Following the Money: Solutions for Google’s Problems with Defrauded Advertisers

Americans are freedom loving people, and nothing says freedom like getting away with it…

From Long, Long Time written by Guy Forsyth

Google’s UK Policy Manager Theo Bertram advised in 2012–“Follow the Money to Fight Online Piracy“.  Google’s copyright lawyer Katherine Oyama endorsed this approach on behalf of Google before the U.S. Congress in 2011 (“We would publicly support legislation like what I described, the follow the money approach…”).

Several UK banks and other advertisers are now doing just that according to the London Times (“Banks pull Google ads in row over hate videos“):

Three of Britain’s biggest banks have pulled advertising from Google after their marketing appeared alongside extremist YouTube videos.

HSBC, Lloyds and Royal Bank of Scotland acted over fears that chunks of their advertising budgets have in­advertently ended up in the pockets of banned hate preachers and anti-semites. The lenders join a growing list of big advertisers who have withdrawn marketing from the search engine and its YouTube video platform. These include McDonald’s, L’Oréal, Audi and the BBC.

How might these sites have gotten a share of revenue from ads served against their videos?  There’s only one way I know of that could happen, and it starts with having a Google Adsense account approved by Google.

Adsense Approval

In order to get an approved Adsense account, the party must apply for it, give out their payment information (see Step 2 “How Will I Be Paid”) and Google approves the account for monetization purposes.  The applicant gets paid because Google approved them for payment.

A YouTube channel partner gets paid for advertising on their YouTube videos through an existing Adsense account, so this is a second layer of approval to associate the YouTube partner channel with the YouTube partner’s Adsense account:

YouTube Channel Partner How to

So if we follow the money as Google has suggested many, many times, it is clear that it is not possible to have a monetized YouTube channel without at least two layers of approval by Google.  Google also knows who to pay, which bank account to pay, and presumably the taxpayer name and tax ID number for the account.  And of course I would assume that Google would be sending an IRS Form 1099 to the channel partner or otherwise complying with taxing authorities.

Following the money in this case would be very simple, particularly if Google is cooperating.

The money isn’t the only issue, however.  YouTube partner accounts depicting Nazi symbolism transmitted in Germany, Austria, Switzerland or any other country with prohibitions on the dissemination of Nazi symbolism may present a different problem.  Those accounts (and presumably Google itself) will be subject to the Strafgesetzbuch section 86a criminal law in Germany and analog criminal statutes in Austria and Switzerland which ban Nazi symbols like this:

Neo-Nazis Using YouTube for Propaganda

And also like this:

kolovrat 1

In fact, if you do YouTube searches for bands on the ADL’s “Bigots Who Rock” list, you’ll find other examples.

It is also worth noting that YouTube monetizes search (YouTube is the second largest search engine online) even if the videos themselves are not monetized, and that YouTube almost certainly keeps all the money such as the ad for Osmo that monetizes a search for extremist videos.

youtube aladnani osmo ad

The problem that YouTube is experiencing now that has resulted in hundreds of major advertisers pulling out is not that different that the problems that Google had with music and movie piracy as described in the Megavideo indictment (pp. 8, 34):

kdc adsense

Google had given Megaupload (or an associate of Megaupload) an Adsense account  Although it appears from the indictment that at least one Adsense account was terminated, Megaupload had been operating for a while before the account was terminated.  It does not appear that Google notified advertisers, recovered improper payments to Megaupload or refunded even Google’s own share of revenue to advertisers.

This is important to remember–following the money inevitably leads back to Google itself for advertisers to demand at least the share of advertisers’ money that Google kept for its own account not to mention the sums paid to the YouTube or Adsense partner.  In fact, there’s an argument to be made that the YouTube or Adsense partner, however distasteful, may have done nothing wrong as between that partner and Google.  It is Google that made the promise to the advertiser of where their ads would appear, not the channel partner.

The solution for this is probably best summarized by Professor Ben Edelman’s bill of rights for advertisers.  The solution is ultimately going to turn on both enforcement of Google’s terms of use as well as its monetization policy.  It should be obvious now that Google’s current practices on YouTube simply will not wash–the plan should be to stop the videos from being uploaded if they violate the terms of use, not relying on advertisers or the police to catch them after the fact.

This will take time to give effect of course.  The good news is that Google has a host of forensic information that will be of good use to the police in some cases, but inevitably will make refunding advertising payments to Google’s clients ever so much easier.

All they have to do is follow the money.

 

Fighting for a Straight Count: Does Streaming Accounting Cost More than the Royalties?

When you drill down on exactly what goes into tracking and accounting for songs and recordings on streaming services one thing becomes apparent:  No matter how much you automate, those systems are expensive and the royalties are minuscule.  This is in large part because of the revenue share method of royalty payments that creates a vastly more complex accounting world than a simple per-use penny rate would require.  It’s time to make that change to simplify the reporting.

A recent post by a founder of a digital distributor gives you a sense of the complexity involved:

It’s easy to figure out how much an artist made. But if you want to figure out how much each collaborator is owed from each stream… now you’re looking at millions of rows in hundreds of royalty reports from dozens of sources — every month.

Payments are paid in fractions of cents.

Did I say fractions? I meant 20 decimal places.

Did I say cents? I meant 30 different currencies.

Did I say 30 different currencies? I meant a 350-row exchange rate lookup table. “Customer currency: Swedish Krona, royalty currency: Ukrainian Hryvnia” is a thing (and so on, and so on).

Did I say a 350-row exchange rate lookup table? I meant a different table every month — from every streaming provider.

This gives you a look under the hood of the number of transactions that are inherent in a royalty system that pays every time an end user listens to a track.  It also informs why artists and especially songwriters are royally cheesed about the sharp decrease in the size of their royalty payments.

The hidden transaction costs of the configuration shift from album bundles to singles with  the coming of iTunes was challenging but was at least manageable.  The shift from singles to individual streams is cost multiplier of significant proportion above the shift from albums to digital singles.  I would submit that not only is the cost not manageable, but when distributors promote themselves based on their ability to handle twenty decimal places to the right, it probably never will be.

When a firm’s costs exceed revenue, the firm must either take on debt, sell equity or shut down the insolvent business or business unit–or delay paying royalties, more about that later.  Royalty accounting is, of course, a core business function of distributors, but it is also a core function of the parties receiving those royalties out to twenty decimal places to the right–record companies and music publishers.  There are even more accounting costs incurred by the labels and publishers in calculating the artist or writer shares and their own share of revenue, which will cause the decimal places to increase–to the right.

What this means is that in order to stay in business, be able to meet contractual obligations and pay their artists or writers, royalty systems must be able to handle a new level of complexity they were never before required to process.  Sound expensive?

Add to this complexity that many digital music services use the compulsory mechanical license that requires monthly statements and a true-up annual accounting signed by a CPA and no audit right–instead of quarterly or semi-annual accounting with an audit right.  Even if a publisher is accounted to monthly and pays writers quarterly or semi-annually, the publisher still bears the cost of processing the monthly accounting.  The frequency of ingesting these monthly payments may compound the transaction costs at the publisher and songwriter level.

One technique employed in the Pandora on-demand song license (paragraph 6(a)) is to defer both payment of mechanicals and royalty statements until the revenue payable is $50.  While this may seem reasonable on its face, it’s not–for largely the same reasons that the Copyright Office rejected this approach (37 CFR Sec. 210.16(g)(6)).  Pandora’s license is clearly a variation on the law, which limits the deferral to $5 (not Pandora’s $50) and requires that Pandora pay any deferred royalties on the Annual Statement of Account.

That means that the service cannot write itself an indefinite interest free loan with the songwriters money and not tell the songwriter it is doing so.  And, of course, you can’t audit statements you don’t receive.

Holding these sums is one way to finance the cost of running these accounting systems that deliver ever-smaller fractions of a penny paid to songwriters and artists.  That should sound familiar–new money used to pay old obligations.  Does the name Madoff come to mind?

It’s also important to note that in a revenue share world where money is allocated based on a core calculation of uses of your catalog divided by all songs used on the service in a month, that fraction will produce an ever smaller share of revenue if the rate of change in your catalog titles is less than the rate of change in the number of all songs on the service. (This will likely be true even if the service revenue increases, because your share of it will decline on a relative basis.)

So what is twenty decimal places today, could be even more decimal places in a year or two.

Where the industry went wrong was in the beginning when services got us to buy into the idea that getting something was better than piracy and that we owed the services a chance to find an audience.  When the revenue shared was low and higher margin goods were the focus, that was one thing.

The current state of plays is another thing altogether and revenue share deals for per listen payments require a level of complexity we can’t continue to support.

And yes, that means you, Facebook negotiators.

How Accurate are Music Subscription Service Subscriber Numbers?

All of you who subscribe to the New York Times, fly Quantas, use any of a number of mobile carriers or who are in the 6th month of your third Spotify 30 day (or 90) free trial may be interested in this post.

According to Billboard in a story titled “Spotify Officially Hits 50 Million Paid Subscribers“, the “official” announcement came from a tweet:

I found this intriguing–how did we go from “Spotify Officially Hits 50 Million Paid Subscribers” in the headline to a tweet that doesn’t really say the same thing?  Maybe like this?

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First, what makes a tweet “official”?  Much less “official” totals of “paid subscribers”?  Finding out may be like asking what makes ketchup “fancy”.

w27cz

Newspaper subscriptions have long been verified by a company specializing in verifying circulation.  Television has the Nielsen ratings, music has Soundscan, and so on.  None of these systems are perfect, but they make it harder to outright misrepresent success in a business where frequently the only people who really know how well they are doing are the people who would like you to believe they are doing well.  This is nothing new, it’s as old as moral hazard.

The quest for truth leads one to independent verification services.

spotify-clown-car
A clown car for 6 million streams

Reuters reported the same story with a more subdued headline: “Spotify Says It Reached 50 Million Subscribers“.  A little more factual, a little less Kool Aid.

This is important because I have yet to find anyplace that Spotify actually says the 50 million subscribers were “paid”.  The press leaped to that conclusion, but Spotify did not say that.

And neither does Apple, a company which is already public and has to be careful what they say about the money they are making or not making.  Yet somehow nobody transforms Eddie Cue’s statement that Apple has “well past 20 million subscribers” into an “official” statement implying a verified number of “paid” subs.

Actually–it may well be that there is a significant revenue difference between “paid subscribers” and “subscribers”.  As the Music Industry Blog wrote last year:

[T]here is a more important story here: Spotify’s accelerated growth in Q2 2016 was driven by widespread use of its $0.99 for 3 months promotional offer. Which itself comes on the back of similar offers having supercharged Spotify’s subscriber growth for the last 18 months or so. In short, 9.99 needs to stop being 9.99 in order to appeal to consumers.

As Spotify has been “dominant” in the music subscription business for a while now (and yes, I mean that in an antitrust sense of “dominant”), it seems that it’s high time for someone to independently audit the veracity of the number of their subscribers.

Or would the Securities and Exchange Commission like to rely on a tweet?

 

 

@katenash Shows that Permissionless Innovation is Just A Trumped Up “DMCA License”

Small business people dealing with big business people always have the same fear–what if they just stiff me.  You know going in that there are some big businesses that simply factor into their financials that the businesses will get away with stiffing a percentage of their contractors with claims of unsatisfactory work daring the small business to sue.  Claims that may be trumped up, so to speak.

Some–not all surely, but some–Silicon Valley companies have taken this “pay them when they sue” mentality to it’s logical conclusion under the guise of the faux “DMCA license” based on sheer bargaining power.  At least the real estate developer stiffing contractors on trumped up claims did actually hire the contractor with a promise to pay.

The Silicon Valley version of “pay them if they sue” is wrapped in the cant of Valley Boy catechism and the leap of faith to “the machines made me do it” or “disruption” resulting in the gospel of “permissionless innovation”.  That’s the trumped up theory that allows the “disruptor” to just take the contractor’s labor and materials without negotiating a contract or paying a dime and then saying “so sue me” and my $20 billion valuation.

UK artist Kate Nash recently called out Snapchat in a viral tweet for profiting themselves from a trumped up license

David Lowery called out Facebook for essentially doing the same thing starting the “#F*CKTHEZUCK” hashtag.

Remember–Snapchat and Facebook, two massive Silicon Valley darlings, have NO licenses and REFUSE to negotiate.  (Google does get licenses for some of its platforms like YouTube but is also busily serving millions of NOIs on the Copyright Office to use songs without paying royalties and also gaslighting the UK music industry with yet another meaningless “voluntary” code of conduct for the billions of takedown notices Google receives for search that Google refuses to fix.)

Kate Nash has put her finger on the key factor in the greatest income transfer of all time–it’s not that the music is free because it is without value, it is free because it is stolen using a trumped up legal theory based on loophole seeking behavior in a legacy statutory construct.  Nobody ever intended for the “safe harbors” to be used to trump up a nonexistent “license held in place by unequal bargaining power.

As Beggars Group Chairman Martin Mills said in his keynote at Canadian Music Week:

[An] imbalance I want to talk about is the safe harbour provisions, and similar terms in other countries. They were introduced, with some foresight, by the legislators in the USA framing the DMCA, to provide a notice and take down procedure for unlicensed content. But the legislation has been distorted into a protective wall behind which cyberlockers and torrent sites, and companies such as YouTube and Grooveshark, operate.

The original intent was to protect reasonable people acting reasonably from falling foul of the law, to enable the digital economy to grow without “ gotcha “ law suits against ISP’s who had no idea that their networks were being used for infringement. They were not intended to provide fortress walls behind which companies could build billion dollar businesses on content that had not been cleared. They were never intended to become a de facto “ licence “.

Kate Nash said it best:  “But where’s my paycheck?”

exposure-bucks

#IRespectMusic: It’s Time for the New Congress to get Serious About the Performance Right for Artists

irm-marsha

Friends don’t let friends get LRFA’d.

Once again we’ve started a new session of Congress with really old news–the National Association of Broadcasters is yet again circulating the reactionary Local Radio Freedom Act (or the grammatically challenged “LRFA”) that’s been warmed over and served up again from the last Congress.

irm-deutch

LRFA’s purpose is twofold.  Get unsuspecting Members to support a policy to deny recording artists their fair share for the performance of their recordings on terrestrial radio.  How?   By aligning America with the practice of Iran and North Korea that is out of step with the business of every other major world economy.  And because America denies the world’s recording artists the same treatment that American artists would enjoy overseas, America’s trading partners justifiably refuse Americans reciprocal treatment in foreign countries.  Which is more embarrassing?

i-respect-music-representative-judy-chu-creative-rights-caucus-2014

It’s not that American artists don’t earn the foreign performance royalties–it’s that the royalties earned overseas by hardworking Americans are denied to them because Congress is misled by the NAB into thinking that fair compensation is somehow bad policy and the US denies equal treatment to foreign artists.  Why should those countries–who actually care about their creative class–grant reciprocal treatment to Americans?

doug-collins

It goes like this:  When you hear Aretha Franklin sing “R-E-S-P-E-C-T” written by Otis Redding on the radio in your car, that economic transaction results in Otis Redding (the songwriter) getting paid as a songwriter under the government’s 75 year consent decrees (another sad story).  Aretha Franklin, however, gets ZERO.

blake-nadler

When that same recording is played in the UK, Otis Redding still gets paid as the songwriter, but the artist does, too.  Except that because Aretha is an American, her money is never paid to her.

This obvious inequity is what motivated over 14,000 musicians and music fans to sign the I Respect Music petition in the last Congress and created the largest grass roots movement in the history of the music business with a positive message.  Because friends don’t let friends get LRFA’d.

It’s one of the few issues left that is truly bipartisan.

When Blake Morgan and the IRM team took the 14,000 signatures on the IRM petition to Congress, they had to carry two huge books of signatures.  And yet, we once again are presented with getting LRFA’d.

irm-team

LRFA is the Alinsky-style straw man–demonize your opponent as something you want people to believe your opponent to be (a “tax” for example), then perpetuate that mischaracterization no matter what.  (In the current parlance, something pretty close to gaslighting fake news.)

This LRFA legacy “nonbinding resolution” has become an evergreen in the arsenal of the NAB’s gaslighting efforts to perpetuate exploitation of recording artists for one reason and one reason only–because they can.  The NAB gets a bunch of Members to sign up, don’t tell them the truth about what they signed, and hope that nobody tells them otherwise until it’s too late.  But when Blake teaches the I Respect Music story on college campuses across America, it requires little explanation.

georgetown

What the NAB’s vast army of lobbyists will do with the LRFA after they largely dupe Members into signing on to it (and dupe Members staffs into allowing their bosses to sign on without doing the real staff work to know how they are being duped) is to perpetuate the greatest inequity in the Copyright Act by convincing members that any performance right legislation is doomed to fail so why support it?

How do we know this?  Because the NAB did the same thing in the last session.  When artists met with Members in their offices to discuss what happened, it turned out that many Members had no idea what the real story was behind LRFA.

blake-poppy-cnn

It’s important that your Member of Congress understand what the NAB is up to with this gaslighting campaign.  The truth behind this great inequity needs to be told along with the hard economic facts–because of faux legislation like LRFA, America is leaving hundreds of millions in real revenue from foreign countries that could easily be repatriated by American artists.

irm-quilt

Not to mention supporting future American artists.

i-respect-music-kid-piano-sm

We cannot let another session of Congress pass by without fixing this great inequity.  Don’t let your Member of Congress be fooled again–because friends don’t let friends get LRFA’d.

Call your representatives and sign the I Respect Music petition by clicking here.

And vote.

irmaiv-1

 

Jacqueline Charlesworth, Former General Counsel of U.S. Copyright Office, Joins Covington & Burling Law Firm

Showing excellent judgement by the firm, Covington & Burling announced that Jacqueline Charlesworth is joining their New York office.  I’m glad to see Jacqueline join the firm and they are lucky to have her.  What’s not included in the press release is that she was one of the counsel of record along with the Gerard Fox firm representing Songwriters of North America, Michelle Lewis, Thomas Kelley and Pamela Sheyne against the United States Department of Justice for the DOJ’s absurd overreach on 100% licensing.

Here’s the press release:

Jacqueline C. Charlesworth has joined Covington’s Intellectual Property Rights and Media and Communications practices in the New York office. She most recently served as General Counsel and Associate Register of Copyrights of the U.S. Copyright Office.

While at the Copyright Office, Ms. Charlesworth had primary responsibility for interpretation of the U.S. Copyright Act. As General Counsel she oversaw a wide range of litigation, legislative, regulatory, and policy matters, including the Office’s participation in cases before the U.S. Supreme Court, rulemaking proceedings under the Digital Millennium Copyright Act and other provisions, legal review of Copyright Royalty Board decisions, administration of statutory cable, satellite, and music licenses, and copyright registration and termination issues. She also advised Congress on copyright-related legislation and policy concerns.

Prior to joining the Copyright Office, Ms. Charlesworth was in private practice, in litigation and transactional matters. She also previously served as General Counsel of the National Music Publishers’ Association and as General Counsel of The Harry Fox Agency, a music licensing organization.

“Jacqueline’s experience includes a rare combination of litigation, transactional and policy work in both public service and private practice,” said Simon J. Frankel, co-chair of the firm’s Intellectual Property Rights Practice Group. “At a time of significant technological developments and potential revisions to the Copyright Act, we believe Jacqueline’s deep expertise will enhance our ability to serve a wide range of clients dealing with copyright and related intellectual property issues.”

“I am excited to resume my private practice and was particularly drawn to Covington because of its outstanding legal talent and highly collaborative culture,” said Ms. Charlesworth. “I look forward to drawing on my government and private sector experience to assist a diversity of clients with their copyright needs.”

Ms. Charlesworth received a B.A. from Brown University and a J.D. from Yale Law School. She clerked for Judge Betty Fletcher of the U.S. Court of Appeals for the Ninth Circuit and Judge Miriam Goldman Cedarbaum of the U.S. District Court for the Southern District of New York.