Month: April 2016

Compulsory Licenses Should Require Display of Songwriter Credits

by Chris Castle

In Washington, DC yesterday, I was honored to participate in a symposium on the subject of “moral rights” sponsored by the U.S. Copyright Office and the George Mason University School of Law’s Center for the Protection of Intellectual Property.  The symposium’s formal title was “Authors, Attribution and Integrity” and was at the request of Representative John J. Conyers, Jr., the Ranking Member of the House Judiciary Committee.  (The agenda is linked here.  For an excellent law review article giving the more or less current state of play on moral rights in the U.S., see Justin Hughes’ American Moral Rights and Fixing the Dastar Gap.)

The topic of “attribution” or as it is more commonly thought of as “credit” is extraordinarily timely as it is on the minds of every music creator these days.  Why?  Digitial music services have routinely refused to display any credits beyond the most rudimentary identifiers for over a decade, and of course the pirate sites that Google drives a tsunami of traffic to are no better.

Yet these services frequently rely on government mandated compulsory licenses (in Copyright Act Sections 114 and 115), near compulsory licenses in the ASCAP and BMI consent decrees, and of course the sainted “safe harbor”, the DMCA notice and takedown being a kind of defacto license all its own particularly for independent artists and songwriters without the means to play.  They get the shakedown without the takedown.

Moral rights are typically thought of as two separate rights: “attribution”, which is essentially the right to be credited as the author of the work, and “integrity” the author’s right to protect the work from any derogatory action “prejudicial to his honor or reputation”.  They can be found most relevantly for our purposes in the Berne Convention, the fundamental international copyright treaty to which the U.S. signed on to in 1988.  (Specifically Article 6bis.)

It is important to understand that the United States agreed to be subject to the international treaties protecting moral rights and that these rights are different and separate from copyright.  Copyright is thought of as an economic right, while moral rights continue even after an author may have transferred the copyright in the work.  Even so, both the moral rights of authors (and the material rights) are recognized as a human right by Article 27 of the Universal Declaration of Human Rights.  Or as Gloria Steinem said, artist rights are human rights.

gloria

The question then came up, why should the U.S. government require songwriters to license their works through the compulsory license without also requiring proper attribution consistent with America’s treaty obligations, good sense and common decency?

Why not indeed.

It is important to note that there are certain requirements relating to the names of the authors that are required by regulations for sending a “Notice of Intention” to use a song under the compulsory license which is what starts the formal compulsory license process.  The required “Content” of an NOI is stated in the regulations is:

(d) Content.

(1) A Notice of Intention shall be clearly and prominently designated, at the head of the notice, as a “Notice of Intention to Obtain a Compulsory License for Making and Distributing Phonorecords,” and shall include a clear statement of the following information….

(v) For each nondramatic musical work embodied or intended to be embodied in phonorecords made under the compulsory license:

(A) The title of the nondramatic musical work;

(B) The name of the author or authors, if known;

(C) A copyright owner of the work, if known…

As I suspect based on the various lawsuits against Spotify over its apparent failures in the handling of these NOIs, the “if known” modifying “the name of the author or authors” is actually translated as “don’t bother” as most of the form NOIs don’t even have a box for that information.  This is a bit odd, because if the song is registered with the Copyright Office, the names of the authors most likely are listed in the registration and thus are “known.”

The question for moral rights purposes, of course, is not whether the music user sends the names of the authors in the NOI–presumably the copyright owner already knows who wrote the song.  The question is whether the music user displays the names of the authors of a song on their service, or better yet, is required to display those names so that the public knows.

This seems a very small price to pay when balanced against the extraordinarily cheap compulsory license that songwriters are required to grant with very little recourse against the music user for noncompliance.  (Short of an unimaginably expensive federal copyright lawsuit against a rich digital music service, of course.)  As the Spotify litigation is demonstrating, these services only have about a 75% compliance rate as it is, if that much.

It is pretty commonplace stuff for liner notes to include all of the creative credits.  So who is behind the times?  The artist releasing a physical disc with all of these credits, or the digital music service with its infinite shelf space that doesn’t bother with 95% of them–particularly the multinational media corporation dedicated to organizing the world’s information whether the world likes it or not?  And we’re not even broaching the topic of classical music, where the metadata and credits on digital services are dreadful.

In fairness, I have to point out that iTunes has made great strides in cleaning up this problem voluntarily, at least for songwriters.  Which goes to show it can be done if the service wants it done.

Digital services should care about whether the songwriters are fairly treated as ultimately songwriters create the one product the services have built their business on–songs.  There is an increasing level of distrust between songwriters and services, so proper attribution can help to restore trust.

As it stands, a generation or two now have little knowledge of who wrote the songs, who played on the records, much less who produced or engineered the records they supposedly “love” and who definitely contribute to the $8 billion valuation of services like Spotify.

It seems that at least the failure to accord songwriters their moral right of attribution could be fixed in the regulations without need of amending the Copyright Act by requiring the collection and display of songwriter credits at least if those credits are part of a copyright registration.  This might have the additional benefit of encouraging songwriters to register their works.

Google will no doubt vigorously lead the charge to oppose this change because that is their customary knee jerk reaction that often colors all digital services with a uniquely Googlely brush.  Even so, I think this is a worthy path for both songwriters and services to pursue and could solve a number of accounting and recordation problems utilizing information that is readily available–to everyone’s advantage in furthering vital transparency.  And as we know, transparency begins upstream.

Why? Because “everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.”  (Article 27, Universal Declaration of Human Rights.)

 

Uber and Lyft Bring Silicon Valley Style Hardball Politics to Austin

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

from Long Long Time by Guy Forsyth.

The list of outsider big money special interests that ran into local Austin resident groups with staying power and grassroots clout is long and distinguished.  Uber and Lyft are about to use surge pricing to run headlong into Texans with pitchforks as the brogrammers pour millions into a ballot measure and the brinksmanship we are all too accustomed to.

Prop 1

The issue?  There’s really two issues.  First, Mayor Steve Adler and the Austin City Council have passed regulations–after considerable debate and revising–that require Uber and Lyft drivers to undergo fingerprinting.  As the Austin Monitor reports:

Austinites will be asked to vote on Prop 1 during the May 7 election. A vote in favor of the measure would reinstate the ride-hailing ordinance passed in 2014, after a petition drive put those regulations on the ballot. A vote against the measure would allow the regulations approved by Council in December to rule ride-hailing in the city. Most of the debate between the two options has centered on background checks – Prop 1 would not require fingerprinting of drivers, and the recently approved regulations ultimately would. But those against Prop 1 warn that there is much more at stake.

And that leads to the second issue, which is rapidly becoming the only issue thanks to the uber-libertarian money that Uber and Lyft are pouring into the campaign for their own benefit.

According to campaign records as reported by NPR affiliate and local success story KUT:

Ride-hailing companies Uber and Lyft have spent nearly $2.2 million so far this year [i.e., during the first quarter of 2016 alone] to fund a campaign to collect petition signatures to get an initiative on the ballot in Austin and advocate for that measure.

The ballot measure would institute a set of regulations, written by Uber and Lyft, that largely mirror rules passed by a previous Austin City Council, which include requiring name-based background checks. It would roll back new regulations passed in December by the current council, which require fingerprint-based background checks for the companies’ drivers, among other things. Those rules are essentially on hold, pending the outcome of the May 7 election.

The political action committee advocating for passage of the ballot measure, Ridesharing Works for Austin, was among the groups that filed required campaign finance paperwork with the Austin City Clerk Thursday. The PAC’s filing showed the companies at the center of the measure pouring large amounts of money in the campaign….

Is anyone fighting back?  Of course, but the locals have raised only 0.006% of Uber’s war chest.  Sounds like a Pandora songwriter royalty or something.

The filings paint a picture of an opposition woefully outgunned.

The main group organized to oppose the ballot measure, Our City, Our Safety, Our Choice PAC, filed paperwork showing $12,458.95 in contributions between February 26, when the PAC was created, and March 28.

As is fairly well known, Uber have hired former Obama campaign manager David Plouffe to run their lobby shop, so it’s not surprising that the biggest expense from the Uber/Lyft PAC is hiring the Washington, DC based petition mill “Block by Block”.

Not only have the Silicon Valley companies dropped big bucks on going around the Austin City Council–solely to benefit its own commercial interests–a mysterious recall campaign called Austin4All (about which little is known) launched lawfare against Austin City Council Member Ann Kitchen who opposed Uber and Lyft according to Community Impact:

Local political action committee Austin4All submitted a recall petition to the city of Austin Office of the City Clerk on Feb. 18. The petition stated Kitchen “has purposefully hurt businesses that employ citizens of Austin.”

The petition had enough signatures and the statement, but the affidavit did not meet city requirements, according to a March 4 memo from City Clerk Jannette Goodall to the mayor and council.

Austin4All Co-Director Rachel Kania said the PAC plans to contest the petition rejection in court.

The way the recall effort was conducted subverted the 10-1 City Council system, Kitchen said.

“You’ve got large amounts of money coming in from outside the district [for the PAC], which is a concern to a district’s ability to elect their own individual,” Kitchen said.

Of course, none of this should come as a surprise to anyone who has followed the career of Uber CEO Travis Kalanick from the file-sharing king of Southern California to the ride-sharing King of The World.  According to Re/Code:

Kalanick vowed that Uber would use the giant war chest to…fight a hard-nosed public relations battle with the “asshole” taxi industry.

It should come as no surprise that Uber’s $17 billion valuation tactics in Austin are becoming a model for the tech industry, according to the leading Silicon Valley news site TechCrunch.  Although the story conveniently omits the overwhelming disparity in funding between Uber/Lyft PAC and locals, it does show you how these outsider tactics fit Silicon Valley like the proverbial glove:

The most recent political campaigns showed politicians the importance of having an online expertise, and the knowledge has resulted in some cross-pollution. Even more recently, tech companies have opened their wallets to hire the boldface names of the DC world, like [Uber’s hire of]  Barack Obama’s former campaign manager.

Despite these recent efforts, tech is clearly still punching well below its weight in the political arena. Much of the real-world fight in politics is on the state and local level, where tech has not bothered to get involved. But a current battle in Austin, Texas against ridesharing companies may show the way that tech can really be involved in [local] politics.

In other words, greed is good.  Let’s get is straight folks–if we allow this to happen, they will be back.  And it won’t be just them.  Remember when Camel used to send brand ambassadors around to bars pushing cigarettes?  It could all come back as TechCrunch glowingly points out:

[S]upporters of the companies have launched two seemingly successful petition campaigns. One is quite straightforward -– it put on the ballot an initiative that would repeal the background-check requirement. Uber and Lyft donated in the neighborhood of $30,000 to get signatures for this effort; they needed 19,965 and got more than 25,000. The vote will be held on May 7 and could easily result in a complete win for the companies.   

Industries have long used the initiative process to try to pass favorable laws. The Initiative and Referendum Institute at the University of Southern California notes that the alcohol industry tried to use initiatives to strike down prohibition laws, and chiropractors needed initiatives to be allowed to practice in some states.

Over the years, the gambling lobby has been extremely active throughout the country in using initiatives and other ballot measures to expand it legalization. And in one of the more bizarre and famous cases, in 1963, theaters owners supported a successful initiative for “free TV” that banned any cable TV (this law was later tossed out by the courts).

But wait…there’s more:

The initiative is one side of the political coin. The other, also being used in Austin, is a recall. Ridesharing supporters handed in close to 53,000 signatures needed to recall one of the bill’s sponsors, Austin councilwoman Ann Kitchen. The signatures were rejected on a technicality (the petitioners didn’t have each page notarized), but they may appeal — and the sheer number of signatures collected suggests that they have good reason to try again.

It is not clear who is leading the recall effort and who is paying for it. Reporters’ attempts to contact the leaders have shown an effort to conceal the supporters, though we have seen that Austin-based Trilogy Software’s CEO has given $20,000 for the recall. It is telling that proponents of the ridesharing services, including drivers themselves, have sought the power of the recall to punish members of the council and ward off future actions.

If TechCrunch seems just tone deaf, that’s unfortunately not unusual.  As Uber CEO Travis Kalanick told GQ:

[T]he way he talks now—which is large—he’s surely making up for lost time. When I tease him about his skyrocketing desirability, he deflects with a wisecrack about women on demand: Yeah, we call that Boob-er.

This may all be a little easier to understand when you realize that the rules that Kalanick wants to impose on the city through the PACs and recalls lionized by Silicon Valley thought leader TechCrunch are against a City Council that was recently elected in a populist shakeup of city politics at least partly designed to counter just this kind of thing.  Under the “old” Austin, there were no city council districts, each Member ran “at large”.  That changed in the “new” Austin “10-1” system where there are 10 council districts electing Members plus the mayor effectively running at large.

Because of this techtonic shift in the Austin city government, saying you want the “old” regulation for Uber and Lyft is like saying you want the rules from the bad old days.  Saying you want the new rules acknowledges that things have changed in Austin and the back room deals are much harder to pull off to the great frustration of special interests like Uber and Lyft.

But Uber (probably through David Plouffe who knows a thing or five about distancing your client from PACs doing the real dirty) disavows any connection to the recall according to the Chronicle:

Austin4All Co-Director Rachel Kania told the Austin American-Statesman that the rejection of the petition is “totally politically motivated” and that Austin4All plans to challenge the ruling in court. If that doesn’t work, they plan to work on a second petition.

Uber – which along with fellow TNC behemoth Lyft, has been suspected of having a hand in the recall effort – has disavowed both its involvement and the recall itself. A statement issued by the company said, “Although we disagree with Councilwoman Kitchen on how to regulate ridesharing, we respect her as a public servant and wish to work alongside her into the future. The Mayor and City Council, including Councilmember Kitchen, are working hard to make Austin a better place to live.”

Pass the apple pie, please.

This is one of the reasons why the recall effort against Council Member Ann Kitchen both failed but seemed an attractive approach for corporate interests to pour money into a little Austin city council district to get rid of a public official.  This should have been a layup for the Washington hacks who could bring their petition mills and marketing campaigns into a district with the population of a few square blocks of San Francisco real estate, but it failed.  Not surprising if you know Austinites.

But where this ends up is really important.  As TechCrunch tells us rather blithely:

The fact that the Austin lawmakers felt they could take action against ridesharing harkens back to the weaknesses that tech companies have faced in dealing with political bodies. But the actions of Uber, Lyft and various supporters to repeal the law and remove at least one official shows that this may be the start of a new day for tech companies in the political world.

A new day of getting away with it.

This is what former Austin City Council Member and Mayoral candidate Laura Morrison meant when she told a League of Women Voters meeting:

“This is not an election about whether or not you like Uber and Lyft,” Morrison said. “This is an election about two main issues. The first main issue is: Who is going to run this city?”

And if we don’t vote, we get the democracy we deserve.

On a brighter note, the market seems to already be producing an alternative with drivers who don’t fear getting fingerprinted.  Chariot for Women is a new ride sharing service with the slogan “Driving Women Toward Empowerment and Safety”.   Again according to a different TechCrunch story (maybe those folks should talk to each other):

“The premise is the same as all the other ridesharing services,” Pelletz said in a phone interview. “There’s a driver app and a client app, except that what makes us unique is our safety feature that other apps forgot to do.” The service’s patent-pending technology gives the driver and the client a code in the app after a ride request has been made. When the car arrives, the driver and passenger make sure their codes match before the passenger gets in the car. Chariot for Women donates 2 percent of every fare to charity, and the company does not use surge charging.

In addition to only having women as drivers, Pelletz uses Safer Places, which has a reputation for performing the most stringent background checks. Chariot for Women also requires that all drivers pass Massachusetts’ Criminal Offender Record Information (CORI) check, the same deep background check used in daycare centers and schools. Chariot for Women pays for the CORI check and will add fingerprinting for its drivers as soon as it’s possible.

The service will also pick up kids of any gender under age 13, as well as anyone of any age who identifies as a woman. “If they’re trans and identify as a woman, they can drive and ride with us, no problem at all,” Pelletz said.

There are likely legal difficulties ahead for a service that states outright that it will not serve men. That doesn’t worry Pelletz. “We look forward to legal challenges. We want to show there’s inequality in safety in our industry. We hope to go to the U.S. Supreme Court to say that if there’s safety involved, there’s nothing wrong with providing a service for women.”

I wonder if Mr. Kalanick’s many lawyers are drafting as you read this to prepare for the lawfare to come against Chariot for Women.

 

Moral Rights Symposium at U.S. Copyright Office/George Mason Center for the Protection of Intellectual Property

CO Program

I am honored to have been asked to participate in this symposium on moral rights co-sponsored by the U.S. Copyright Office and the Center for the Protection of Intellectual Property at the George Mason University School of Law.

Moral rights is a key area of the law of copyright that is sadly lacking in the United States and an important legal tool to protect the rights of artists.  You can find more about the symposium and register on the Copyright Office page.

Moral rights (or for the fancy people, droit moral) are largely statutory rights that maintain and protect the connection between an author and their work.  (As I highlighted in Artist Rights are Human Rights, moral rights are not economic rights like copyright, but transcend those rights.  This is why you see language in the human rights documents, like the Universal Declaration of Human Rights, that essentially track the moral rights language.)

The two principal moral rights are the right of integrity and the right of attribution (which conversely includes protection from misattribution).  These are recognized in the Berne Convention (Article 6bis for those reading along).  Others that are not mentioned in Berne include the right of first publication (which the U.S. has a version of in the “first use” doctrine for songs under compulsory license) and withdrawal–which is a bit reminiscent of the more recent right to be forgotten.

When it comes to attribution, or what we might think of as credit, there is a form of imperfect social contract between record companies, film studios and television produces with the creative community.  This is largely thanks to years of collective bargaining with guilds such as the Writers Guild, SAG-AFTRA and the Directors Guild as anyone who has been to a Writers Guild credit arbitration can attest.  It is unlikely that any of these would trade on a creators name.

The place where we have problems, of course, is with the New Boss companies like YouTube, Google and Facebook.  These companies don’t just trade on your name, they SELL your name as an advertising keyword thus associating the artist’s name with products, works or services without the artist’s knowledge, albeit somewhat in the background.

Try boosting a post on Facebook and selecting the attributes of the audience you want to reach.  Type in the names of 5 popular artist and I feel certain that you will find them all there.

Facebook Artist Names

We also have confirmation of this business practice from the Luke Sample affidavit in a piracy case against Google where Google executives advised Sample how to maximize traffic through Google Adwords to push Sample’s pirate site:

Luke Sample

If the U.S. expands its moral rights “patchwork”, it is likely that these business practices could come under a microscope as violations of moral rights.

Sony Sues Rdio Executives for Fraud, A Cautionary Tale for Entrepreneurs

I’m on the alert for signals and other signs and portends that the Bubble Riders are about to bring down the U.S. economy yet again.  My theory is that Dot Bomb II: All Dogs Go to BK is casting right now, and will go into principal photography later this year.  Three signs are Spotify’s bonds (where a year maturity can be a “century bond“), Deezer’s busted IPO and of course the Rdio bankruptcy.

When bubbles burst, the harsh reality of the rules of bankruptcy suddenly become part of the vocabulary instead of aggregating bricks-and-clicks niches or facilitating user-centric content. And before you think that Rdio’s disaster is Pandora’s blessing, realize we also may be seeing a bubble bursting signal with the lawsuit that Sony Music filed against Rdio executives Anthony Bay, Elliot Peters and Jim Rondinelli.

The cautionary tale begins right there–note that this lawsuit is against these men individually.  If the case withstands the various means of dismissing it before it gets started which time will tell, this is about personal conduct, not the corporate actions of Rdio which has filed for bankruptcy.  Another reason that Sony may be suing these men individually is to pursue their action outside of the bankruptcy court that has jurisdiction over Rdio, a legitimate, but potentially intricate maneuver.

Of course you should realize that we haven’t heard the other side of the story yet, so keep that in mind.  There will be defenses and another side to the facts.  But what you should also keep in mind is that given the current state of the business, if a streaming service owes you money, you will have virtually no way to find that out.  Streaming services are very snide about affording artists and especially songwriters the right to conduct a royalty compliance examination (or “audit” for short, although it has nothing to do with CPAs, GAAP or financial audits).  Often the only time an artist or songwriter knows they are owed money is when the service goes bankrupt and the creator finds their name on the unsecured creditors list.

According to the Sony lawsuit (read it here) the defendants seem to have been some or all of the negotiating team for Rdio that came to Sony and asked for help.  Pay close attention to the timeline and remember that if your company is insolvent and either shuts down or actually files for bankruptcy, what you did in the run up to your bankruptcy will get scrutinized in bankruptcy.  Or as I prefer to call bankruptcy, volunteering to have a federal judge oversee every breath you take and ever have taken (key concepts are highlighted):

Unbeknownst to SME [Sony Music Entertainment], however, at the same time that Rdio was negotiating the amendment to its Content Agreement with SME, it was simultaneously negotiating its deal with Pandora—under which Rdio would file for bankruptcy [also known as a “prepack” or “prepackaged bankruptcy” usually requiring the advance approval of the creditors, including SME in this case]; Pandora would  buy Rdio’s assets out of bankruptcy; defendant Bay (as part-owner, executive officer, and  director of Rdio’s secured creditor) [potentially conflicting duties in a bankruptcy setting] would expect to be first in line to receive proceeds of the Pandora  deal; and SME (as an unsecured creditor) would receive pennies on the dollar for the amounts owed to it under the amended Content Agreement.

To summarize Sony’s allegations:  You guys came crying to us about renegotiating your deal, we were nice and gave you a break.  Even while you were crying to us, you were conspiring with Pandora to screw us because you knew that we would be in a weak position compared to the secured creditors like you.

That highlights another part of the cautionary tale–while officers and directors of a company have a fiduciary duty to stockholders under “normal” circumstances, when the company is essentially or actually insolvent, that fiduciary duty shifts to the creditors including the unsecured creditors.  Why?  (For a trip down memory lane on this subject, see the New York Times coverage of a judge’s ruling that denied Bertelsmann the ability to bid on Napster assets due to the “divided loyalty” of Napster’s CEO, a former Bertelsmann executive.)

Because the law puts the onus on the officers and directors to protect the creditors when it is likely that the officers and directors are the only ones who know that the company is going under.  Is this surprising?  On the schoolyard, you are supposed to protect the weaker kid before they get beat up, especially before they get beat up by your crazy brother.

The difference in these streaming service bankruptcies is going to be numerosity–the number of unsecured creditors will include every songwriter, artist, publisher and record company who is owed money.  Another reason why experienced digital service royalty auditors like Keith Bernstein of Royalty Review Council advises creators lucky enough to have an audit right to audit annually.  Don’t wait around for the service to go bust.

And here it comes in the next paragraph of Sony’s complaint:

Defendants knew that, had SME learned about Rdio’s negotiations with  Pandora at any time during the negotiations to amend the Content Agreement, SME would have  demanded immediate payment of the $5.5 million that Rdio owed to SME, and would have refused to grant Rdio further access to the recordings owned by SME. That in turn would have  diminished Rdio’s business and jeopardized the secret proposed sale to Pandora….Unbeknownst to SME at the time, Rdio had one day earlier signed a Letter of Intent with Pandora concerning the intended bankruptcy filing, which would prevent Rdio’s performance of its obligations to SME under the Renewal Amendment. Rdio never intended to fulfill the commitments it made in the Renewal Amendment.

I would point out that it takes two to tango (or maybe four or five in this case) and I’m surprised that Pandora isn’t in this lawsuit as well.  It would have made sense for Pandora to ask for some evidence that Rdio had the approval of all of its creditors (or at least all of the major creditors) before committing to buy Rdio’s assets.  Gutting the company of its ability to earn revenues (like buying its major assets and hiring its relevant employees) has its own set of problems.  Time will tell.

The timeline in this case is crucial:

On July 8, 2015, Pandora presented Rdio with a preliminary Letter of Intent to proceed with a sale of Rdio’s assets in bankruptcy. This was followed by further negotiations that culminated in a signed Letter of Intent between Rdio and Pandora on September 29, 2015, one day prior to Anthony Bay’s signing of the Renewal Amendment with SME. In other words, Rdio and Pandora had agreed in writing to proceed with a bankruptcy sale before Bay executed the Renewal Amendment [with SME]….

A material provision of the Renewal Amendment was Rdio’s obligation to pay SME $2 million on October 1, 2015—the day after the Renewal Amendment was executed.  This presented a dilemma for Rdio: the Pandora deal would be jeopardized either upon Rdio’s taking $2 million in cash out of its business, or upon Rdio failing to make the payment to  SME and putting its ongoing access to SME’s content at risk. To escape this bind, Defendants made false statements designed to induce SME to extend the due date for the payment rather than terminate the Renewal Amendment. Defendants Bay and Rondinelli fraudulently misrepresented to SME that Rdio was raising capital that would enable it to make this payment, when in fact Rdio was finalizing its deal with Pandora, under which Rdio would pay SME neither the $2 million, nor the monthly fees it owed for the rights to SME’s content that Rdio continued to exploit, nor the millions of dollars in other payments required under the Renewal Amendment.

And here is the Old Testament ending you knew was coming, sure as Cain and Abel:

As detailed below, Rdio ultimately succeeded in hiding the Pandora deal from SME until November 16, 2015, the date on which Rdio and Pandora signed an Asset Purchase Agreement and Rdio filed for Chapter 11 relief. As a result of this fraud, SME lost millions of dollars owed to it by Rdio.  Each of the Defendants was an officer or director of Rdio, and each of them knew of and participated in the fraud on SME. Defendants Bay and Peters were both personally involved in Rdio’s simultaneous negotiations with Pandora and SME, and knew that Rdio’s representations to SME were false. In addition, Defendants Bay and Rondinelli personally made fraudulent misrepresentations to SME in furtherance of the fraudulent scheme.  Defendants’ fraudulent actions substantially harmed SME, and enriched the individual Defendants by making the Pandora deal possible.

These are very serious charges, and Sony has a lot to prove.  But the cautionary tale is this: When you get into these situations, streamers have to be very careful about the sequence in which you do things and be very clear with all concerned about who benefits.  The timing of pre-bankruptcy events that affect the value of the bankruptcy estate will definitely get questioned.

On the licensor’s side, you have to always ask yourself, what happens if they go bankrupt tomorrow?  Is my minimum guarantee going to get caught up in the bankruptcy, either as a preference or am I never going to see the money?  There are ways to get comfortable with this, but it requires some extra precautions.

What is Texas Pacific Group Up To with Pandora and Spotify? Something? Anything?

by Chris Castle

As I’ve noted a couple times, convertible debt financing is all the rage with digital music service these days.  Deezer turned to it after a busted IPO in France, and now both Pandora and Spotify went there.  What’s attractive about debt?  Different reasons depending on the company’s situation.

Convertible debt is a special form of (usually) secured or collateralized loan that looks like any other loan except that it is convertible into the shares of the company.  The amount of time between the funding of the notes and the call on the debt gives the company some running room.  Given that the shares of the company may be worth less (or worthless) at the time the note converts, there’s usually some equity kickers in there along with a pretty bullet proof “event of default” clause.

Depending on how much money is involved and the negotiating position of the lender (usually near infinite leverage at this point), it’s possible for the lenders to effectively take over the company.  If you’re in the management team, that kind of thing can ruin your whole day.

When a company has already been to the well  in the public equity market like Pandora, sometimes going a third time is just not in the cards.  This is particularly true when the company’s share price is going the wrong direction, like Pandora.

Pandora 4-4-16

For Spotify, I’ve already speculated that the main reason Spotify would like converts is because it avoids establishing a valuation for the company.  This can either be a clever move or a desperation hail Mary.  Since both Pandora and Spotify are suddenly in the debt business in a big way (Pandora $300,000,000 and Spotify $1 billion) something common to both caught my eye and that is Texas Pacific Group (or “TPG”).

According to the Wall Street Journal and Bloomberg, TPG is a lender in Spotify’s $1 billion line of convertible debt.  As Spotify is not publicly traded (and I presume these are not publicly traded bonds), we don’t have all the details you’d get in a public offering.  But it looks to be a pretty rich deal for the lenders as you would expect.

According to the WSJ:

Private-equity firm TPG, hedge fund Dragoneer Investment Group and clients of Goldman Sachs Group Inc. [which probably means Sean Parker] participated in the deal, which has been signed and is expected to close at the end of this week, these people said.

But wait, there’s more:

In return for the financing, Spotify promised its new investors strict guarantees tied to an IPO. If Spotify holds a public offering in the next year, 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.

In addition, TPG and Dragoneer are permitted to cash out their shares as soon as 90 days after an IPO, instead of the 180-day period “lockup” employees and other shareholders are forced to wait before selling shares, the people said.

TPG and Dragoneer will buy $750 million worth of the deal, with the remainder going to clients of Goldman Sachs Group Inc., which advised on the financing, according to people familiar with the deal.

Spotify indicated to new investors it plans to go public in the next two years, people familiar with the matter said.

It’s possible to get more expensive money, but that would involve credit cards.  One thing I feel confident in guaranteeing about TPG, they got their pound of flesh.  And for Spotify–this deal looks pretty desperate.

As an aside, the Bloomberg reporting continued the thoughtless canard:

[L]ike other streamers, Spotify makes losses because it has to pay high fees to the music labels. On about 1 billion euros ($1.1 billion) of revenue in 2014, Spotify suffered an operating loss of 165 million euros, with some 70 percent of costs going to pay labels.

Wrong–the reason that Spotify loses money is because it is trying to maintain a near vertical growth curve.  Remember “get big fast”?  The mantra of the Dot Bomb Collapse?  And then there’s that nasty bit of not actually paying songwriters or bothering to get a license.

But TPG also turned up at Pandora where they got a board seat.  According to a Pandora press release:

[Pandora] is expanding the size of Pandora’s board from nine seats to 10 seats with the addition of Anthony J. “Tony” Vinciquerra, a technology, media and telecom expert with over 30 years of industry experience. Vinciquerra will join the board as a Class III Director and will be included in Pandora’s proxy statement for election at the 2017 Annual Meeting of Stockholders.

Mr. Vinciquerra has a background working very successfully for that well-known milktoast, Rupert Murdoch.  I find it interesting that within a month of Mr. Vinciquerra joining the board Brian McAndrews is out and Pandora is reportedly selling the radio station it bought for the sole purpose of sticking it to songwriters.  Hard to say if Mr. Vinciquerra is kicking ass and taking names, but ousting the guy who championed dropping $450 million on Ticketfly, antagonizing creators to the point of rank hostility and did not understand the definition of payola might be a step in the right direction.

Whether he can do the same for Spotify is an open question.

pandora_500_billboard_cover

Who knows?  Peace could be breaking out all over.  And that would be nice for all of us.