds rate”) and the money supply.  

The money supply is going to be our focus in this post, but it wasn’t much of an issue at the Fed until the financial crisis of 2008 when the Fed introduced “quantitative easing.”  The growth of the money supply has become a significant issue since COVID and especially since 2021.  

How the Fed Injects Too Much Money in the Economy

The way the Fed typically increased the money supply before quantitative easing was by buying Treasury notes or other liquid assets in the open market or by actually printing more currency which was distributed in the real economy through retail banks.  (Remember we separated banks between retail and commercial during the New Deal in the Glass Steagall legislation.  Read up on that separately, beyond our scope here.)  Most of the Fed activity before 2008 has been focused on tinkering with the interest rates that the Fed controls, often the “Federal funds rate”.

Increasing the money supply before quantitative easing typically lowered interest rates, put more money in the hands of the consumer and stimulated business activity—including loaning money to other retail banks–through an increase in aggregate demand.  Lowering interest rates expands the economy by making money cheaper; raising interest rates contracts the economy by making money more expensive.  The Fed can decrease the money supply by selling Treasuries in the open market which is another way to control inflation, or try to anyway.  This is also called reducing the Fed’s “balance sheet” (securities held by the Fed) and tends to raise interest rates. If you follow the financial press, you’ll hear a lot about that currently.

When demand is high, i.e., economic activity heats up, the Fed typically raises interest rates to avoid high demand becoming hyper inflationary.  (People often use post WWI Germany as an example of hyperinflation when workers were paid a few times a day to avoid their money losing value by the time they got off work–yeah. Think on that when you buy gasoline or groceries this week.) The Fed also may largely leave the money supply alone.  When demand is low or collapses, as has happened in various financial crises such as the Great Recession, the Fed may lower interest rates to encourage demand with debt-driven economic activity by consumers and firms—and, of course the government.  We’ll come back to the government part.

The Fed historically has let the money supply grow at a relatively steady rate.  The growth of the M1 (M0 plus demand deposits less reserves) looks something like this which makes that 2020-2022 hockey stick look even more pronounced:

What do we remember most about the financial crisis?  I don’t know about you, but the event I remember most was the first time I heard one of the newsreaders utter the word “trillion” as a modifier for “dollars.”  I remember that like I remember where I was on 9/11.  And I also remember what I thought at that moment—these numbskulls are going to bankrupt the lot of us because it’s the government.  When it comes to a trillion dollars, it’s betcha can’t spend just one. (Fast forward a few years to the Speaker of the House saying with a straight face, “if they come up a trillion, we’ll come down a trillion.”  And they give you that look like they just said something smart. Insane.)

But I digress.  Quantitative easing was a workaround to get more cash into the financial markets.  Not in your bank account, but into Wall Street.  How so?

Some Mechanics on Quantitative Easing

Remember, the Federal Reserve is responsible for controlling the money supply.  The civics class version of this story is that the Treasury Department prints the money.  When the Federal Reserve actually prints currency, it submits an order to the Treasury Department’s Bureau of Engraving and Printing then distributes that newly printed currency to the thousands of banks, savings and loans and credit unions in the banking system.  But you see the problem there?  Someone at the Federal Reserve Board of Governors has to submit an order (which must be voted on) to the BEP, and then all those bankers know what’s going on.

Does that sound easy?  Does that sound like a politically costless transaction? Why no, it does not.  And that may be why that process is called printing money.  So it’s not quantitative easing.

When the U.S. Government spends money—and it spends lots of money—it does it in two ways at a high level.  It either takes in money in what are euphemistically called “revenues” or it borrows the money backed by the full faith and credit of the United States. Which means you and me.  “Revenues” are also called “taxes,” paid by you and me.  Borrowing means that you and I promise to pay interest and principal on U.S. Treasury bonds.  But that means someone has to buy the bonds.

And therein lies the rub.

If the U.S. Government needs to sell $X in bonds but only has buyers for say 2/3 $X, what happens?  Does the government say, I better cut that spending by 1/3?  Oh, no, no, no.  It doesn’t do that.  What happens is that indirectly, the Federal Reserve buys the bonds that the government can’t sell to unrelated third parties.

Wait you say—do you mean that the Government is borrowing from itself?  How can that be legal?  Good question.

And here is where we need to understand an entity called a “primary dealer.”  According to Wikipedia (because why not):

“A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities…. In the United States, a primary dealer is a bank or securities broker-dealer that is permitted to trade directly with the Federal Reserve…. The relationship between the Fed and the primary dealers is governed by the Primary Dealers Act of 1988 and the Fed’s operating policy “Administration of Relationships with Primary Dealers.” Primary dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public.”

The Federal Reserve Bank of New York says in Fedspeak:

Primary dealers are trading counterparties of the New York Fed in its implementation of monetary policy. They are also expected to make markets for the New York Fed on behalf of its official accountholders as needed, and to bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices.

Any guesses about which banks might be “primary dealers”?  That’s right.  Wall Street banks, like JP Morgan Chase (or JP Morgan Securities, more precisely), and that would not be the First Bank of Your Town.

Let’s say the New York Federal Reserve Bank has some treasury bonds to sell.  A trader at the Fed calls a trader at JP Morgan to place an order to buy the treasuries for say $1 billion.  (It will be a lot more but humor my dread of the “T” word.)  The Fed then futzes with the JP Morgan reserve accounts and presto-changeo JP Morgan has more of this digital money to buy the bonds the government can’t sell.

Printing money? I think it is, but people will quibble about it, particularly people who could get blamed for that whole hyperinflation thing. And then there’s that whole Constitutional speed bump, but let’s not worry about that. I’m sure there’s no legal problems with the authority for quantitative easing. The smart people in the Imperial City said so and that must be true. Remember, the Federal Reserve isn’t directly elected by anyone.

The Fed’s Balance Sheet

But that’s not the only thing the Fed has been doing during this 14 year period of quantitative easing. In addition to government bonds, the Fed has also been buying mortgage backed securities and other corporate debt in the open market. (That’s right–mortgage backed securities as in The Big Short. Feeling nauseated yet?) The Fed’s balance sheet since 2008 has looked like this:

The Fed actually publishes its balance sheet so that the taxpayers who can do little to nothing to affect the Fed’s decisions can at least see where the Fed spends the full faith and credit of the United States. A recent balance sheet looks like this:

After 14 years of quantitative easing, cutting interest rates to 1/4% (aka the “lower bound”) and buying securities we still have extraordinary inflation at rates not seen in 40 years. All of this was predictable as soon as the Fed started the quantitative easing program after the Great Recession and did not stop.

Various COVID relief spending programs compounded the inflationary effects as Steve Rattner stated in a widely-read op ed (Rattner was an Obama Treasury official and is a frequent go-to for the New York Times, Morning Joe and other programs):

[The Biden Administration] can’t say they weren’t warned — notably by Larry Summers, a former Treasury secretary and my former boss in the Obama administration, and less notably by many others, including me. We worried that shoveling an unprecedented amount of spending into an economy already on the road to recovery would mean too much money chasing too few goods….

The original sin was the $1.9 trillion American Rescue Plan, passed in March. The bill — almost completely unfunded — sought to counter the effects of the Covid pandemic by focusing on demand-side stimulus rather than on investment. That has contributed materially to today’s inflation levels.

Focused on the demand side, even most pessimists — me included — missed a pressing problem. Supply-chain bottlenecks have led to shortages of many goods, a crisis that has been exacerbated by the reluctance of Americans to return to work. The worker shortage has also hurt the service sector. Many restaurants, for example, remain closed because they can’t find workers. Both also spark higher prices.

Now, between the government payments and underspending during the pandemic, American consumers are sitting on an estimated $2.3 trillion more in their bank accounts than projected by the prepandemic trend. As they emerge from seclusion, Americans are eager to spend on everything from postponed vacations to clothing. But the supply chain breakdown has turned the simple act of spending money into a challenge.

Mr. Rattner was writing in November 2021 before the onslaught of inflation in the first few months of this year and before Russia invaded Ukraine. The most recent inflation rate, a lagging indicator, tells the story (and notice the higher lows and higher highs over time):

The Easy Money Tax Comes to the Kitchen Table

After inflating asset prices (like stocks and real estate) through quantitative easing, the easy money bubble is now coming to consumer goods. And what happens to consumers when there is a sudden price shock for consumer goods? They have to cover those goods in the short run in one of two ways–take on more debt (usually credit card debt) or spend their savings (called “dis-saving”). And a couple last charts:

12-month view of personal savings

Savings shot up in March 2021 coincidentally at the time of the American Rescue Plan passing in March 2021 and have decreased ever since, and the saving’s rate is headed toward zero or at least the lower lows that it hit in the recession.

2008-present view of personal savings

And of course when savings decline to zero, out comes the credit card. What else does the Fed tell us will be happening starting this month? Interest rates will increase, which means that credit card interest rates will may well trend higher interest rates just at the moment that consumers will be increasing debt.

Remember, savings deposits were made in historical dollars but are spent on goods and services in inflated dollars, so there is essentially a implied tax on dis-saving. The same is true of running high credit card balances on inflated goods, particularly at a time of higher credit card interest rates. A good example of paying higher interest on inflated prices is filling up the van with $5-$7 gas for a tour and financing shows on the credit card.

To be continued…

@RIAA Chief’s Proposal to Settle the Frozen Mechanicals Crisis by Expanding the Songwriters at the Table

The frozen mechanicals crisis points up one of the key problems in administering the statutory mechanical license in the US: Songwriters are a fragmented group. Merely chanting to courts that you represent all songwriters and publishers in the world when you know that is not reflective of reality is not a recipe for successful negotiations. It was only a matter of time until one of these deals imposed on the songwriter community turned sour. Frozen mechanicals turned out to be the black ice on the Nantucket sleigh ride.

Getting a result that is satisfactory to a broad group of songwriters and independent publishers is a challenge, no doubt. But the frozen mechanicals situation is actually not quite as bad as it could be.

First, we know what the dispute is about and the way the dispute could be solved. Those terms:

–Raise rates on the “Subpart B” configurations, meaning songs sold under the compulsory license in the permanent download, vinyl and compact disc configurations;

–Reach a private settlement and avoid the “battle of the experts” and further expensive litigation

–Include a broad group of activists from the US and other countries in the process.

–Create a settlement that is likely to pass review by the Copyright Royalty Judges (and ultimately Congress) and is at least less likely to get appealed by George Johnson and whoever else can manage to be granted standing.

–Unite the community against the streaming services.

The detailed and well-thought out sober comments by so many songwriters that seem to have been at least somewhat compelling and persuasive to the Judges tell the RIAA members who they must deal with and also give a good idea of what these group would find satisfactory. The RIAA members also have a unique opportunity to extract themselves from the “late fee waiver” deal that can be recast on more appropriate terms and include a much wider group with far fewer relations that give the appearance of conflicts.

Second, this is why it was encouraging to read this quote from Mitch Glazier, a long time community leader, deal maker, and head of the RIAA in an Ed Christman post from yesterday–a comment made outside the four corners of the RIAA’s controversial filing now characterized as “procedural”:

Glazier, however, says that he has no control who participates in the CRB proceedings — it has its own process that makes those decisions — he does have a say who participates in the negotiations for a new rate settlement and wants to include other independent songwriting groups, publishers and labels. He wants their point of view to inform negotiations, he says. But in order to have those discussion, it will take more time than the CRB currently would allow, thus the motion to delay responding to the judges on how adjudication should move forward.

I have to imagine that the major labels probably went into this Phonorecords IV proposed settlement first filed in early 2021 (so negotiated in late 2020, one would guess) feeling that surely their counterparties would have polled their membership and reached a bona fide consensus before making the deal. Particularly when the streaming companies were so obviously going to make the “good for the goose” argument in the streaming piece about frozen rates being applied equally to mechanicals regardless of who was paying.

This is particularly true when the services get to pay the old rates pending an appeal and are therefore incented to stretch out appeals as long as they can as a matter of drill if not sport. Another huge miss in the negotiation of Title I of the Music Modernization Act.

Songwriters know that if they are not at the table, they are on the menu as our dear late Governor Ann Richards used to say. It’s nice to see Mitch Glazier offering to include the wider group in settlement negotiations and we should all look forward to see how that goes. As Mr. Glazier said, his members are free to negotiate with anyone they want, and it’s obvious that the people who held themselves out has having all the experience and authority to speak for all songwriters in the world fell a bit short this time.

Let’s not make that mistake again. We are on the clock, and the golden hour for settlement is at hand.