I’m pleased to have been asked by the brilliant Gigi Johnson to reprise our SXSW panel at the UCLA Herb Alpert School of Music Center for Music Innovation on July 20 from 6-7:30 pm. Gigi will moderate and has invited Sam Kling from SESAC and Ted Cohen from TAG to join.
As I noted in a recent Huffington Post blog, major labels are in the middle of renegotiations with YouTube, Google’s subsidiary and the world’s dominant video search engine. These deals are relatively short term and are renegotiated every few years.
What’s different this time is that a growing number of artists and songwriters at the grassroots and established levels are asking a simple question: How can the labels conclude any negotiation with YouTube that doesn’t address the problems with YouTube’s legacy “DMCA license” business? Would this not trigger an artist revolt if their demands are not met?
You may say you’ve never heard the term “DMCA license”. It’s a term that has come to describe a bargaining position that plays a desire to push an extreme interpretation by a music user of the “notice and takedown” rules that twists the statute into an unrecognizable shape–so the users have neither a DMCA compliant service nor a license. The DMCA license is predicated on the user having an essentially unlimited litigation budget that allows the user to strong arm an entire industry. There is only one company in this category at the moment–Google–but others like Vimeo and Facebook are not far behind.
Will Negotiations Fail?
There are at least three key points to be addressed in any new deal with YouTube: updating YouTube’s legacy revenue share based royalty, marketing restrictions (such as on selling artist names as keywords and the use of recordings in UGC not approved by artists), but most importantly Google’s aggressive DMCA practices in both search and on YouTube.
For the first time, artists are crossing Google’s DMCA position in search with YouTube’s desire to have the cover of licenses on YouTube.
As of this writing, Google is rumored to be holding the line in their renegotiations regardless of what the artists want. When you consider the issues we covered in YouTube’s Messaging Problem, it’s not surprising that the brittle true believers in Google’s policy shop make compromise on Google’s legacy business an impossibility (like long-time true believer Fred Von Lohmann, chief architect of the Electronic Frontier Foundation’s legal strategy to destroy artists livelihood).
This leads me to believe that when confronted with these choices, the negotiations with YouTube will fail. This is unfortunate, because what really should be happening is that YouTube should agree to take the DMCA safe harbor off the table if they are getting a license. It seems not only logically inconsistent to have both a real license and a faux DMCA license, trying to combine the two comes up with an unworkable and frustrating structure.
If YouTube wants the benefits of a license with copyright owners, they should not be surprised that artists expect them to abandon the safe harbor for those licensed recordings, adopt a private arbitration process to resolve disputes, and respect the marketing restrictions that artists reasonably expect.
Where Do We Go if Negotiations Fail?
There’s no reason that official videos could no longer be available on Vevo that is partly owned by YouTube–although expect YouTube to violate their fiduciary duties as a stockholder if major label partners withdraw from YouTube.
The most likely outcome of getting out of the YouTube deals will be a renewed emphasis on alternative video sites like Apple and Spotify. There’s actually no reason not to start working more closely with those two services right away which will address the artist displeasure with Google.
Plus, as I spun out a bit more on the Huffington Post, YouTube has the great benefit of label marketing budgets spent to drive traffic to YouTube (as well as marketing resources from companies in all other copyright categories). If those budgets are redeployed to drive traffic away from litigious companies that insult artists with aggressive and unreasonable DMCA positions, the industry will be better prepared for the inevitable “step away” from YouTube.
I think that labels need to be coming to grips with a succession plan as it seems increasingly unlikely that Google will stop acting on the advice of the “policy people” who have never sold a record in their lives.
If the labels fail to satisfy their artists, there will no doubt be an artist revolt.
Since the FTC closed its investigation of Google’s business practices, researchers have found that Google ties its content to its search results in ways that harm the public—one of the very practices that FTC had scrutinized and decided posed no problems.
A Guest Post By Alan Graham of OCL. Let’s get real. There’s a lot of talk about data and transparency and blockchain these days when it comes to the music industry. This will solve everything! However, there are issues no one seems to want to discuss that also need immediate attention. So let’s open up and take a very bitter […]
In this guest post, UK technologist Alan Graham offers some penetrating insights into what the much ballyhooed blockchain will and won’t do, and some technologies that are not so far over the horizon that we should all be thinking about how to bring into a safe and sane environment.
Copyright Alliance has a useful FAQ that collects a number of questions and answers about copyright. Works created after March 1, 1989 do not require a copyright notice in order to be protected under U.S. copyright law. However, there are a number of benefits to including a copyright notice, such as: It puts potential users […]
New York is Music coalition announced the passage of the Empire State Music Production Tax Credit (A10083A/S7485A) in the NY Legislature and urged Governor Cuomo to sign the bill into law.
A study from long-time consumer researcher Russ Crupnick suggests tens of millions of consumers want better sound quality from streaming and will pay more for it.
For many the belief is that simply solving an issue of data or creating a central and transparent repository of rights in the music industry will solve most of the issues when it comes to money and the speed at which it finds its way back to the creators. But if the answer is “data”, what is the question?
[The Copyright Office is preparing a new study on the effects of the “notice and takedown” clauses of the Copyright Act (often called the “DMCA takedown”. The DMCA takedown law has been criticized by artists for creating a legacy system that puts 100% of the burden of policing unauthorized copies of the artist’s work on […] […]
Music industry licenses that require a music service to pay a royalty to a copyright owner have traditionally included what’s come to be called an “audit clause”. Because so much information required to actually confirm that royalties are paid properly is under the control of the person doing the paying, the control of that information by the party in whose interest lies the underpayment creates significant moral hazard.
Under Pandora’s new version of the direct publishing license for their on-demand streaming service currently being circulated by MRI, we get some good news. Here’s why….
In the MRI license Pandora has dropped many of the restrictions on royalty compliance examinations (commonly called “audits”) that it tried to get the Copyright Royalty Judges to impose on artists and record companies through the sound recording statutory license. SoundExchange conducts these audits under the compulsory license on behalf of featured artists, nonfeatured artists and sound recording owners.
This will, no doubt, come up on one of the appeals of the CRJs, so hopefully the ruling of the Copyright Royalty Judges (called “Web IV”) on this issue will now be moderated by reality in the form of this new Pandora commercial benchmark. And we all know how important Pandora’s contracting practices are for benchmarking the law the rest of us must live under.
Digital services are new to royalty audits and have perpetuated the charade started with the very record companies these services are quick to criticize–this time that somehow only certified public accountants have the qualifications to conduct royalty audits of the services.
There is a great tradition in record deals of trying to load up as many restrictions as possible on the artist’s auditor to suppress the number of “inbound” audits coming at the record company. Almost all record companies will drop the CPA requirement, because in reality everyone knows that royalty compliance has nothing to do with GAAP, financial statements or any of the other tools of the CPA’s trade. More on this below from a Warner Music Group executive.
Royalty compliance examinations are a science of knowing where to look, knowing when you’re being lied to, and having the means to hold feet to the fire. And due to the complexity of streaming and its billions of lines of royalties, an auditor also needs to have the technical expertise, staff and systems to manage enormous volumes of data.
This is not a knock on CPAs, but that expertise has nothing to do with GAAP or the skill set tested by the CPA licensing examinations. The reason that a digital service traditionally wants a CPA requirement is that (1) it is usually more expensive (unnecessarily so), and most importantly (2) very few CPAs do royalty compliance examinations of digital services so the service is likely to be audited by someone who doesn’t know where–or how–to look. (All due respect to CPAs, but royalty compliance–especially the specific skill set required for digital service audits–is simply not part of their training.)
The National Association of Broadcasters went even further in the recent Web IV proceeding with the full-throated support of Pandora’s CFO Michael Herring–under the CRJ’s new rules not only must a compulsory license audit be conducted by a certified public accountant, that CPA must also be licensed in the jurisdiction where the audit is conducted. This is another one of the real howlers enunciated with a straight face by the Copyright Royalty Judges in their Web IV determination recently published. (See the final determination paragraph G6.)
Not even the evil record companies ever tried to get away with this licensing requirement under the audit clauses of record deals, probably because they would have been laughed out of the room. Unfortunately, that’s not possible with the government’s boot on your throat in the form of the Copyright Royalty Judges.
Warner Music Group executive Ron Wilcox gave an excellent summary of this issue in his Web IV testimony (at p. 15):
WMG’s agreements generally do not require that a certified public accountant (“CPA”) perform royalty audits with its digital partners. Auditors who conduct royalty audits of digital services generally do not draw on the set of skills required to pass the CPA exam.
Rather, royalty auditors must be able to understand the technical systems that WMG’s partners use, to interpret data those systems maintain and generate, and the like. For example, a royalty auditor may have to examine a streaming service’s server logs and content databases to determine the accuracy of the service’s statement of performances and royalty payments.
This could require understanding how the service’s systems record digital performances, how those records are retained, and how those records are used to generate royalty statements. In addition, royalty auditors must be familiar with some of the unique conventions and jargon in the music industry as well as the royalty terms applicable to each service provider.
For instance, auditors need to understand how to calculate a pro-rata share from a label pool, how performances are defined in the relevant contracts, and how to account for non-royalty-bearing plays.
Because royalty audits require extensive technical and industry-specific expertise, in WMG’s experience a CPA certification is not generally a requirement for conducting such audits. To my knowledge, some of the most experienced and knowledgeable royalty auditors in the music industry are not CPAs.
For some unknown reason, the Copyright Royalty Judges chose to disregard this testimony from one of the most experienced and knowledgeable executives in the music business. Who happened to get the issue exactly right, by the way.
So the CRJ’s disconnected ruling on this issue was unfortunate. Especially so because this ruling affects all SoundExchange audits–conducted on behalf of artists, musicians, vocalists and record companies. The CRJ’s ruling makes an already difficult practice Jesuitical in the extreme and adds untold expense and inefficiency to an already cumbersome process.
But good news has come to light–actually great news. Pandora has seen the error of their ways on this issue and has dropped both the CPA requirement and the licensing requirement in its most recent push for direct licensing conducted by MRI. This is truly great news and indicates a welcome change of heart at Pandora.
Here’s the new language in Pandora’s announced streaming service:
Audit: In order to enable PUBLISHER to be satisfied that it is being accounted to on an accurate and timely basis in connection with the Pandora Services (including by verifying that the calculation of all financial information is correct), PUBLISHER may appoint an independent third-party auditor (“Auditor”) to examine and make copies and extracts of Pandora’s books, records and server logs related to the use of PUBLISHER Compositions and fulfillment of Pandora’s obligations under this Agreement (collectively, the “Accounting Materials”), such audit to occur at Pandora’s offices and at PUBLISHER’s expense.
This is a triumph of reason over the absurdly out of touch positions taken during Web IV by Pandora, NAB and others, and should immediately be brought to the attention of the appeals court to conform the audit regulations in line with the Pandora commercial benchmark.