The Economics of Recoupment Forgiveness

Can Forgiveness Be Compulsory?

There is a drumbeat starting in some quarters, particularly in the UK, for the government to inject itself into private contracts and cause a forgiveness of unrecouped balances in artist agreements after a date certain–as if by magic.  Adopting such a law would focus Government action to essentially cause a compulsory “sale” by the government of the amount of every artist’s unrecouped balance due to the passing of time for what is arguably a private benefit.

Writing off the unrecouped balance for the artist’s private benefit would essentially cause the transfer to the artist of the value of the unrecouped balance to be measured at zero–which raises a question as to the other side of the double-entry if the government also allows a financial accounting write off for the record company investor  but values that risk capital at zero.  Government action of this type raises Constitutional questions in the U.S., and I suspect will also raise those same types of questions in any jurisdiction where the common law obtains.  We’ll come back to this.  It also raises questions as to why anyone would risk the investment in new artists’ recordings if the time frame for recovery of that risk capital is foreshortened. We’ll come back to this, too.

What’s Wrong with Being Unrecouped?

Remember—being unrecouped is not a “debt” or a “loan”.  It’s just a prepayment of royalties by contract that is conditioned on certain events happening before it is ever “repaid.”   There is no guarantee that the prepaid royalties will ever be earned.

One of the all-time great artist managers told me once that if his artist was recouped under the artist’s record deal, the manager was not doing his job.  The whole point was to be as unrecouped as humanly possible at all times.  Why?  Because it was free money money bet that may never be called.  Plus he would do his best to make the label or publisher bet too high and he was never going to let them bet too low.

Another great artist manager who was representing a new artist who went on to do well before breaking up said that once he realized he was never going to be recouped with the record company it was a wonderfully liberating experience.  He’d talk them into loads of recoupable off-contract payments like tour support, promotion and marketing that made his band successful and that he didn’t share with the label.  Tour support is only 50% recoupable?  How much will you spend if it’s 100% recoupable?

Get the idea?  We’re starting to hear some rumblings about a statutory cutoff for recoupment of a term of years.  First of all, I would bet such a rule in the U.S. if applied retroactively would be unconstitutional taking in violation of due process under the 5th Amendment.  Regardless, whichever country adopts such a rule will in short order find themselves with either no record companies or with vastly different deal points in artist recording agreements subject to their national law.  (See the “$50,000 a year” controversy from 1994 over California Civ. Code §3423 when California-based labels were contemplating leaving the State.  We’re way beyond runaway production now.)

Record Company as Banker

Let’s imagine two scenarios:  One is an unsigned artist trying to finance a recording, the other is a catalog artist with an inactive royalty account.  They each illustrate different issues regarding recoupment.

Imagine you went to a bank to finance your recordings.  You told the banker I do some livestreams, here’s my Venmo account statements and I have all this Spotify data on my 200,000 streams that made me $500 but cost me $10,000 in marketing.  Most importantly of all, your assistant thinks I am really cool, if you catch my drift.

I want to make a better record and I think I could get some gigs if clubs ever reopen.  My songs are really cool.  I need you to lend me $50,000 to make my record and another $50,000 to market it.  (Probably way more.)  I don’t want a maturity date on the loan, I don’t want events of default (meaning it is “non recourse”), you can’t charge me interest, I don’t want to make payments, but you can recoup the principal from the earnings I make for licensing or selling copies of the recordings you pay for.  I’ll market those recordings unless my band breaks up which you have no control over.  As I recoup the principal, I’ll pay you in current dollars for the historical unrecouped balance.  I keep all the publishing, merch and live.  And oh, if you want you can own the recordings, but understand that I will be doing everything I can to try to get you (or guilt you or force you) to give me the recordings back regardless of whether you have recouped your “loan” which isn’t a loan at all.

Deal?

Catalog Fairness

Then consider a catalog artist.  The catalog artist was signed 25 years ago to a term recording artist agreement with $500,000 per LP on a three firm agreement that didn’t pan out.  After tour support, promotion, additional advances to cover income tax payments, the artist got dropped from their label and broke up with a $1,000,000 unrecouped balance.   In the intervening years, the artists went on to individual careers as songwriters and film composers, but none of those subsequent earnings were recoupable as they got dropped and were under separate contracts.  Another thing that happened in the intervening years was the label went from selling CDs at a $10 wholesale price through their wholly owned branch distribution system to selling streams at $0.003 each through a third party platform with probably triple the marketing costs.

The old recordings eventually dwindled below 1,500 CD units a year for a few years, and in 2005 the label cut them out, but continued to service their digital accounts with the recordings as deep and ever deeper catalog.  After a few sync placements, earnings reached zero for a couple years and the royalty account was archived, i.e., taken off line.  Streaming happened and now the recordings are making about $100 a year until one track got onto a Spotify “Gen Z Afternoon Safe Space Tummy Rub” playlist and scored 1,000,000 streams or about $600 give or take.  When the royalty account was archived, it had an unrecouped balance of $800,000 in 1995 dollars.  So the $600 gets accrued in case the catalog ever earns enough to justify the cost of reactivating the account—which means the artist doesn’t get paid for the recordings because they are unrecouped but they also don’t get a statement because they’ve had an earnings drought.  Like most per-stream payments, it would cost more to account for the $600 on a statement than the royalties payable.

Bear in mind that adjusted for inflation—and we’ll come back to that—the $800,000 in 1995 dollars would be worth $1,366,866.14 today.  But because the record company does not charge either overhead, interest, or any inflation charge, the historical $800,000 from 1995 is paid off in ever-inflated current dollars.

As the artist managers said, the artists long ago got the benefit of getting essentially a no-risk lifetime royalty pre-payment (it’s not really correct to call it a “loan” when there’s no recourse, maturity date, payments, interest rate or repayment schedule) and long ago spent the money on a variety of business and personal expenses.  Which potentially enhanced their careers so they could get that film work later down the line.  Or more simply, a bird in the hand.

Do You Really Want Monkey Points?

If you want to see what would happen if this apple cart were rocked, take a good look at a good corollary, the “net profits” definition in the film business, or what Eddy Murphy famously called “monkey points.”  Without getting into the gory details, studios will typically play a game with gross receipts that involves exclusions, deductions, subdistributor receipts, advances, ancillary rights, income from physical properties (from memorabilia like Dorothy’s slippers), distribution fees, distribution and marketing expenses, deferments, gross participation, negative costs, interest on the negative cost, overbudget deductions, overhead on negative cost and marketing costs (and interest on overhead)…shall I go on?  And then there’s the accounting.

The movie industry also has a concept called “turnaround”.  Turnaround happens when Studio A decides (usually for commercial reasons) it is not going forward with a script that it has developed and offers it to other studios for a price that allows it to recover some or all of its development costs usually with an override royalty.  Sometimes it works out well–after a very long time, the project may become “ET.”  Would artists prefer getting dropped or having their contracts put into turnaround?

The point is that while it may sound good to make unrecouped balances vanish after a date certain, people who say that seem to think that all the other deal terms will stay constant or even improve for the artists after that substantial risk shifting.  I seriously doubt that, just like I doubt that venture capitalists who fund the startups that bag on record companies would give up their 2 or 3x liquidation preference, full ratchet anti-dilution protection, registration rights or co-sale agreements.

Should 5% Appear Too Small

But did the unrecouped balance actually vanish?  Not really.  The value was transferred to the artist in the form of forgiveness of an obligation for the artist’s private benefit, however contingent.  That value may be measured in an amount greater than the historic unrecouped balance.  Is this value transfer a separate taxable event?  Must the artist declare the forgiveness as income?  Can the record company write off the value transferred as a loss?  If not, why not?  I can’t think of a good reason.  If anything, valuing the “taking” in current dollars would only correct the valuation issue and could amplify the tax liability of the transfer.

As you can see, wiping out unrecouped balances sounds easy until you think about it.  It is actually a rather complex transaction which immediately raises another question as to when it stops.  Why just signed artists?  Why not all artists?  Songwriters?  Profit participants in motion pictures or television?  Authors?  All of this will be taken into account.

King John and the Barons: Don’t Tread On Me

Setting aside the tax implication, were such government action to take the form of a law to be enacted in the United States, it would prohibit a fundamental right previously enjoyed under the 5th Amendment to the U.S. Constitution (one of the Amendments known as the “Bill of Rights”).  The “takings” clause of the 5th Amendment states “…nor shall private property be taken for public use, without just compensation.”  In fact, such government action would implicate the fundamental rights expressed in the 5th Amendment and applied against the states in the 14th Amendment to the Constitution.  The 5th Amendment derives from Section 39 of Magna Carta, the seminal constitutional documents in the United Kingdom (dating from 1215 for those reading along at home) and was central to the thinking of Coke, Blackstone and Locke who were central to the thinking of the Founders.

In the U.S., such a law would likely be given a once over and strictly scrutinized by the courts (including The Court) to determine if taking unrecouped balances from a select group of artists, i.e., those signed to record companies, is the only way to get at a compelling government interest in promoting culture even though the taking would be pretty obviously for the private benefit of the artists concerned and only benefiting the public in a very attenuated manner. In other words, will treating a select group of pretty elite artists (at a minimum those signed vs. those unsigned) satisfy the strict scrutiny standard applied to a government taking of private property with no compensation.  (This distinction also smacks of a due process violation which is a whole other rabbit hole.)  I suspect the government loses the strict scrutiny microbial scrub and will be required to compensate the record company for the taking at the fair market value of the unrecouped balances.

Because I think this is pretty clearly a total regulatory taking that is a per se violation of the 5th Amendment, I suspect that a court (or the Supreme Court) would be inclined to hold the law invalid on Constitutional grounds and simply stop any enforcement.

Failing that strict scrutiny standard, a court could ask if the zeroing of unrecouped balances with no compensation is rationally related to a legitimate government interest.  I still think that the taking would fail in this case as there a many other ways for the government to promote culture and even to encourage labels to voluntarily wipe out the unrecouped balances at some point such as through a quid pro quo of favorable tax treatment, changing the accounting rules or offsets of one kind or another on the sale of a catalog.

Running for the Exits

If anything, I think that government acting to cut off the ability to recoup at a date certain with no compensation (which sure sounds like an unconstitutional taking in the US) would necessarily make labels start thinking about compensating for that taking by moving out of those territories where it is given effect (or at least not signing artists from those countries).  Such moves might make artists start thinking about moving to where they could get signed.

Or worse yet, it would make labels re-think their financial terms and re-recording restrictions.  Overhead charges and interest on recording costs would be two changes I would expect to see almost immediately.  And that would be a poor trade off.

Iterative Government Choices

The choice that artists make is whether to sign up to an investor like a record company who wants a long-term recoupment relationship against pre-paid royalties.  If you don’t like a place, don’t go there and if you don’t like the deal, don’t sign.

Any government that contemplates taking unrecouped balances must necessarily also contemplate offering artists grants to make up the shortfall due to signing contractions.  This could include for example the host of grant funding sources available in Canada such as FACTOR and the many provincial music grants.  And those grants should not come from the black box thank you very much.

On the other hand, I do see a lot of fairness in requiring on-demand services to pay featured and nonfeatured artists a kind of equitable remuneration like webcasters and satellite radio do, which is paid through on a nonrecoupment basis directly to the artists in the US.  While they may criticize the system that produced the recordings that have made them rich beyond the wildest dreams of artists, songwriters or music executives (except the ones the services hire away), that doesn’t mean that they shouldn’t pay over to creators some of the valuation transfer that made Daniel Ek a multibillionaire while artists get less than ½¢ per stream.

So the takeaways here are:

  1. Wiping out unrecouped balances with no compensation is likely illegal.
  1. Creating a meaningful and attractive tax incentive for record companies to wipe out an unrecouped balance conditioned on that benefit being passed through to artists is worth exploring.  (Why wait 15 years to give that effect?)  This may be particularly attractive in a time of rising taxable income at labels.
  1. Requiring the services to pay a royalty in the nature of equitable remuneration on a nonrecoupment basis is a way to grow the pie and get some relief to both featured and nonfeatured artists.  This new stream is also worth exploring.

Guest Post: The Music Modernization Act is Stifling Innovation in the Music Industry

[The chickens are coming home to roost.  As I warned before the Music Modernization Act was passed, Title I has big problems.  Remember that Title I established the Mechanical Licensing Collective (publishers and songwriters) and the Digital Licensee Coordinator (digital music platforms). It was sold to songwriters on the basis that “the services pay for everything”.  We will see how true that ends up being (as the copyright owners have to pay their costs to populate or correct the HFA database which is a massive undertaking).  Nobody talked to any DMP startups when the legislation was drafted or when the “administrative assessment” was litigated before the Copyright Royalty Judges.  But now startups are getting the bill and they’re not too happy, particularly 115 services that never had to pay for a license other than royalties.  I addressed some of this in a 2018 post on MusicTech Solutions that was reposted on Newsmax Finance.]

From: Max Fergus
Date: Tue, Nov 10, 2020 at 11:06 AM
Subject:
To: LUM Team

A Letter to the Music Industry,  

Beware, the future of music is in jeopardy.

The Music Licensing Collective (“MLC”) recently announced that it will begin to regulate the largest major music streaming platforms in 2021. However, this agency, formed behind closed doors between the major labels and streaming services themselves, will only hurt those of us who are actively fighting the unjust practices of the platforms that are being regulated in the first place.

The Music Modernization Act is a “competition killer” set out to destroy the platforms that are trying to create a new tomorrow for independent musicians and stifling current and future innovation within the industry.

We are not alone and it’s time to fight. 
Please find our LinkedIn Article here as well as a link to our post
Please share and repost if possible in our fight against the MMA.

___________________________________________
Article Preview
We were told when we started our company that the institutions within the music industry were always going to be against us. In fact, many people told us these institutions would do everything in their power to curb innovation to make sure the money stayed where it always has – in the pockets of the major labels and the major music streaming services.

Finally, after 10 years of archaic practices in the music streaming industry, which widened the financial gap between the one percent of the music industry stakeholders and the rest of the starving artists, the Music Modernization Act (“MMA”) was created. At its most basic level, the goal was to take the onus off of major streaming platforms to track and remit royalties generated from these major platforms into the pockets of the right artists/labels in a more timely fashion through a new government-subsidized organization known as the Mechanical Licensing Collective (“MLC”).

Sounds great, right? Wrong. This will set back the music industry for years to come.

Imagine starting a process to MODERNIZE MUSIC and how music is monetized for all artists, yet the only stakeholders the MLC brought in to discuss how the MMA and the MLC would operate are the major streaming platforms and major labels themselves. So, what did they do? They structured the MLC in a way that will save these major corporations millions of dollars while completely neglecting the reason why the law was written in the first place – to oversee the music streaming platforms that have consistently, purposefully and negligently not paid the creators – whose content drives their service – their fair share in a transparent and efficient way.

The MMA was designed to regulate and modernize the practices of “royalty-bearing” music streaming services like Spotify, YouTube, and Apple. Next year, the MLC will open its doors and, as part of its first year of operations, it requires the companies included within the MLC to help pay for “start-up fees.” Companies outside of the largest music streaming companies, such as smaller DSPs and smaller royalty-bearing music streaming platforms, must also share unproportionally in these expenses. Essentially, the MLC and the largest streaming platforms want smaller services to pay more than their fair share for the MLC to oversee and audit the largest players in the music streaming industry…even those services who operate to fix the same problems as the new entity itself.

It gets worse.

LÜM was created to serve a similar foundational mission to these entities – to help guide an industry that needs to better support its creators through innovation. Because of that, we made a choice to not be a part of the traditional recorded music industry. We pay NO royalties and instead have proven that there is a better future. Instead of royalties, LÜM created the first virtual gifting system in a music discovery platform that allows fans to help directly support their favorite independent artists. The result?

Artists on LÜM earn an average of ~6x more per stream than every single other music streaming platform in the U.S.

Just like so many other companies that are trying to advance the music industry, LÜM is now facing an uphill battle against an organization (MLC) that was developed in conjunction with the same stakeholders who put the music industry in this position in the first place. The fees LÜM and other innovative companies are facing, to help fund the MLC, are substantial. Every new innovative company will face them and will provide a financial hurdle that will leave the majority of current and future innovative music startups dead in the water. No new entrants and no new competition mean the industry will stay exactly where it has for the last 15 years – putting money in the pockets of the rich and neglecting those that are trying to change the industry for the better.

We cannot let this happen. Innovation must continue or we face a scary reality for the music industry and the majority of artists and innovators that have been neglected by it.

— 
Max Fergus | Chief Executive Officer

Check out my favorite song on LÜM Here!

The World is not Flat: @CISACNews and BIEM Focus on Vendor Lock-in at the MLC

One of the many U.S.-centric shortcomings of Title I of the Music Modernization Act (that created the Mechanical Licensing Collective, the safe harbor giveaway and the blanket license) is that it pretty much ignores the entire complex system of content management organizations outside the U.S. As they describe themselves, “CISAC and BIEM are international organisations representing Collective Management Organisations (“CMOs”) worldwide that are entrusted with the management of creators’ rights and, as such, have a direct interest in the Regulations governing the functioning of the Database and the transparency of MLC’s operations. CISAC and BIEM would like to thank the Office for highlighting the existence and particularity of entities such as CMOs that are not referred to in the MMA.”

I have to say at the outset that as someone who lived outside the U.S. for a big chunk of time, it’s rather embarrassing but sadly unsurprising that so little attention has been paid to the global system of CMOs and the cold fact that we are now weeks away from the January 1, 2021 deadline.

You would not be aware of this unless you read the many comments to the Copyright Office on the MLC oversight rule makings. Aside from the fact that these organizations have decades of experience with blanket mechanical licensing (which the MLC might benefit from), CISAC and BIEM should have been included in the MLC itself, particularly since the MLC promoters appear to have been handing out non-voting directorships to themselves. It is embarrassing, kind of like those Americans who think the best way to speak French is to speak English louder.

CISAC and BIEM raise excellent issues in their comments, which often are accompanied by gentle hint language indicating the points have been raised before and ignored, or at least not responded to. According to a recently posted “ex parte” letter, CISAC and BIEM have focused in on a critical issue–where is the MLC’s statutorily required database and what benefits accrue to its vendor–principally HFA which was recently reunited in the MLC with its former owners.

You can read the CISAC and BIEM ex parte letter here. (Ex parte letters essentially document private discussions by the Copyright Office on matters they are currently regulating. Ex parte letters help to build a full record on matters placed before the Copyright Office by interested parties that may or may not be addressed in regulations.)

Here’s a key excerpt that I think deserves more attention (and is not going to be covered by the trade press until the system collapses in all likelihood).

CISAC/BIEM also raised further concerns regarding potential competitive advantages that The MLC or its vendors’ access to information may have and risks that such information could potentially be used for purposes outside of Section 115 mechanicals. The USCO assured the CMOs that they were perfectly aware of this issue, which had also been raised by other parties, and considered that these concerns were being addressed in the Confidentiality Rulemaking, and that the Statute requires Regulations to prevent the disclosure or improper use of information or MLC records. The proposed Rule establishes that MLC vendors cannot use the data obtained for processing for other purposes. The USCO further confirmed that it was very much aware of the need to ensure the necessary balance and that it was still contemplating how best to resolve this, including whether there should be more regulation.

I have to say that this is not the impression I got from the first panel of “MLC week” rather that the panel seemed to think that at least any member of the public could use the data provided to the MLC for any purpose. Since the MLC’s vendors would also be members of the public ostensibly, it does seem that disconnect needs to be cleared up.

The ex parte letter continues:

The CMOs CISAC/BIEM considered that some of these concerns were based on the January 1 deadline and whether The MLC would be operating with HFA’s database or with its’ own DQI processed separate database.

This depends on the antecedent of “its” in the last clause. If you take The MLC as the antecedent, the meaning would be “or with The MLC’s own DQI processed separate database.” If you take HFA as the antecedent, the meaning would be “whether The MLC would be operating with HFA’s database or with HFA’s own DQI processed separate database.”

While I think that CISAC and BIEM meant the former, the reality appears to be the latter however nonsensical it may seem. This is because there do not appear to be two separate databases, just the HFA database that The MLC accesses through an API. The DQI operation is designed to improve the data quality of the HFA database which benefits both The MLC and HFA.

There seems to be more than a little confusion about this:


USCO noted that there are still open questions regarding this issue, as it seemed that the HFA database would be used as a starting point, but through programmes like DQI data was being updated, so it did not seem as if both databases were identical.

I would argue with this (and have). This idea that DQI was updating a database other than the HFA database sounds like there is a stand-alone musical works database as required by the statute. If so, where is it? Why does the DQI produce search results like this:

HFA DQI

The USCO reiterated that the proposed Confidentiality Rulemaking specifies the limitations imposed on proposed vendors and that The MLC had in writing acknowledged that neither The MLC nor its vendor owned the data. The USCO acknowledged that there was a lot of concern expressed about this issue and ensured the CMOs it was going to address this issue.

Ownership alone is not the only issue and misdirects attention. On the one hand, The MLC says it does not own the database (another example of drafting oversights in Title I of the MMA–ownership is one of those issues you would think would be clearly spelled out but was only referenced indirectly).

I come away from reading the ex parte letter more concerned than ever that the core issue that The MLC was tasked with by the Congress is simply not being addressed–where is the Congress’s musical works database? Remember the words of the legislative history:

“Music metadata has more often been seen as a competitive advantage for the party that controls the database, rather than as a resource for building an industry on.”

The Good News is the Bad News is Wrong: Universal Invests in the Future with UMUSIC Hotels Venture

According to some good news in Fast Company, Universal Music Group has announced that “the first three locations for the music-focused hotel partnership with Dakia U-Ventures are Atlanta, Orlando, and Biloxi, Mississippi.”

These locations will be pretty massive music-themed hotels under the UMUSIC hotel brand and at least one casino built around live music venues and integrated into the local music culture in Atlanta, Orlando, and Biloxi, Mississippi.

At first blush, the venture may look like the Hard Rock chain, but as someone who remembers the Hard Rock when it was a kind of cheesy bar in Mayfair where the lads went to make new friends, the project is well above that rather low bar so to speak.  Frankly, the Hard Rock franchise was never a place that seemed more welcoming to music than it was to tourists (or perhaps the AVN Awards).   (“Look, mommy, there’s a musician! Can we feed him?”)  The Universal venture looks far more sophisticated with a far more thoughtful integration of music into the brand and the local music economy.  And, of course, with a much, much bigger on-site investment.

You may be asking why would anyone invest in hotels during a pandemic and that is exactly the question.  It takes a certain fearlessness and optimism to undertake this venture.  Another good thing about the project is that it will be in a different end of the market than typical local venues.  If anything, once we get to the other side of the lock down the UMUSIC hotels will complement and even drive business to the local venues if typical festival economics is a guide.

Given the scale of the plans, it will take years to complete the project and open for business.  Right away, this tells you that these are patient investors who are making a very big bet on the future of live events and especially the future of live music.  

Of course, what I like most about the project is that the venues are not being built in New York, Nashville or Los Angeles and are locating in areas that have rich music cultures away from the “centers”.  I don’t know that this was part of the planning, but after the lockdown it will take a while for fans to be willing to travel long distances to experience live music, so why not bring it to the fans.  (You could make the argument that all three of the proposed locations are within driving distance of a major megaregion.)  

The Universal project should also be a big message to Congress that the Save Our Stages movement is not a bunch of hippies they can ignore.  It should also be a message to people like the Mayor of Austin that you cannot just shut down an event like SXSW that contributes over $300 million in economic impact to your city with no plan to make up the vast amount of harm they inflict from a single government action–other than turning independent venue spaces into Uber Eats.  Eight months later, they still have no plan, and frankly I don’t see any other “music city” stepping up either.  Which is no excuse for any of them, but makes the UMUSIC hotel project even more important.

Live music is as deserving of strategic industrial planning as is competing for an Amazon facility or a Tesla plant, and we should thank Universal for their leadership in putting together the optimistic partnership that highlights that reality–even for the dim lights in the Live Music Capitol of the World.  

A long term commitment to live events and the infrastructure that supports a live music culture is desperately needed now.  It’s fitting that a music company puts together the private investment to show the rest of the public and private sectors the good news that we are coming back and that the bad news is wrong.  And guess what?  It’s not digital.

 

Pandemic: Livestreaming is Silicon Valley’s Great Step Forward to the Venue DNR

Livestreaming was intended to be temporary.  It was a bridge between a pre and post COVID reality.  But it’s not.  The biggest of Big Tech companies intend it to be permanent and they mean to control it.  And you have to believe that a very high percentage of venues may not be coming back.

Live music venues are closing permanently at a rapid clip.  Cities like Austin and festivals like SXSW and ACL Fest are changed forever.  We know that the real estate developers are licking their chops at the idea of dumping those live music venues and onboarding Uber Eats, Google, Facebook or something really important.  (See “I Don’t Need Another Email Whining About COVID“)  But they are not the only ones who have no intention of helping live music recover in a venue-free future.

Facebook/Instagram is probably leading the way on this Great Step Forward, followed closely by TikTok and of course YouTube.  Facebook in particular is adopting policies to limit DJ-type listening parties on the platform.  (This very well may backfire.)  The elephant in the room is that Facebook seems to have gotten religion on music licensing after a 17 years growth binge of shredding artist rights.  While asserting “You are responsible for the content you post” Facebook also tells us “Unauthorized content may be removed.”  Why not track it and monetize it?  Because they can’t be bothered.  It does seem that Facebook intents to permit artist-branded live-streaming events which is nice of them, but it also seems like the new policy clears the way for Facebook to monetize live streaming events and take their cut.

It has become obvious that whenever audiences decide to come out of the lock down, there may not be any venues for them to go to.  (Or restaurants for that matter.)  As I have said almost from the beginning of the pandemic, Austin is about to become another college town with a Google/Facebook campus and the City government itself is just thrilled about that expanded tax base.  Cynical?  Not really.  Spend a little time getting condescended to by the City of Austin and you will get the idea that they would just as soon that live music was in the rear view mirror.  If that happens to Austin, which had styled itself as “The Live Music Capital of the World” to the great gnashing of teeth by almost every other sector starting with tech, it will happen in a host of cities around the world.

Of course Big Tech cannot be seen to be leading the charge to live music oblivion.  That would be quite impolitic (if not actionable).  But the vibe from governments in the erstwhile “music cities” like Austin, Denver, Seattle,  and even San Francisco is similar to the efforts of Spotify, Facebook, Google & Co. to support the venues that create the value and the fan base that drives traffic to the live streams they think are the future.  These politicians and Big Tech companies want to be seen to be helping, but not too much.  They don’t want to help so much that most of the venues might actually recover.

Evidence?  Talk to anyone at Facebook who has contact with artists and labels.  (And if you ever wondered who doesn’t click “Skip Ads”, it’s them.)

Facebook certainly is building its “Stars” tip jar model that is in closed beta but will be rolled out soon.   That’s partly because Facebook views live streaming as a permanent part of the data mining ecosystem that Facebook is uniquely positioned to control.  Facebook Stars will prove to be a key component of the venue free future after the COVID and Facebook duo deliver the venue DNR.  And in case you didn’t quite get how Facebook values music, a Star is worth 1¢.  That’s right–one penny.  (Which will make it easier to switch Stars scrip to Facebook Bucks aka Libra.)

Don’t forget, Tencent led the way on this “gifting” concept.  Tencent allows users (all users, subscription or ad-supported service) to make virtual gifts in the form of micropayments directly to artists they love.  (The feature is actually broader than cash and applies to all content creators, but let’s stay with socially-driven micropayments to artists or songwriters.)

Tencent, of course, makes serious bank on these system-wide micropayments.  As Jim Cramer noted in “Mad Money” :
“Tencent Music is a major part of the micropayment ecosystem because they let you give virtual gifts,” Cramer said. “If you want to tip your favorite blogger with a song, you do it through Tencent Music. In the latest quarter we have numbers for, 9.5 million users spent money on virtual gifts, and these purchases accounted for more than 70 percent of Tencent Music’s revenue.”
And that’s real money.  Tencent actually made this into a selling point in their IPO prospectus:
We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion copyright protection-because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.

So in case you were wondering why we haven’t seen Big Tech really step up to contributing money to support venues in line with the value of the data they scrape from all the fans driven to live streaming, it’s because they don’t want live music venues to be sustainable.  They’ve been trying to break down live music for a decade and the pandemic presented the disruption opportunity for them to actually do it.

Facebook and their counterparts are getting all kinds of free content (and the corollary free data) from desperate bands in the latest example of pandemic price gouging.  Those desperate artists are now forced to consider the option of the Data Lords coin of the realm–advertising and brand integration.  The effect may well be that the only artists who survive the venue DNR are those willing to take the King’s shilling.  Welcome to the company store.

The Data Lords have finally found a way–fear of death–to get fans to substitute away from live music.  There’s nothing quite as disruptive as the threat of dying.  If you ever thought that the live experience was the last stronghold of authenticity against the onslaught of Silicon Valley disruption, you probably never thought that fear of mortality would drive the nail in the coffin of the backstage pass or burn the velvet rope.  Stars in every pot and a drone-delivered Big Box on every doorstep.

But you’d be wrong.  As we slip into the twilight days of live music and festivals, Facebook stands ready with their venue DNR orders.  And live-streaming will be driven by desperation to be the Data Lords’ venue free meal ticket.

Why is this bad?  Because if you talk to any of the label relations types at Facebook, Google or TikTok it is a name droppers paradise.  They don’t really understand how to do the careful spadework that is necessary to break an artist to have an actual career.  They have major artists handed to them after that work has already been done, and done long ago in many cases.  There may be the odd “influencer” who gets a movie or a commercial, but the jury is out on whether these platforms can build careers.  (Or whether there will be many movies for influencers to get a role in.)

Not so of venues.  We know what they do and they’ve been doing it for a long, long time.  But we have to face the harsh reality that unless something changes very quickly, the Data Lords may have just piggybacked the massive income transfer of their DMCA and 230 safe harbors into another takeover of our business.  And they’ll do it in a way that could leave the entire live music economy and workers flopping like fish on a beach.

TikTok’s Buyer Just Got Another Problem: Child Facial Recognition Class Action

There is a long line of copyright infringement cases that demonstrate how hard it is to right a situation that starts out wrong. In addition to TikTok’s copyright problems which it is frantically trying to buy its way out of, TikTok also has a problem with how it treats children.  This isn’t the first time around for TikTok’s exploitation of children–they also were fined by the FTC as the plaintiffs note in their complaint.  A group of child advocates have complained to the FTC that TikTok is ignoring the FTC’s orders.

As any TikTok buyer will soon discover, TikTok is the gift that keeps on giving.  TikTok has been sued in a multi district class action for violating the privacy rights of children and the biometric privacy laws of several states (TikTok’s parent company Bytedance is also named). In their complaint (now In re TikTok, Inc., Consumer Privacy Litigation, Case No. 1:20-cv-04699, Master Docket No. 20 C 4699, U.S.D.C. N. Dist. Ill. East. Div.)  the children state:

Part of the reason for TikTok’s popularity, particularly with younger users such as Plaintiff, are the filters and other effects users can apply to their own videos, as well as those uploaded by others. In order to utilize many of these effects, Defendants scan users’ faces and “face geometry” to capture their biometric data, as well as to determine the user’s age using an algorithm.

In collecting and utilizing Plaintiff’s and the Class’ biometric identifiers4 and biometric information5 (referred to collectively at times as “biometrics”), Defendants fail to: (1) warn users that the app captures, collects, and stores their biometric data; (2) inform users of the purpose or length of time that they collect, store, and use biometric data; (3) obtain users’ written consent to capture their biometric data; and (4) implement and/or make publicly available a written policy disclosing to users its practices concerning the collection, use, and destruction of their biometric information in violation of the Illinois Biometric Information Privacy Act (“BIPA”), 740 ILCS 14/1, et seq….

Many of the features and effects require scanning the user’s face geometry in order to place effects over the user’s face, swap the user’s face for an emoji or other individual’s faces, or enhance aspects of their facial features.

But Plaintiff and similarly situated users place themselves at risk when they utilize TikTok features that require access to users’ biometric identifiers and/or information. TikTok acknowledges that it shares personal information that it collects from users with third parties, including entities in China. Multiple U.S. military branches and the Transportation Security Administration have banned use of TikTok due to privacy and cybersecurity concerns.

TikTok, and its predecessor musical.ly, also have a long history of exploiting the millions of minors that make up the lion’s share of TikTok’s user base. In 2019, the Federal Trade Commission settled a case against TikTok and musical.ly for violating the Children’s Online Privacy Protection Act by improperly collecting personal information from children under 13 years old without their parents’ consent.8 The FTC fined Defendants $5.7 million, the largest COPPA fine in the FTC’s history.

In response to complaints regarding children under 13 years old using the app, TikTok implemented a feature that scans the user’s face to determine if he or she appears to be 13 years old or younger. TikTok compares the geometry and features of the individual’s face to an algorithm to determine his or her age.

In other words, TikTok violates the law by capturing child biometric data, then they capture child biometric data to use in an algorithm to catch themselves violating the law.

The case has progressed to the settlement stage.  In response to the reported allegations that TikTok was attempting to fix the outcome of the settlement by cherry picking which attorneys participate in the settlement mediation, the court issued this statement in a case management order dated yesterday (9/1/20) (my emphasis):

[T]he Court is informed by certain Plaintiffs’ counsel that progress has been made in settlement discussions with Defendants. Certain other Plaintiffs’ counsel take umbrage with the manner in which those settlement discussions have taken place, stating that they were not allowed to participate in the settlement discussions (for one reason or another) and have not been informed of the terms of any potential settlement. It goes without saying that, before this Court can approve a class-wide settlement of any kind, it must consider the factors set forth in Fed. R. Civ. P. 23(a), (b), and (e). Those factors include, without limitation, whether the settling class representatives and class counsel have adequately represented the class, whether the proposal was negotiated at arm’s length, whether the relief provided for the class is adequate, and whether the proposed settlement treats class members equitably relative to one another.

In the Court’s experience, it often is advisable for the settling plaintiffs to encourage the participation in the settlement process of attorneys who represent other plaintiffs who have brought similar claims in other venues. After all, those attorneys may represent potential class members, possible objectors, or others who may opt out of any settlement class altogether.

So the Court is basically not having it when it comes to TikTok’s tactics.  It may be shocking that TikTok even wound up in this situation of getting sued for strong arming children and then strong arming children in its attempt to escape liability (and potential criminal prosecution).

All of this occurs in the shadow of the US government’s order requiring that Bytedance divest itself of TikTok.  And that leads to the most interesting part of the court’s case management order:

[T]he attorneys for certain Plaintiffs have raised the concern that any upcoming sale of TikTok, Inc., or its assets by its current owner to a domestic company may result in the destruction of relevant documents as that term is used in the Federal Rules of Civil Procedure. The Court wants to make it clear that, in the event that such a sale takes place, any successor-in-interest shall be bound by Paragraph of CMO No. 1 (just as the Defendants are now) and must make all reasonable efforts to preserve any and all evidence in the possession, custody, or control of TikTok, Inc., that is relevant to the claims and defenses raised in this action.

Of course, I’m sure it’s not lost on the Court that much of this evidence may be located outside of the Court’s jurisdiction and would be subject to China’s National Intelligence Law.  

Who wants to bet that preservation ship has already sailed?

 

 

Pandemic: Abacus Shines a Light on the COVID Gap with New Poll of Musician Attitudes on Touring

It could be called the revenge of the middleman.  In one of the greatest wealth transfers of all time, the value of recorded music has been largely transferred to the new middlemen at companies like Spotify, YouTube, Apple and Amazon.  Record companies with large market shares are doing well with streaming, but those returns are also below where the market should be.

The running dogs of Big Tech have for years told artists that what the solution to their problem with DMCA whack-a-mole was to get out on the road and sell those t-shirts.  The artists didn’t have much choice–we saw Levon Helm essentially die on the bandstand because he couldn’t stop touring.

The forced choice made by artists under DMCA duress allowed the “value gap” to spread into what could be called the “COVID Gap.”  The sudden constriction of touring income to zero or near zero acts like a reality superspreader—the streaming deal is both grotesquely unfair and supremely enlightening.

We know why it’s unfair: Fans pay for music they don’t listen to.  But its enlightening because the tale of the tape demonstrates that recorded music does have tremendous value and that value is being captured by the middlemen, especially Spotify and more particularly Spotify’s President for Life Daniel Ek’s personal fortune.  There’s no rational reason why Spotify should have a market cap that is 300% of the Warner Music market cap.

SPOT Comparison Covid

Canadian polling company Abacus has completed a study that everyone in live music should read very carefully.  The poll tells us a lot about artist attitudes toward the recovery of live music and it is the only one of its kind that I know of.  Why we don’t have something similar in the U.S. or in the U.K. is a mystery, but I doubt that it would tell you anything different.

It highlights the main factor that seems to get overlooked a lot—great that people want to open up venues, great that there is some bit of money being thrown at venues (although nowhere near enough), but even if the venues manage to survive and even if they manage to attract fans to come back, who exactly do people think they are going to get to perform?

Artists are presented with a patchwork quilt of rules and regulations that show a rather hair raising maze to drive through (because nobody’s going to be flying).  Artists have families just like anyone else, so before you even get to the economics, you have to protect the children.

I strongly recommend that everyone read carefully the Crowded Out study and think hard about what it means.  As an Austinite, I can tell you that I fully expect that Big Tech will be granted its fondest wish–Austin will become just another college town with a Google campus and they can finally jettison this “Live Music Capitol of the World” moniker.

If you don’t want that to happen to New Orleans, Nashville, Memphis and Atlanta, or a host of other cities, then you need to have some answers to the Crowded Out research.

You also need to have the fortitude to renegotiate those streaming deals to eliminate both the Value Gap and the COVID Gap.

Who Owns The MLC Database of Songs?

If you’ve been following the evolution of the “aircraft carrier” revision of the U.S. Copyright Act styled the “Music Modernization Act,” you will remember that America now has a blanket license for the mechanical reproduction of songs (or will have as of 1/1/21).  The “MMA” comes in three parts (or as I say three and one-half):

  • Title I which establishes the blanket license, a willing-buyer willing-seller standard for mechanical royalty rate setting, the Mechanical Licensing Collective (called the “MLC”), the all-important safe harbor for Big Tech’s massive infringement of songs, and authorized the creation of the “musical works database” which is the subject of this post;
  • Title I-1/2 which gives certain small benefits to ASCAP and BMI;
  • Title II which provides meaningful relief and largely fixes the pre-72 loophole that the Turtles sued over (formerly the CLASSICS Act); and
  • Title III which gives producers a statutory basis for SoundExchange royalties, another truly meaningful change.

I supported Title II and Title III, but I have lots of bones to pick with Title I, not the least of which has to do with the musical works database.  A lot of my issues have to do with what I perceive as sloppy drafting and a mad rush to “get a bill” at all costs which has led to a strong need to “fix” a lot of “glitches” in Title I itself (such as the failure to dovetail the major change in the compulsory mechanical from a per-song basis to a blanket basis. This in turn has an affect on other copyright provisions such as the termination right for songwriters which is now having to get solved–maybe–through the caulking of regulations to cover sloppy workmanship.  (Caulk cracks.)

For those of us who sweep up behind the elephants in the circus of life, I fear that the musical works database of other people’s things is an 11th Century solution to a 21st Century problem–a list of things that will be very difficult to get right and even more difficult to keep right, not unlike William the Conqueror’s Domesday Book.  Static lists of dynamic things necessarily are out of date the moment they are fixed.  We are going to discuss Title I musical works database today from a very simple threshold question:  Who owns it?

Spoiler alert:  The public owns it.  This is logical, but like so many things in the drafting of Title I, the drafting is glitchy, which is what you call it if you’re in a good mood.  I apocryphally attribute the term “glitch” when applied to massive Internet data breaches to the Fathers of the Internet who not only failed to take care that the herd was protected but also created a never ending series of data breaches.  That, in turn, birthed the entire Internet security industry–you know, “glitch” protection. (Looking at you, Vint Cerf.)

When you consider that the most valuable asset of the MLC is going to be the song database, and this database of other people’s things must be created by the efforts of potentially hundreds of thousands of songwriters given no choice in the matter, ownership matters.  It would be a bit much for the U.S. Congress to require all this only to enrich one U.S. corporation controlled by the U.S. publishers by leveraging a compulsory license to create a very valuable private asset.  Particularly one paid for by other people that might then get taken and given to a replacement MLC.  (There’s that “taken” word again.)  That’s typically not what they do.

Let’s also remember that on paper, the MLC does not pay a penny for the cost of its operations, including the creation of the database.  The entire cost of the MLC’s operations is borne by the users of the blanket license through an organization called the Digital Licensee Coordinator.  (If you’re thinking what’s with these names, I know, I know.  Forget it, Jake, it’s Washington.)

This database ownership issue has been raised a couple times, and no one has answered it.  I made it part of a recent comment I filed with the Copyright Office in the current rule making for regulations implementing Title I.  Maybe they’ll get around to answering the question this time.  After a while, you have to wonder why they have not.

A side note demonstrating both that ownership matters and that The MLC is thinking about ownership:  a service mark registration for “The MLC”.  (A service mark is a kind of trademark.)  There is a difference between “the MLC” and “The MLC”.  That’s because “the MLC” is the organization envisioned by the Congress that has to be redesignated (think “re-approved”) by the Copyright Office every five years.  On the other hand, “The MLC” refers to “The MLC, Inc.” which is the corporation created by the super popular proponents of Title I who were designated the first MLC and who style themselves “The MLC” using the definite article.  But if I told you that there was a difference between “the MLC” and “The MLC” would you find that confusing?

The clear implication of the definite article seems to be that they don’t envision any future in which they will not be the MLC, i.e., will not be redesignated.  They also probably don’t envision a future where a different corporation would be designated the MLC and The MLC would be looking for something to do.  Maybe they know something we don’t, but there it is.

This also raises some interesting trademark questions should The MLC seek to prevent a successor from trading under the name “MLC”, enough to stop The MLC from claiming a proprietary interest in the statutory description.  That mark is arguably descriptive and probably should be denied.  In fact it’s so descriptive it actually asserts a private intellectual property interest in the statutory language that describes the organization created by statute.  Sort of like asserting a trademark in “TVA” or “ICC” or “FOIA”.

MLC TM Registration

Let’s be clear about who owns the Congressional database.  As you will see, the musical works database does not belong to the MLC or The MLC and if there is any confusion about that, the Copyright Office should clear it up right away (which would save having to go to other avenues to do the same thing).  There really isn’t a practical alternative to the Copyright Office jurisdiction.  Congress gave the Copyright Office broad regulatory powers over the MLC (and, therefore, The MLC).

The public “musical works database” that Congress envisioned in Title I of the Music Modernization Act is largely a crowdsourced asset.  Congress has asked the world’s songwriters or copyright owners to spend considerable time preparing their catalogs in whatever format The MLC and the DLC determine is good for The MLC (with the Office’s blessing through regulations).  There inevitably will be quality control and accuracy review costs invested by the world’s songwriters and copyright owners in making sure that their catalogs are correctly reflected in the musical works database.  “Copyright owners” may also include sound recording copyright owners asked to contribute their ISRCs or other data that they, too, have invested considerable expense in creating and maintaining.

Unfortunately, the transaction cost to the songwriter and copyright owner for participation in The MLC and crowdsourcing Congress’s database is an unfunded mandate at the moment.  From a commercial perspective, the dynamic evolution of data is a potentially limitless expense, yet we have both this unfunded mandate which will spike in the early years but continue on a rolling basis essentially forever.  Yet the MLC’s administrative assessment appears to be capped at a fixed increase by a settlement agreement.  Again, a “glitch.”  Still, MLC executives seem positively giddy about their prospects with all the relief of someone who got tapped for lifetime employment with a pension (no doubt) while the songwriters these leaders are to serve are having the fight of their lives.

Yet, it seems clear that at the time of passing Title I, Congress had no intention of using a public law to create a private asset.  Neither was their intention to use the law to leverage the creation of an asset for private ownership by whoever the head of the U.S. Copyright Office designated to be the MLC, regardless of how “popular” they might have been.

The creation of the musical works database is replete with hidden costs paid or incurred by songwriters and copyright owners.  Neither the Congress nor the Copyright Royalty Judges  were asked to directly address these hidden costs of creating the musical works database.   (The Copyright Royalty Judges (or “CRJs”) are relevant because they approve the DLC’s financial contribution to the MLC through the “Administrative Assessment.”  The assessment is intended to cover the “collective total costs” which includes broad categories of cost items related to the database.)  And as usual, these costs appear to have gone straight over the heads of the Congressional Budget Office in their mandated assessment of the costs of Title I.

Even so, the MMA Conference Report from Congress addresses the cost issue head on:

The [Congress] rejects statements that copyright owners benefit from paying for the costs of collectives to administer compulsory licenses in lieu of a free market. Therefore, the legislation directs that licensees should bear the reasonable costs of establishing and operating the new mechanical licensing collective. This transfer of costs is not unlimited, however, since it is strongly cabined by the term ‘‘reasonable.’’[1]

It will be impossible for the “new mechanical licensing collective” to fulfill its statutory duties or build the complete musical works database to which the United States aspires without songwriters and copyright owners around the world doing the intensive and costly spade work to prepare their data to be exported to The MLC.[2]  It is clear that the reasonable costs of preparing and exporting that data should be borne by The MLC[3] as part of the “Administrative Assessment.”[4]  This material cost clearly is covered by the definition of “collective total costs”[5] and so was, or should have been, included in the current Administrative Assessment,[6] unless the intention was to cover The MLC’s side of these costs and force songwriters and copyright owners to eat their side of the same transaction.  If that is the case, it would be helpful for the Copyright Office to clarify that intention in the name of transparency through their broad regulatory authority.

If there is another drafting glitch there, it is worth noting that the CRJs clearly contemplated revisiting the Administrative Assessment  on their own motion for good cause.[7]  If there were ever good cause, the staggering cost of registering potentially millions of songs would be it.[8]

It should be clear that no one’s intention was for the services to pay to create the musical works database and for the songwriters and copyright owners to labor to export their data to make the musical works database complete, only to have The MLC claim ownership of the musical works database, particularly if The MLC were not redesignated as the MLC following the five-year review by the Copyright Office.  That unhappy “take my ball and go home” arbitrage event is foreseeable and would entirely cut against the “continuity” contemplated by Congress.[9]

It is critical that the Copyright Office clarify in regulations that neither The MLC nor any other MLC owns the musical works database.  In fact, the MMA clearly states that “if a new entity is designated as the mechanical licensing collective, [the Office shall] adopt regulations to govern the transfer of licenses, funds, records, data, and administrative responsibilities from the existing mechanical licensing collective to the new entity.”[10]  Since The MLC will have to transfer the musical works database and the other statutory materials to the new MLC if they fail to be redesignated, there should be no misconceptions that The MLC “owns” the database and could withhold all or part of it.[11]  Because The MLC is just An MLC.

It should also be made clear that any MLC or DLC vendor does not obtain an ownership interest in any copy of all or part of the musical works database they may obtain for any reason.

This should be an easy ask of the Copyright Office.  Watch this space to find out if it is.

          * * * * * * * * *

[1] Report and Section-by-Section Analysis of H.R. 1551 by the Chairmen and Ranking Members of Senate and House Judiciary Committees, at 1 (2018) at 2 (emphasis added).

[2] This effort is referred to as “Play Your Part™” a business process trademarked by The MLC available at https://themlc.com/preparing-2021.

[3] I would point out that the way The MLC should work—and in the end probably will end up functioning as a practical matter–is that The MLC needs to be able to handle however songwriters ingest their data.  Instead, it appears that The MLC is trying to dictate to all the songwriters in the world how they should assemble their song data before they register with The MLC. If The MLC wants to shift that burden, they should expect to pay for it.  Otherwise, this is exactly backwards.

[4] 17 U.S.C. §115 (d)(7)(D).  The Administrative Assessment is what makes the MLC different from other PROs or CMOs where members bear their own cost of participation.  The Administrative Assessment is to cover the entire cost of creating the musical works database, not just The MLC’s startup or overhead costs.  If nothing else, another way to treat these out of pocket costs is as a contribution to the operating costs of The MLC by songwriters and copyright owners that should be offset against future Administrative Assessments.

[5] 17 U.S.C. § 115 (e)(6).

[6] Order Granting Participants’ Joint Motion to Adopt Proposed Regulations, In re Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (U.S. Copyright Royalty Judges Docket No. 19-CRB-0009-AA (Dec. 12, 2019)).

[7] The CRJs included this footnote in their ruling on the administrative assessment (emphasis added):  “The Judges have been advised by their staff that some members of the public sent emails to the Copyright Royalty Board seeking to comment on the proposed settlement agreement. Neither the Copyright Act, nor the regulations adopted thereunder, provide for submission or consideration of comments on a proposed settlement by non-participants in an administrative assessment proceeding. Consequently, as a matter of law, the Judges could not, and did not, consider these ex parte communications in deciding whether to approve the proposed settlement. Additionally, the Judges’ non-consideration of these ex parte communications does not: (i) imply any opinion by the Judges as to the substantive merits of any statements contained in such communications; or (ii) reflect any inability of the Judges to question, [on their own motion without a filing from a participant] whether good cause exists to adopt a settlement and to then utilize all express or reasonably implied statutory authority granted to them to make a determination as to the existence…of good cause [to reject the settlement now or in the future].”   Order Granting Participants’ Joint Motion to Adopt Proposed Regulations, In re Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (U.S. Copyright Royalty Judges Docket No. 19-CRB-0009-AA (Dec. 12, 2019) n.1 (emphasis added)).

[8] There is a simple solution to determining these costs to songwriters and copyright owners.  The Copyright Office could designate several metadata companies who could compete to handle the various steps of creating and exporting metadata to The MLC, such as in the CWR format, for example North Music Group and Crunch Digital have such tools.  To avoid picking winners and losers and to preserve competition, the Office could alternatively establish a benchmark of quality control or some other criteria for becoming an approved company.  The costs charged would likely vary depending on the size of the catalog, but The MLC need only pay the invoice of these companies which would be included in the Administrative Assessment.  Obviously, the entity performing such work should be independent of The MLC, the DLC or any of its members, or any of their respective vendors.  This would, of course, introduce the concept of competition into the monopoly which may interest no one but might benefit everyone.

[9] See H. Rep. 115-651 (115th Cong. 2nd Sess. April 25, 2018) at 6 (hereafter “House Report”); S. Rep. 115-339 (115th Cong. 2ndSess. Sept. 17, 2018) at 5 (together with identical language, hereafter “legislative history”) (“Although there is no guarantee of a continued designation by the collective, the Committee believes that continuity in the collective would be beneficial to copyright owners so long as the entity previously chosen to be the collective has regularly demonstrated its efficient and fair administration of the collective in a manner that respects varying interests and concerns. In contrast, evidence of fraud, waste, or abuse, including the failure to follow the relevant regulations adopted by the Copyright Office, over the prior five years should raise serious concerns within the Copyright Office as to whether that same entity has the administrative capabilities necessary to perform the required functions of the collective.”)

[10] 17 U.S.C. § 115 (d)(3)(B)(ii)(A)(II).

[11] It seems that if an incumbent MLC that was not redesignated and continued to operate, it would almost unavoidably compete with the newly designated MLC but with a substantial leg up.  I realize there have been some statements made about The MLC taking on work beyond the blanket license, such as voluntary licenses.  That additional work might require additional investment, or a sharing of the total collective costs by third parties.  I have not addressed that allocation as I for one would like to see The MLC stick to their knitting and succeed at the job they are obligated to do, and, frankly, paid to do, before worrying about expanding into profitable roles for the non-profit corporation.   It does seem that if The MLC is not redesignated, there would not be much for them to do once they transfer the public’s assets to the new MLC.

Arithmetic On the Internet Revisited: The Sustainable Ethical Pool Solution to User Centric Royalties

“Sick of my money funding crap.”
A Fan

“These companies are taking power away from listeners, because listeners don’t have any say where their money goes,” Keating said. “If you only listen to me, I should get all the percentage of the money you spend on music.”
Zoë Keating

“User-centric” is rapidly becoming all the rage in the streaming royalty debate.  To its credit, Deezer is the only streaming service that has announced it is working on trying to implement a user-centric model.  (Others may be, but no public announcements.)

It’s not surprising that a small casual poll by Artist Rights Watch showed that when asked what would help artists the most, the overwhelming choice (83.9%) was buying a CD directly from the artist compared to streaming on Spotify (16.1%) or on YouTube (0%).  More rigorous data is required to reach a conclusion, but the lopsided nature of  the responses suggests that music fans very well may get it.  Not only do they get it, they may be woke enough to try something new.

Streaming is not a way to help independent artists.  And it’s definitely not a way to help songwriters who are still waking up from a century of sleeping on their rights.  Fans are getting the message that the economics of streaming are not sustainable for independent artists (and probably not other artists who are so unrecouped they may not care).  When Daniel Ek makes over $600 million in stock accretion in a single day during a pandemic that has reduced touring revenue to zero, Spotify’s income inequality just seems grotesquely unfair and unethical.  (Ek made more than Saudi Arabia paid for its stake in Live Nation).  This imbalance seems straight out of San Francisco’s Big Four railroad robber barons of the Gilded Age. Both artists and fans feel more than a little dirty contributing to it.

I wrote the first “Ethical Pool” post in 2018, and given the rumors about difficulties Deezer is having with implementation of a user-centric model, I thought it was a good idea to recap the Ethical Pool approach.  I’m not going into the same level of detail as I did in Ethical Pool I, and I’m going to assume that you know certain elements that I won’t get into again here.  If you need more detail, I recommend reading the first piece first.  In this post, we will briefly recap the royalty pool allocation compared to the Ethical Pool, and then focus more on implementation suggestions.

The Perception of Unfairness

Why do we care?  There are a few reasons why streaming royalties are paltry and therefore controversial.  The income inequality is brought into sharp relief with Spotify due to the distribution of shares in Spotify’s public stock sale.  (The problem being Spotify’s typically short-sighted business decision, i.e., failure, to share their good fortune with all creators on the platform, not with the fact that only the majors and big indies got stock.  You can’t take what was never offered.)  However, the problem is not with one particular platform, it’s with all the platforms because they all use some version of the revenue share model of calculating royalties.

At a high level, there are two approaches to paying royalties—up front and back end.  Up front payments are often fixed price per project or fixed price per unit.  Examples of an up-front fixed price royalty would be the statutory mechanical royalty for songwriters or the program license fee for television.  The up front model says, the price for my work is $X, I don’t really care if you make a penny, that’s your problem.  If it doesn’t profit you to pay my up front fee, get another one.  If the up front royalty is small and contemplates numerous copies being sold, there’s often a minimum guarantee or “advance” which does not get paid back, but which is recoupable from the sale of those copies.  A television program may have just a lump sum license fee with some distant profit participation.

The bet is that the user will make money and has the means to finance (or deficit finance) the project to get to the cash flow positive stage.

A backend deal usually has a royalty rate attached instead of a fixed penny rate which is a form of revenue sharing.  The minimum guarantee appears again, and may be recoupable or nonrecoupable or some combination of the two.  Still, the typical backend deal depends on how the licensed work commercially performs in isolation.  In other words, if I license a song to a record company or a television program to a network, I don’t really care how the rest of the songwriters or television producers are compensated (although I will sometimes protect my upside by asking for “Most Favored Nation” treatment on some financial terms which can have its own legal problems).

Unintended Consequences of the Big Pool:  A hyper efficient market share distribution

Streaming backend deals have an additional twist, and it is this twist that creates this hyper efficient marketshare distribution.  Unlike the typical backend deal, streaming backend deals depend on a revenue share.  You could ask why is that different, it’s all a revenue share of some kind.

True.  But this is a very particular kind of revenue share.  Streaming deals establish a pool of service revenue on a monthly basis and that pool is allocated among sound recordings based on plays by the service’s users.

Streaming revenue share is essentially a popularity contest for who gets the most money from the pool at the end of the month.  So rather than having a fixed price that varies based on how you do, how you do depends entirely on how you do relative to everyone else in competition for a fixed pool.

Naturally, the more leverage you have, the less Malthusian your deal will be, and you will have lots of downside protection bells and whistles like per stream minimums, per subscriber minimums, subscriber conversion incentives, and other goodies.  You may have a bigger share of the monthly revenue pie (so the service retains less), but the high level reality comes down to this:  The bigger your market share, the more money you make, and the smaller your market share, the less money you make.  It is essentially a zero sum game.

There is another mathematical reality to this calculation–the per-stream rate tends to decline over time.  Why?  Because if the rate of change in the revenue pie (the “A” value below) does not increase faster than the rate of change in the number of recordings being streamed (the “C” value below), the per stream rate will always decline.  Or more accurately, the nominal per stream rate since it is not actually fixed (outside of the downside protections).  And Spotify is never going to exert pricing power as long as it is in a growth mode, so the “A” value is very unlikely to ever increase enough to counter the increase in the “C” value.

The calculation looks something like this (although the algebra allows different steps to get to the same result):

Ethical Pool

Critics will say there is no per-stream rate in streaming licensing contracts.  That’s true, but there is a nominal per stream rate that can be approximated, which is about the only way to compare services to each other, so it is a relevant calculation.  (See The Trichordist Streaming Price Bible).

streaming price bible

So you can see that if you have a lot of popular recordings that are in genres that get streamed a lot, you will be very happy with the streaming revenue share calculation.  A concrete example might be hip hop compared to contemporary classical.  The ability to fund both an on and off-platform marketing spend that outstrips the competition clearly has a pronounced effect on revenue, also.  Playlist placement may make a difference, but whoever knows how particular tracks get included in playlists, please come forward.  So even within a genre, the better heeled have a better chance of dominating the royalty allocation and the less well-heeled will see their income fluctuate for Kafka-esque reasons beyond their control.

In the calculation illustrated above, that would mean that if your “B” value is larger than anyone else’s B, then you will dominate that month’s allocation.  The more downside protection you have negotiated in your license, then it is likely that your nominal share of the pie will be even bigger if that downside protection is baked into your royalty calculation.  (It’s also possible that one party’s downside protection actually reduces the monthly pie for those who don’t have it, but that’s a timing question that is difficult to know the answer to without a royalty compliance examination and even then may be inconclusive.)

From a user’s perspective, the big pool royalty allocation means that their subscription payment goes into the big pool and is allocated based on how that user and all other users stream during the month nearly regardless of which artists the user actually listens to.  The impact any one user makes on the allocation of revenue to a particular artist varies inversely to the number of active users on the service in a particular month.

Streaming revenue, then, has become a hyper-efficient market share distribution based on factors like who has the bigger catalog being streamed on the service, which at the margins probably means who has the bigger catalog full stop.   This is why the fan says she is “sick of my money funding crap.”  “Crap” obviously is in the eye of the beholder, but what she is really saying is that she’s tired of having nearly all of her subscription payment being paid for recordings she never streamed (and maybe would never stream).

User Centric and the Ethical Pool

User centric royalties would capture the user’s revenue (let’s use subscriptions as an example) and allocate it solely to the same user’s streams.

Let us accept as a given that changing the entire royalty system would require the consent of everyone involved who has a license (which is a lot of copyright owners).  That consent is unlikely to be given the larger the market share of the copyright owner.  Plus a single holdout could stop the whole thing.

Let us also accept as a given that changing the entire royalty system would be very complex and costly.

But–here’s another given.  The lower the per stream rates go, the lower the royalty payments go, and the greater the incentive for independent artists to get out of the streaming game altogether.  (Not to mention getting angry.)  When your royalty payment is minuscule it is easy to just say no.  Your motivation for staying in the service certainly isn’t based on the financials and is more likely to be fear of missing out or other preference curve distortion.

Therefore, rather than asking other copyright owners to opt-in to a user-centric model (which many probably won’t do), artists who are poorly served should consider opting out of the big pool.  (It must be said that U.S. songwriters gave up the right to opt out of audio-only mechanical licenses long ago, and even perpetuated this travesty in the recent Title I of the Music Modernization Act.  Why they did not fight back when they had the services on the ropes through class action litigation is anyone’s guess–but maybe it had something to do with money other than royalty rates.)

If those artists want to stay on the service, then the service could essentially duplicate their big pool accounting ruleset and create a separate pool of revenue–the “Ethical Pool.”  This would require allowing users to still pay their subscription fee, but direct where their money would be allocated for royalty purposes.  (Users would probably have to opt out of the big pool service since their fees would no longer pay for it, but hardcore fans probably wouldn’t mind and might even view it as a feature.)  That could be accomplished by a button in the user’s account settings and artists seeking to participate in the Ethical Pool could have a green check or some other icon indicating that the artist was in the Ethical Pool so would the fan please make that change.

This might take a few months to reach a critical mass of users and artists opting in, but when your royalty starts three or four decimal places to the right anyway, how much worse could it be?  Properly promoted, the changeover could be relatively simple and simplicity for the existing and new users should be the guiding light.

No deal points would change for the “big pool” copyright owners so their consent would not be required for the Ethical Pool.  The only change would be the rough equivalent of artists dropping out of the service and their fans leaving with them.  That risk was part of the original negotiation.  For the dominant players, it is unlikely that they will see any real fall-off in revenue, and if anything their hyper-efficient market share allocation may even increase slightly (because the C value would decrease by the number of streams that transition to in the Ethical Pool).

The Ethical Pool will require an investment by the service to create this parallel infrastructure, but if the big services don’t do it, it’s only a matter of time until insult exceeds injury and artists start leaving.  Or someone launches a service that caters to artists who would be Ethical Pool candidates.

I don’t think this is the end of the story, but it is a workable interim step on the path to sustainability that is more important now than ever.  The Ethical Pool would at least make the money clean and remove that feeling that the fan is actually hurting the artist when streaming.

The arc of the moral universe is long, but it bends towards justice.  However–it doesn’t bend by itself.  At this moment, the arithmetic on the Internet is starting to bend that arc.  The way it bends is up to us.

Pandemic: The Local Culture Card Solution Lets Public and Private Sectors Cooperate to Save Our Local Musicians and Retailers

The Local Culture Card would be a limited purpose debit card that permits the cardholder to purchase goods or services from a designated group of “local arts vendors” who would be artists, retailers or nonprofit arts organizations operating in the locality of the user.  It would be like a targeted gift card sponsored by state or local government, local corporations, radio or television stations.

Local culture cards would be distributed free of charge to local residents charged up with a minimum payment that must be spent within 30 days of activation.  Once funds are used, the issuer or sponsor could elect to replenish the funds on the same 30 day basis.

Alternatively, the local culture card could be sold like a gift card on the same terms.

The purpose of the Local Culture Card would be to empower consumers with purchasing power to directly inject cash into a local artist community—and quickly.  This would help everyone in the supply chain from vinyl manufacturers to one-stops to local record stores to the artists themselves and their songwriters.

Those local arts vendors would sign up to accept the Local Culture Card as payment for goods or services.  The Local Culture Card could not be used at Amazon, Spotify,  Target, Best Buy, Apple or other big box retailers because the benefit would be too diffused and would not retain local funds in local communities.  The card could instead be used for purchases at a local brick and mortar store’s online operation or to make a Venmo contribution for a live stream performance for a local artist (or purchase directly from the artist’s Bandcamp account).

The Local Culture Card would initially be charged with a minimum amount of credit or could be purchased like a gift card.  It could be branded by locality, state or region and could also be branded as a sponsored card by either state or local government or other private sector sponsor.  It could be included or branded as Record Store Day collateral or similar commercial efforts as it will be effective in both commercial and noncommercial applications.

For example, an Austin Culture Card could be sponsored by the Austin Music Office or the City of Austin Economic Development Department.   City funds would be used to charge up the card with a minimum amount of spending power, say $50.

Artists like Guy Forsyth or Dave Madden could sign up to accept payment through a webpage for their direct online sales or contributions through Venmo or Paypal for live streaming events.  Local retailers like Waterloo Records could sign up to accept the Austin Culture Card for purchases at their online store of recordings by any artist.  Ballet Austin could sign up so that patrons could use the Austin Culture Card to donate to that organization.  Alternatively, Austin Creative Alliance could sign up to accept donations for any of its member organizations.

The same process could be repeated by the Texas Music Office for artists statewide through the TMO’s “Music Friendly City” operation, or by the Small Business Administration for regional or national artists, retailers or organizations.

Alternatively Local Culture Cards could be sponsored by corporations and distributed to their customers or radio stations and distributed to their listeners.  Indie labels could sponsor cards as a tie in with local record stores that carry the label’s recordings.

The only other requirement for using the Local Culture Card would be that the money had to be spent within 30 days of issuance or it would expire.   Ideally a bank issuer would agree to provide the card as either a physical or virtual credit card for a zero transaction fee.  Remember–the Local Culture Card is not scrip, it’s cold cash placed directly into the hands of artists, retailers and arts organizations  by their fans.

While the examples I’ve given are from Austin, there is nothing unique about Austin.  The Local Culture Card would be relevant for any city with a cultural community from New York to New Orleans–that the fans want to retain during and after the pandemic.