Original Sin and Obama’s Missed Opportunity: What’s Next for the ASCAP and BMI Consent Decrees?

Original sin–In Christian theology, the condition of sin that marks all humans as a result of Adam’s first act of disobedience to God.

It’s kind of an Old Testament thing.  The ASCAP and BMI consent decrees punish songwriters for a kind of original sin that most of them don’t know about and that happened some time before 1941–before most of them were born.  And yet all of them are held guilty in advance.

Sound familiar?

The Obama Justice Department just had a spectacular loss on its misguided and probably unconstitutional 100% licensing position in front of Judge Louis Stanton, the BMI rate court judge who has primary responsibility for interpreting the BMI consent decrees.  BMI asked for declaratory relief from Judge Stanton which was granted in a decisive opinion rejecting the government’s position.  So now what?

Not only did the Obama Justice Department go down the wrong rabbit hole with the consent decrees, they also managed to get themselves sued–by songwriters.  How in the world could that have happened?  Not just one, but two separate and distinct lawsuits.

The songwriters lawsuit is against the Justice Department, the Attorney General of the United States and the head of the Antitrust Division, Principal Deputy Assistant Attorney General Renata B. Hesse.  (It appears that Principal Deputy Assistant Attorney General Hesse is the prime mover in pushing the DOJ’s position on 100% licensing through the Justice Department, although it is hard to imagine that the Attorney General did not personally approve the position given the magnitude of the change in position.)

The songwriters’ lawsuit is not brought under the consent decrees.  The complaint alleges that the DOJ attorneys, starting with Principal Deputy Assistant Attorney General Hesse, engaged in unconstitutional behavior by denying songwriters their due process rights as well as taking the economic value of private property without compensation (see Professor Richard Epstein).

The lawsuit also alleges that the process that Principal Deputy Assistant Attorney General Hesse engaged in–secret phone calls, no public comment on proposed amendments to the consent decree, deceptive practices designed to encourage songwriters to leave their PROs–violated laws governing the behavior of federal administrative agencies.  The implication is that the DOJ intentionally engaged in deceptive practices lead by Hesse but also the recently departed Litigation III Section Chief David C. Kully.  (Mr. Kully was probably “just following orders”, but we all know where that can lead.)

What are the possible steps forward from here?

No Change for Music Users

Some of the less knowledgeable reporting on fractional licensing suggests that somehow music users are burdened by the decision.  Not true–most music users already have licenses from ASCAP, BMI, SESAC and increasingly from Global Music Rights.  SESAC and GMR are not subject to consent decrees because more PROs means more competition which means good things happen, right?  That was, after all, reason for the consent decrees in the first place–to encourage more competition, not less, in the public interest.

The choices afforded songwriters among competing licensing associations are no more burdensome for music users than having to deal with any other vendors in their business.  On the contrary, if the Justice Department had been successful in their stated goals of encouraging songwriters to leave ASCAP and BMI, the Justice Department would have mandated mind numbing complexity in the market place.

The Missed Opportunity

The real policy failure is that the Department of Justice failed to adopt any of the hundreds of policy proposals made by the public to amend the consent decrees–the longest running consent decrees in the history of the United States–after years of review, negotiation and discussion.

Not one.

Instead, the DOJ fixed on 100% licensing, which is something that nobody had asked for publicly as the Copyright Office noted (at p. 2, text accompanying note 8):

Despite the wide-ranging nature of the study and invitation to raise additional issues, none of the participants identified fractional licensing of musical works by the PROs as a practice that needed to be changed.

The Justice Department missed an historic opportunity to do something good for everyone.

This is tragic.

Possible Futures

DOJ Changes Position on 100% Licensing

The easiest thing would be for Principal Deputy Assistant Attorney General Hesse to issue a statement acknowledging she got it wrong on 100% licensing and that the DOJ is abandoning the position.  I doubt this will happen.

DOJ Appeals Judge Stanton’s Ruling 

Given the general bull-headedness that produced the flawed 100% licensing statement in the first place, I think it is more likely than not that the DOJ appeals Judge Stanton’s ruling.  If you were able to suspend reality to the point that you would come up with the idea in the first place, then you are probably possessed of the kind of denial that would make you believe you will prevail on appeal.

As Judge Stanton is a U.S. District Judge sitting in the Southern District of New York, the appeal in this case would go to the Second Circuit Court of Appeals.  It seems unlikely that the Second Circuit is going to rule against the subject matter expertise of the BMI Rate Court judge–expertise is the point of having rate court judges in the first place.  This is particularly true in a case requiring an interpretation of the consent decree.

Nevertheless, I will not be surprised to see an appeal, particularly one filed before the ASCAP rate court judge (Judge Cote) follows Judge Stanton’s which is likely.  An appeal of the BMI case would allow the DOJ to drag out the uncertainty which seems to be the plan for reasons no one outside the Justice Department can understand.

ASCAP Asks for Declaratory Relief

Given the many rulings against songwriters handed down by Judge Cote, caution may be the watchword for any request for declaratory relief by ASCAP.  However much I appreciate Judge Stanton’s ruling, it must be said that the conclusion is rather obvious.  Even so, I thought that the ASCAP members’  partial withdrawal from collective licensing of the bundle of rights was so obviously the law that it was axiomatic, and Judge Cote ruled against that rather obvious policy.

It may be better for ASCAP to simply wait it out until the issue arises before Judge Cote in a future proceeding.  Since the MIC Coalition seems to have its hand in the Justice Department’s positioning anyway, it would not surprise if the MIC Coalition went to Judge Cote for their own declaratory relief.

MIC Coalition
MIC Coalition Members

SONA Pursues Its Lawsuit

The most interesting part of the puzzle is the lawsuit brought by Songwriters of North America, Michelle Lewis, Thomas Kelly and Pamela Sheyne.  As a threshold matter, it reinforces the idea that ASCAP and BMI are comprised of songwriters bargaining collectively.  While it may be convenient for the broadcasters, Google and their MIC Coalition to heap condemnation on the PROs, when doing so they are actually shaming the individual songwriters who are members of ASCAP and BMI.  Those songwriters don’t feel they’ve done anything wrong.

The SONA lawsuit confirms this for all to see.  While it takes considerable courage to sue a defendant who comes with badges and guns and prints money to pay their legal bills, the DOJ is now faced with a process that reeks to high heaven, looks at least potentially fraught with corruption and which SONA will now put under a microscope–if they survive summary judgement.

Of course, it should not be lost on anyone that the DOJ’s position will be some version of “We lost, so no harm, no foul” as absurd as that may seem.  I’m not sure that “just kidding” is a good look for them.

Until the ASCAP judge rules on the issue and follows Judge Stanton’s reasoning and the DOJ agrees not to file an appeal, there’s no reason for SONA to change course.  If SONA survives summary judgement on one or both of its claims, then things may get interesting.

Governors Take Action

Texas Governor Greg Abbott was the first state governor to call on the Attorney General to back off of the 100% licensing rule, acting in defense of Texas songwriters.  It would not be surprising to see other governors write their own letters to the AG, particularly now that Judge Stanton has ruled.

Terminating the Consent Decrees

What this episode should teach everyone is that the consent decrees have run their course.  They are now being manipulated by crony capitalists for private commercial advantage.  Hesse’s connections to Google and the MIC Coalition are well known and only further undermine the public’s trust in government’s ability to operate fairly.

Abandoning the consent decrees does not mean that songwriters would get a free pass on antitrust prosecution, it just means that the true free market would operate outside of a little intellectual elite in a far away Eastern city that thinks it can plan the lives of songwriters better than songwriters can themselves.  Music users and the government would still be free to bring antitrust actions if the facts warranted it as has already happened to SESAC (which is not subject to a consent decree).

So for the moment, songwriters are in a holding pattern but with the wind at their backs.

I’m still looking forward to an explanation of why Google, Pandora, Clear Channel and a host of other giant multinational corporations with hundreds if not thousands of lobbyists need the awesome power of the U.S. Government to protect them from…songwriters.

Getting closure on this regrettable episode will be better for songwriters and for music users.  It’s hard enough without the Nanny State intervening.  Collective licensing is one of the few areas of the business that is working pretty well in the digital age.

Songwriters deserve the chance to live their commercial lives without paying for long-forgotten sins committed before most of them were born.

 

 

 

 

 

Europe Leads With A Solution to the “Safe Harbor”Problem

Recital 38 of proposed European Commission Digital Single Market reforms:

In order to ensure the functioning of any licensing agreement, information society service providers storing and providing access to the public to large amounts of copyright protected works or other subject matter uploaded by their users should take appropriate and proportionate measures to ensure protection of works or other subject matter, such as implementing effective technologies. This obligation should also apply when the information society service providers are eligible for the liability exemption provided in Article 14 of Directive 2000/31/EC.

The legacy safe harbors in the U.S. legislation commonly called the Digital Millennium Copyright Act (DMCA) and its European counterpart are a dichotomy:  The law provides a little latitude to reasonable people acting reasonably, but it also provides a smokescreen for those who are trying to fake their way to one of the great income transfers of all time.

Which players are on which side of that dichotomy?  One easy yardstick is the ISPs who participate in the Copyright Alert System and those who don’t.  CAS members have a real commitment to infrastructure, are not in a line of business that is based on commoditizing other peoples value, and seem to have a genuine commitment to staying within the boundaries of the DMCA safe harbors.

And then there’s Google and its wholly owned subsidiary YouTube.  It’s been 10 years since Google acquired YouTube and it’s an even bigger mess today than it was when it was operated as a blatant infringement machine.  But the real risk about YouTube is that Google has shown other powerful multinational corporations that you don’t want to infringe a little–you want to infringe a lot.

Now we can add Facebook and Vimeo to the list of billionaires who profit themselves by hiding behind the DMCA safe harbors.  These others, especially Facebook, are likely to simply point to YouTube and say if you’re going to shut us down, you have to shut them down, too.

And they have a point.

That’s why it’s so refreshing to see the European Commission taking a selective approach to tackling safe harbor abuse.  While I’m sympathetic to the urge to try to abolish safe harbors altogether, I don’t think that’s fair to the good actors in the ISP space.  Wouldn’t you rather have other ISPs point to the good corporate citizens like AT&T, Cablevision, Comcast, Time Warner and Verizon as a model rather than Google and Facebook?  (After BMG Rights’ multimillion dollar victory over MIC Coalition member Cox Communications we have to assume that the industry understands where the boundary is, but time will tell.)

A better starting place for reforming safe harbor abuse might be to identify the bad actors and deny them the chance to misuse the law to commoditize the property rights of artists, among others.  Given the lobbying clout that Google and Facebook can bring to bear in the U.S., we’re probably going to have to wait for the European Commission to lead the way forward as they have with antitrust prosecutions of Google.

It should come as no surprise that nations that value their creators are willing to take on rapacious multinationals even as the Googles and Facebooks desperately try to increase the size of their lobbying footprint on the faces of Europeans.

Google Fiber Goes Wireless–Where Does That Leave Nashville?

There is no motion, because that which is moved must arrive at the middle before it arrives at the end, and so on ad infinitum.

Zeno’s Paradox of Motion

Nashville is one of the cities who was in early on Google Fiber–Google’s much vaunted gigabit fiber to the premises Internet service.  (Fiber is now reportedly called “Access” and is being downsized after Google’s reorganization under the “Alphabet” company name.)

The Nashville page for Google Fiber describes it as “Fiber is coming”.  Which must mean Fiber is not there yet.

According to recent reporting in Watchdog.org:

The Nashville Metro Council is considering a new ordinance to allow Google to quickly access utility poles and move existing equipment largely owned by rivals Comcast and AT&T. The measure will likely be voted on Sept. 6….Representatives from AT&T, Comcast and Google Fiber met with Nashville City Council members earlier this month to hash out the issue.Google Fiber claimed it might bypass the city if the ordinance isn’t passed.

That’s an interesting threat given other recent news regarding Fiber from The Wall Street Journal:

Google parent Alphabet Inc. is rethinking its high-speed internet business after initial rollouts proved more expensive and time consuming than anticipated, a stark contrast to the fanfare that greeted its launch six years ago.

Alphabet’s internet provider, Google Fiber, has spent hundreds of millions dollars digging up streets and laying fiber-optic cables in a handful of cities to offer web connections roughly 30 times faster than the U.S. average.

Now the company is hoping to use wireless technology to connect homes, rather than cables, in about a dozen new metro areas, including Los Angeles, Chicago and Dallas, according to people familiar with the company’s plans. As a result Alphabet has suspended projects in San Jose, Calif., and Portland, Ore.

Meanwhile, the company is trying to cut costs and accelerate its expansion elsewhere by leasing existing fiber or asking cities or power companies to build the networks instead of building its own.

It is well to remember that when Google nixed the Google Glass project, the decision came out of the blue when it encountered a consumer reaction ranging from yawn to outright hostility.  Also, Recode is reporting that “Google’s moonshot factory is having trouble getting products out the door.”

The Information reports that Fiber/Access is also struggling:

When Google was planning to launch its Fiber broadband and TV service, Fiber executives had ambitious hopes of signing up around 5 million subscribers in five years, said a person close to Google’s parent, Alphabet. But by the end of 2014, more than two years after service began, Google had only signed up around 200,000 broadband subscribers, said a former employee. The current number isn’t known, but it’s still well short of initial expectations, said another person close to Alphabet….But that’s only part of the story. Last month, Alphabet CEO Larry Page ordered Google Fiber’s chief, Craig Barratt, to halve the size of the Google Fiber team to 500 people, said the second person close to Alphabet.

The Watchdog.org report also discusses a recent poll about Fiber taken in Nashville

As Nashville and internet providers debate pole attachment rules, a recent poll shows most residents of the Music City think rules should be relaxed to expedite Google Fiber’s network growth there.

Local polling company icitizen found that 94 percent of Nashville residents favor “one-touch, make-ready” legislation that would allow a single utility crew to rewire poles for all providers to accommodate a new company. Eighty-five percent of respondents strongly favored the idea, while only 4 percent were opposed to such legislation. Icitizen polled more than 550 Nashville residents Aug. 18-24 for its survey….Watchdog asked [an citizen representative] if she was concerned about possible bias in the poll, given that the question about the legislation notes the current law is leading to a delay in Google Fiber rollout but doesn’t emphasize the argument of rival telecom providers that one-touch, make-ready impedes on their property rights and doesn’t offer sufficient relief or notification in case their equipment is damaged. The question does note the concerns over possible disruption of infrastructure and giving a shortcut to Google.

The poll also omitted the fact that Fiber/Access is downsizing by 50% and is planning on shifting to wireless anyway.  So why should Nashvillians go through the headache of “one-touch make-ready” in the first place?  Google’s championing of the issue almost looks calculated to create a negative public perception of Google’s competitors in the Nashville market.

Austin has recently suffered through the Silicon Valley-style “take my ball and go home” tactics with Google Ventures portfolio company Uber.  (Uber’s ballot proposition was defeated by a 56% majority after Uber and Lyft’s $10 million campaign trying to get Austin to yes backfired.)  While some were aware that Uber is planning on replacing its independent contractor drivers with driver-less cars, most voters in the substantial majority of the Austin community rejected Uber’s threats anyway.

I’m not saying the two are synonymous, but it’s a lot easier for Google to leave Nashville before it installs cables on poles or wireless infrastructure.  It’s hard to believe that a 50% cut in the Fiber workforce will result in anything like the bubbly version of the future of Fiber in Nashville that Nashvillians were thinking of when they took that poll.

If Nashville residents were told that they were going to get half the customer support and none of the pole problems, there’s no telling how that poll would have turned out.

Spotify IPO Watch: Blame ≠ Profit

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By its own calculation, Spotify dominates the global streaming music market.  According to a 2014 speech by Will Page, Spotify’s director of economics, as reported by Billboard:

….Page noted Spotify has launched in 32 of the 37 countries where streaming is the primary digital source of revenue. Page also pointed out that Spotify is half of the $1.5 billion global subscription streaming market. In the U.S. market, Spotify made up approximately 90 percent of last year’s growth in subscription revenue, according to Page.

While competition from Apple is certainly heating up, Spotify still is the dominant company in the space.  According to the Wall Street Journal, Spotify’s revenues nearly doubled to $2 billion last year and is expected to do well again this year.

Like Pandora and every other IPO-focused music service except for perhaps Tidal, Spotify blames its inability to make a profit on royalty payments rather than on its self-inflicted battle with Apple and spending levels based on a growth strategy.

Spotify also took on a billion dollar convertible loan at what will turn out to be credit card interest rates to fund that grown strategy.   Not to fund royalties, but to fund growth and competition with Apple.

Spotify’s main arguments about why no IPO is summed up in a Wall Street Journal article that misses a few key points, but the lead paragraph is revealing:

As Spotify AB gears up for a potential initial public offering next year, the music-streaming service is missing one key component in its pitch to investors: rights to play the music in years to come, according to people familiar with the matter.

First–as predicted, no Spotify IPO this year or for the foreseeable future.  And also as predicted, the blame for no IPO is not due to mismanagement by Spotify’s executive team, it’s due to The Evil Record Companies.  Due to solid reporting by Hanna Karp at WSJ,  Spotify’s “leak when you’re weak” strategy didn’t really give them what they wanted.

daniel-ek-spotify-ceo-2012billoardspoof-2

Leak When You’re Weak

Spotify has a long history of leaks, and in particular leaks that backfired.  This WSJ story is no exception.  The actual story is not one of “scrappy little startup beset by The Evil Record Companies” which is the narrative that Big Tech has been selling since 1999 and is getting a little dog eared.  This is particularly true of Spotify with a valuation greater than any record company’s.  However misguided that valuation, that is the one they have.

Rather, the story is that inexperienced management has tried to play in the tall weeds with the big dogs on Wall Street and are embarrassing themselves from the financial corner they are painted into by the shortcomings of their own business strategy.

Nobody but Spotify got Spotify into the corner they’re in.  And that’s the story that the WSJ is telling.

How did they get there?  Lavish spending, rapid expansion, high executive salaries and a general failure to capitalize on the many markets in which Spotify operates before entering new and uncertain markets is not a good look for a “start up” with a higher market capitalization than that of any one record company they do business with.

And then there’s the songwriters–not mentioned once by the WSJ.  Spotify is outright stealing from songwriters by using unlicensed songs for which they don’t pay royalties.  So where ever Spotify comes up with this “we pay 70% of revenues in royalties” begs the question–if that’s true, then why are there two class action lawsuits brought against Spotify by songwriters for nonpayment?

Why did Spotify have to make a quick settlement with the National Music Publishers Association (former owner of Spotify’s licensing service provider)?  Why are there rumors that many independent publishers rejected that settlement and are planning their own class action?

That part of the story didn’t get included in the WSJ’s reporting, but you know who notices that kind of story?  Bondholders.

And bondholders have a clause in the typical bond that in extreme cases allows them to take over the company in cases of insolvency and a reasonable expectation that the bonds can’t be paid due to the uncured mismanagement of the debtor–an event which, at best, may result in a call for accelerated repayment of the loan or a reset of the bond’s interest rate–higher, and with even more warrant coverage.

Market Conditions

While the publicly traded tech sector leaders and the broader indices have recovered somewhat from earlier lows driven by downward pressure on oil prices and the Brexit crash, the U.S. IPO market is still in the doldrums and is likely to stay there for the rest of 2016 and probably at least the first quarter or two of 2017.

In order for a high risk investment like Spotify to get a full commitment underwriting syndicate interested in floating the company’s stock on a public exchange at a valuation that smells like victory in the morning, it’s going to need to do better than it’s doing now or has done in the last few years.  This is the point at which underwriters ask why a company with a $2 billion top line cannot seem to make a profit.  Will those underwriters be willing to accept The Evil Record Company story more than The Incompetent Management story?  Or The Incompetent Management Can’t Manage Their Vendors story?

Absent the “greater fool” frothiness in the markets which I don’t see coming back from 1999 any time soon, a lack of “irrational exuberance” may means goodbye IPO for Spotify and hello Chapter 11.

And Then There’s the Debt

Said another way, the earliest that Spotify could IPO in the U.S. is likely to be more than one year from March 29, 2016, the date that Spotify announced its $1 billion convertible note with Texas Pacific Group, hedge fund Dragoneer and Goldman Sachs clients.

If Spotify holds a public offering in the next year [that is, before March 29, 2016], TPG and Dragoneer will be able to convert the debt into equity at a 20% discount to the share price of the public offering, according to two people briefed on the deal. After a year, that discount increases by 2.5 percentage points every six months, the people said.

Spotify also agreed to pay annual interest on the debt that starts at 5% and increases by 1 percentage point every six months until the company goes public, or until it hits 10%, the people said. This interest—also called a “coupon” and in this case paid in the form of additional debt, rather than cash—is commonly used in private-equity deals but rarely seen in venture funding.

So the equity warrants start to decrease 18 months out, i.e., starting around September 2017, but the interest rate will increase from 5% to 6% around the end of September 2016–next month, that is.

Running Spotify will get very much more expensive in about 30 days from today.  That has nothing to do with royalty payments or licenses.

Do you think that Spotify executives will be asked to take salary cuts?  Cancel magazine subscriptions?  Fly coach? Move from Manhattan to Syracuse?  No more Uber black cars?

And will that make the bondholders happy?

When is a Down Round Not Called A Down Round?

When it is convertible debt, apparently.  Companies often use debt to avoid closing a round of financing at a valuation that is lower than the last round of financing.  Why?  Because there are usually antidilution penalties that are triggered to protect the “pre-money” shareholders from being diluted by the subsequent down round that they may or may not invest in, too.

Even so, Spotify’s debt may have already diluted the pre-debt valuation of the company. Again, according to the Wall Street Journal:

While Spotify’s valuation doesn’t technically change with the debt round, one of its mutual-fund investors has marked down its stake. Fidelity Investments held its Spotify shares at [absurdly high stock price of] $1,643 a share in January, down 27% from last August, according to regulatory filings. [That’s a markdown from an implied share price of an even more exuberant share price of $2,250.] Another mutual fund, Vanguard International Growth, paid $2,229 a share for a stake in Spotify and still held it at that price as of December.  [Attention Vanguard shareholders!]

The Deal is Bad and They Are Untrustworthy

If the songwriter experience with Spotify is any guide, you can’t trust these people to run what is essentially a glorified record club unless they are under the watchful eye of a magistrate judge.

On top of that, they routinely seem to leak terms in an effort to get themselves a better deal with the people who actually own the rights they need to license.

If people want to do exclusives with Apple, they’re going to do them even if the dominant multinational in the space–that means Spotify–doesn’t like Apple getting those deals.  Maybe if Spotify got caught up on all their songwriter payments they’d be more worthy of sympathy.  In fact, maybe the songwriters (who are often the artists, too) might even take their side occasionally.

These deals should have been closed long ago, and that’s a reflection on poor management at Spotify that can manage to borrow $1 billion, but can’t close a box when it comes to licensing their one product.

Show Me the Proof

There are two great canards at Spotify (and all subscription services that offer a free tier, to be fair):  Exclusives hurt their business and if consumers get something for free long enough, they’ll want to pay for it instead.

There is no public consumer research that I’m aware of that supports either of these conclusions.

I’d love to hear about that research, I’m all ears.  Maybe its just another excuse for not being able to turn a profit on $2 billion of top line revenue.

Conclusion:  No Spotify IPO, not now, maybe never

As I’ve written before on Spotify IPO Watch, a combination of factors have gotten Spotify where it is now.  Market conditions, bad management, arrogance, stiffing songwriters and getting too big, too fast.

Until all those things change to one degree or another, it’s likely that the Spotify IPO myth will remain just that.

Watch this Space: MTP Podcast on 100% Licensing with David Lowery, Steve Winogradsky, Chris Castle coming soon

The MusicTechPolicy podcast is back! Next week we will kick things off with a discussion of the Department of Justice [sic] ruling on 100% licensing and partial withdrawals. Participants will be David Lowery, Steve Winogradsky of Winogradsky/Sobel and author of Music Publishing: The Complete Guide and me. Watch this space for links to the podcast when […]

via Watch this Space: MTP Podcast on 100% Licensing with David Lowery, Steve Winogradsky, Chris Castle coming soon — MUSIC • TECHNOLOGY • POLICY

The MTP Interview: Alan Graham’s Artist’s Guide to Blockchain, Open Music Initiative, Smart Contracts and Dark Social (Part 2)

This post is Part 2 of the MTP Interview with Alan Graham. Read Part 1 here. Chris Castle: How are licensing payments fulfilled using blockchain? Alan Graham: Hard to say exactly without examining an actual business model, but for the sake of argument, currently the mechanism for this would require the use of a crypto […]

via The MTP Interview: Alan Graham’s Artist’s Guide to Blockchain, Open Music Initiative, Smart Contracts and Dark Social (Part 2) — MUSIC • TECHNOLOGY • POLICY