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

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

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

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

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

SPOT Comparison Covid

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

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

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

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

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

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

Who Owns The MLC Database of Songs?

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

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

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

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

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

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

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

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

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

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

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

MLC TM Registration

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

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

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

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

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

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

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

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

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

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

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

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

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

          * * * * * * * * *

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

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

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

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

[5] 17 U.S.C. § 115 (e)(6).

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

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

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

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

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

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

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

“Sick of my money funding crap.”
A Fan

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

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

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

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

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

The Perception of Unfairness

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

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

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

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

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

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

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

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

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

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

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

Ethical Pool

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

streaming price bible

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

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

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

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

User Centric and the Ethical Pool

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Pandemic: Should Government Ordered Shut Downs Be Government Backed “Business Interruptions”?

There will, no doubt, be several rounds of body blows to the U.S. economy as the result of an unprecedented shut down of business activity–ordered by the government, be it federal, state or local.  This will send insurance agents and underwriters scurrying to their policies to see if there’s a way to deny coverage for business interruption.  Both government and the insurers are acting rationally–one is trying to prevent the spread of the virus, the other trying to avoid massive claims.  But why is this government-ordered shut down not a “business interruption”?  And why shouldn’t the taxpayer in the government unit ordering the shut down also guarantee business interruption coverage payments?

Small business, including restaurants, festivals and live music venues are caught in the middle in a sudden contraction that they no doubt thought they were insured for under overlapping policies that included losses from business interruption.  We are already seeing small businesses–which are something like 90% of all jobs–lay off employees.  This creates the kind of demand side collapse that leads to a true depression and unemployment at 30%.

Beware the Ides of March

So far all of this has happened in March.  April is just around the corner and on April 1, rent or mortgages are due.  When businesses are ordered to shut down, they will have to start depleting their cash reserves or drawing down on credit lines.  When employees are laid off, they will do the same.  When April 1 comes, both employers and employees will need to make some hard choices, and thus the cascading effects of the denial of coverage really begin to accelerate.  It is only a matter of time before they will fail to pay their credit cards or loans or rent (some states are passing emergency rules that prohibit eviction for the duration), and when that happens on this scale it can have catastrophic  effects.

Because guess what?  All that debt is still being sold in a very similar way to the commoditization that lead to the 2008 financial crisis.  If your business loan or mortgage was with the local bank and you couldn’t make your payments, you could go sit with your banker and figure it out.  Your banker wants to keep you in business, and you want to keep being able to borrow from your banker.

But when your loan is sold as part of a financial instrument, there’s no one to talk to and you either make your payments or the loan defaults.  Green light or red light.  No amber.

The challenge then today, and I do mean today, is to get cash into the bank accounts of small business so they can keep at least some of their staff and pay their rent.  Ideally, this needs to be done by April 1.

No Live Music Capitol With No Live Music

Assuming of course you want them to reopen at some point in the not too distant future.  As I am regrettably fond of saying to people in Austin, it’s kind of hard to be the Live Music Capitol of the World when there’s no live music.  And without venues, there’s no live music, and without live music there are far fewer bars, restaurants, condos, Uber, or increasing property values, not to mention far fewer hotels, airline tickets and rental cars.  So all of those intricate economic relationships come down to musicians, songwriters and venues.  (See the Austin Music Census.)

You have to be pretty naive to think that you can just put all that on hold and then weeks or months later it will just snap back to where it was before the government shut it down.  So do we agree that the situation is beyond dire?  It is life changing.  Perhaps for all the right reasons, but that doesn’t make it any less life changing.

Austin, San Francisco, New Orleans, Memphis, lots and lots of cities outside the “centers” need to solve this problem right away.  Otherwise, Austin will just be another college town with a Google campus.  I promise.

Solving for Business Interruption Coverage

Solving this problem will require different tools for different reasons, but on the small business side, one way to do it would be for the federal government to deem the shutdowns ordered by various levels of government to be a business interruption covered by business interruption insurance and to guarantee payments under those policies.  There is already a billing relationship between those carriers and their insureds and the transaction costs of handling it this way will be far less than the government essentially re-creating the exact same financial structure.

Along the way, thought can be given to how to solve for those who are ordered to shut down who do not have business interruption coverage.  Some strings could be put on the use of funds, so that the payments must be used to pay rent, suppliers and employees.   Insurers should be prevented from price gouging and should be required to cap their administrative costs.  This would not be a loan, it would be a direct payment of an insurance casualty benefit.  We may need to look into special bond offerings to finance these payments.  (For comparison, the World Bank issues a parametric catastrophe bond that covers pandemic risks as part of its Pandemic Emergency Financing Facility.)

Making America Creditworthy Again

Alongside this type of bold move would be a requirement that any defaults on credit following a government ordered shutdown cannot be reported to the credit reporting agencies or taken into account for a borrower’s creditworthiness in the future.  That step needs to be covered, too, because that’s just exactly the kind of kafka-esque shenanigans that these people would come up with if left to their own devices.

I want to encourage everyone to read the op-ed by Ben Bernanke and Janet Yellin in the Financial Times. You may have to register to read the post, but it’s a vitally important step to understanding the real issues with the current crisis.  Here’s the key paragraph from the FT post:

If critical economic relationships are disrupted by months of low activity, the economy may take a very long time to recover. Otherwise healthy businesses might have to shut down due to several months of low revenues. Once they have declared bankruptcy, re-establishing credit and returning to normal operations may not be easy. If a financially strapped firm lays off — or declines to hire — workers, it will lose the experienced employees needed to resume normal business. Or a family temporarily without income might default on its mortgage, losing its home.

To avoid permanent damage from the virus-induced downturn, it is important to ensure that credit is available for otherwise sound borrowers who face a temporary period of low income or revenues.

I’d add that to avoid permanent damage from the government-ordered downturn, it is also important for the government to ensure that cash is available before April 1 for business interruption losses that would otherwise be denied because of unseen underwriters denying coverage.

 

Pandemic: Virtual Venues, Old School Collections and Audits Become a Practical Reality

As the effects of coronavirus quarantine efforts keep expanding, artists who were able to survive into the second decade of the age of piracy are now watching their live show revenue dry up, too.  From festivals to major tours, club shows, everything is cancelled or cancelling, sometimes months out.  Show guarantees are evaporating.  Even if there were a vaccine and a cure tomorrow, it will take months for the industry to reorient itself and rebook cancelled shows–assuming the venues survive.  Many will not.  (If you doubt this is happening because it hasn’t happened to you–yet–see David Crosby’s sobering interview with GQ.)

And that’s the crux of it.  We need to keep the artists alive and we also need to keep the venues alive, including the bars and restaurants that provide the infrastructure for “entertainment districts”.  I’m working on the “Keep Austin Weird Pledge” that is focused on the venues, but this post is going to focus solely on the artists.

Artists facing a sudden constriction in their base line revenue really have to bust a move right about now.  I think you need to plan for the worst and hope you are pleasantly surprised.  But realize that you may also be unpleasantly surprised.  Like the First Rule of Electronics Repair, you have to make sure that you are collecting what you are owed and perhaps consider auditing your royalties, particularly for indie labels and publishers.  Signing up for collections, reviewing black box and the more complex virtual venue set ups are all things you can do from isolation as long as you have a phone and an Internet connection.

Remember–just like you can’t pay your rent with exposure or data, social media alone won’t save you.  It’s time to start monetizing.  We are leaving the age of promotion and entering the age of sales.

Virtual Venues

Virtual venues have been a growing sector for years now, often as an afterthought for artists who are accustomed to higher end touring.   No longer.  A virtual venue relationship is not a “nice to have” anymore.  Getting paid is not something to be sneered at as a “paywall”, an expression invented by the ad supported, but this requires some thought.

The grand daddy of virtual venues is Stageit run by Evan Lowenstein and backed by partners like IBM.  (I’ve been a fan of Stageit for years, starting with a 2011 post.)  There are a handful of others as well as listed in a good checklist generously assembled by Cherie Hu that is well worth reading and following as she updates it.

Not only will virtual venues exist as part of an artist’s commercial repertoire, they may actually come to be part of reality for brick and mortar venues, too, a la the old Digital Club Network.  If a venue has a strong brand, just like an artist with an active fan base, there may be value in considering an installed simulcasting package.

Make Sure You Are Signed Up With Collecting Societies

The first thing that an artist should do when concerned about cash flow is make sure that  you have tied down the obvious–if you are a songwriter, make sure your PRO  knows where to find you and that they are not holding any money for you (this would be ASCAP, BMI, GMR, SESAC).  On the mechanical side, check in with HFA, Audiam, CDBaby for the same reason.

For artists and label owners, be sure you have joined SoundExchange.  To my knowledge, SoundExchange is the only PRO that pays on a monthly basis.  I always urge artists and labels to join SoundExchange as a member (as opposed to simply registering) as you can tap additional income streams.

SoundExchange also has a look up portal so you can see if they are holding money for you, which is a box you need to check.

You should also check and make sure that the union intellectual property funds are not holding money for  you or can’t find you.  If you are a union member, check with your local to see if there are any residuals floating around that haven’t found their way to you yet.

Although it’s not a collecting society, you should also check the Spotify class action claiming portal at Song Claims (powered by Crunch Digital).

If you were signed to a record company or music publisher at some point in the past, even if you are currently signed, make sure they know where to find you.  They may have money for you.  If you have your own distribution agreements, then take a look at those, too.

You can also look at companies like Lyric Financial that may give you an advance on more substantial royalty earnings, and companies like AdRev can go out to collect YouTube monies for you.

Audits

While not an immediate source of funds, it may be worth it to consider a “royalty compliance examination” or “audit”, particularly if you are a label or publisher with audit rights against digital distributors.  Audits can be conducted largely remotely, and sometimes even a desktop audit can shake loose some monies based on undeniable mistakes.  Consult your business manager or accountant to look into this as desktop audits can be conducted remotely.

 

Pandemic: Force Majeure Contracts and Insurance in the Music Business

After the cancellation of SXSW, we need to think about those “force majeure” clauses that everyone skips over in contractual boilerplate.  “Force majeure” or the less secular “Act of God” clause is a species of the “impossibility of performance” defense to a breach of contract claim that excuses the liability of a nonperforming party.  Earthquakes, floods, severe weather or other natural disasters are what the parties are typically thinking with force majeure, some act that is beyond their control.

These clauses sometimes are risk shifting, meaning that party A and party B may agree that one of them will bear the economic damages of the disaster, or permit rescheduling or other delay until the force majeure event has passed in a reasonable period of time.  Force majeure clauses typically break between suspending performance for a period of time and allowing the parties to terminate the contract, with little or no penalty.  It’s well to think of force majeure as a species of the impossibility defense to a breach of contract that has been available in the law since 1863.  A successful impossibility defense may be thought of as an exoneration of the breach, so excuses nonperformance before the breach actually arises.

This post is much longer than we usually ask you to read, but I think it’s a very important topic and I hope you find it useful.

Examples of Force Majeure Clauses

Distribution Agreement

Contract 1

Force Majeure. If because of: act of God, inevitable accident, fire, lockout, strike or other labor dispute, riot or civil commotion, act of public enemy, enactment, rule, order or act of any government or governmental instrumentality (whether federal, state, local or foreign), failure of technical facilities, failure or delay of transportation facilities, shortage of raw materials, or other cause of a similar or different nature not reasonably within Distributor’s or Company’s control, as applicable (a “Force Majeure Event”), either party hereto is materially hampered in the performance of its obligations under this agreement or its normal business operations are delayed or become impossible or commercially impracticable; then, without limiting such party’s rights, the party affected by such Force Majeure Event shall have the option, by giving the other party notice, to suspend its obligations hereunder for the duration of any such contingency (other than the obligation to account or pay hereunder or permit audits hereunder, except to the extent either party’s ability to do so is impaired by virtue of such Force Majeure Event). Any such suspension shall be limited to a period of the duration of such Force Majeure Event, but in no event longer than six (6) months, after which, unless such suspension shall be lifted, the party not suspending its obligations hereunder may, during the pendency of such suspension, terminate this agreement by notice in writing to the other party. Should Distributor suspend the manufacture or distribution of Products pursuant to this Paragraph, Company shall have the right to manufacture and/or distribute (as applicable) Products itself or through third parties during the pendency of such suspension.

Contract 2

Neither party shall be deemed in default of this Agreement if either party’s obligations are delayed or become impossible or impractical by reason of an act of God, war, fire, earthquake, strike, sickness, accident, civil commotion, epidemic, act of government or governmental instrumentality, failure of technical facilities, failure or delay of transportation facilities, shortage of raw materials, or any other cause of a similar or different nature beyond Distributor’s or Owner’s control (“Force Majeure Event”). Upon the happening of any Force Majeure Event, Distributor may suspend the Term for the duration of the Force Majeure Event by written notice to Owner. Owner shall have the right to terminate this Agreement upon sixty (60) days written notice to Distributor if the Force Majeure Event affecting Distributor is not prevalent throughout the recording industry in the United States and continues for one hundred and eighty (180) days. Distributor shall have the right to terminate this Agreement upon sixty (60) days notice to Owner if the Force Majeure Event affecting Owner is not prevalent throughout the recording industry in the United States and continues for one hundred and eighty (180) days.

Digital Distribution

Contract 1

For the purposes of this Agreement, “Force Majeure” shall mean any event which a Party hereto could not reasonably prevent or predict, such as fire, flood, acts of God or public enemy or terrorist, Internet failures or “hacking”, earthquakes, governmental or court order, national emergency, strikes or labor disputes, the effect of which it could not reasonably prevent or predict and which renders impossible or impractical the performance of contractual obligations either totally or in part.  The Party invoking a Force Majeure shall inform the other Party (either by notice, email, or telephonically) within five (5) business days of its occurrence by accurately describing all the circumstances of the situation involved and its effect upon the performance of its contractual obligations.  The taking place of a Force Majeure shall have the effect of suspending the obligations of the Party which has invoked the provisions of this Section to the extent such obligations are affected by the Force Majeure.  Contractual dates shall be extended for a period equal to the duration of a Force Majeure.  The cessation of a Force Majeure (in the judgment of the Party that invoked it) shall be communicated by the Party that invoked it to the other Party (either by notice, email, or telephonically) within five (5) business days of such cessation.

Contract 2

Force Majeure Event:  any act or event, whether foreseen or unforeseen, that meets all three of the following tests:  (i) the act or event prevents or delays a Party (the “Nonperforming Party”), in whole or in part, from (A) performing its obligations under this Agreement; or (B) satisfying any conditions to the other party’s (“Performing Party”) obligations under this Agreement; (ii) the act or event is beyond the reasonable control of and not the fault of the Nonperforming Party, and (iii) the act could not have been prevented by reasonable precautions and cannot reasonably be circumvented by the Nonperforming Party through the use of alternate sources, work‑around plans or other means.   Without limiting the generality of the foregoing, each of the following acts and events is deemed to meet the requirements of clauses (i) through (iii) and to be a Force Majeure Event: war, flood, lightning, drought, earthquake, fire, volcanic eruption, landslide, hurricane, cyclone, typhoon, tornado, explosion, civil disturbance, act of God or the public enemy, terrorist act, military action, epidemic, famine or plague, shipwreck, or strike, work-to-rule action, go-slow or similar labor difficulty or other similar or dissimilar causes.

Recording Agreement

If because of:  act of God; inevitable accident [an old common-law version of an unavoidable accident, like an accident caused by a deer jumping in front of a car]; fire; lockout, strike or other labor dispute; riot or civil commotion; act of public enemy; enactment, rule, order or act of any government or governmental instrumentality (whether federal, state, local or foreign); failure of technical facilities; failure or delay of transportation facilities; illness or incapacity of any performer or producer; or other cause of a similar or different nature not within Company’s control; Company is materially hampered in the recording, manufacture, distribution or sale of Records, then, without limiting Company’s rights, Company shall have the option by giving you notice to suspend Company’s obligations under this agreement for the duration of any such contingency.  If any suspension imposed under this paragraph by reason of an event affecting no Record manufacturer or distributor except Company continues for more than six (6) months, you may request Company, by notice, to terminate the suspension by notice to you within thirty (30) days after Company’s receipt of your notice.  If Company does not do so, this agreement shall terminate at the end of that thirty‑day (30) period (or at such earlier time which Company may designate by notice to you), and you shall be deemed to have fulfilled all of your obligations under this agreement except those obligations which survive the termination of this agreement (such as warranties, re‑recording restrictions and obligation to pay royalties.

Show Agreements

Contract 1

Each party’s obligations to perform hereunder will be excused in the case of a Force Majeure Event.  A “Force Majeure Event” is defined as acts, omissions, accidents and events which are beyond the reasonable control of the party claiming Force Majeure and which prohibit that party’s performance of its obligations under this Agreement including, without limitation, (i) acts of God, (ii) strikes or labor disruptions in the metropolitan area where the Event is scheduled to be held, (iii) civil riots or disturbances in the metropolitan area where the Event is scheduled to be held, (iv) weather events in the metropolitan area where the Event is scheduled to be held, (v) acts of terrorism in the metropolitan area where the Event is scheduled to be held, (vi) medical conditions, which result in quarantine or similar limitations or restrictions on travel or congregation in the metropolitan area where the Event is scheduled to be held, (vii) damage to the venue where the Event is scheduled to be held rendering it unsafe or unsuitable for giving of live entertainment performances.   In the case of Artist, a Force Majeure Event includes, without limitation, death, serious illness or incapacity of Artist which renders it impossible or not reasonably practical for Artist to attend the performance.  If the Event is cancelled due to a Force Majeure Event, the parties will use commercially reasonable efforts to schedule the Event on an alternate date.  

 Contract 2

In the event Show cannot reasonably be put on because of unpredictable occurrences such as an act of nature, government, or illness/disability of Band, the 50% deposit of Fee is non-refundable, but no other portion of Fee is due, and the parties may negotiate a substitute Show on the same terms as this Agreement save for the time of Show, with no further deposit of Fee due, in which case a new Agreement reflecting this will be signed by the parties. No further damages may be sought for failure to perform because of force majeure.

Hosting Agreement

Except as otherwise provided, if performance hereunder (other than payment) is interfered with by any condition beyond a party’s reasonable control, the affected party, upon giving prompt notice to the other party, shall be excused from such performance to the extent of such condition.  However, if a force majeure detrimentally affects a party’s performance of a material covenant hereunder for fourteen (14) days or more, the other party can terminate this Agreement.  Each party acknowledges that website operations may be affected by numerous factors outside of a party’s control.

Termination for Impossibility Force Majeure

As you can see from the examples given, contracts vary widely on what constitutes a force majeure event outside of a few core events.  They also vary on what action the parties are to take, tending toward short term suspensions with a right of termination.  Only two examples I could find actually mention “epidemic” while another refers to “quarantine” but it is fairly common to refer to what are essentially government orders which may include “state of emergency” type declarations such as that by the City of Austin that essentially caused the cancellation of SXSW.

Almost all refer to the contract law doctrine of “impossibility.”  What is that?  For example, A and B may contract for A to promote concerts at B’s venue on a “four wall” basis, but before the concerts can be performed, B’s venue burns to the ground.  Even if the contract between A and B is silent on force majeure, or refers obliquely to “acts of God,”  the continued existence of the venue is an implied term of the agreement.  In our example, as long as neither A nor B is an arsonist, a court might well find that both are released from their obligations under the agreement because performance is now literally impossible.  B may also be excused from paying A’s losses for promoting the event, or guarantees to performing artists.  The same could be true of heirs not being liable for a personal obligation to perform by a party who dies before the date that performance is due.

Less final intervening events may give rise to a suspension of performance for a period of time with performance subsequently rescheduled.  If the intervening event continues past a certain time period that would be long enough to make the performance stale or undesirable, then some force majeure clauses allow for termination.  It’s common to see this period be designated as six months in the entertainment industries which is usually designed to address labor strikes for companies that are signatories to collective bargaining agreements.

It is important to note that the clean hands–so to speak–of both parties is significant in these cases.  That determination may be proved to a court or jury in evidence by the party not affected by the force majeure event, or made by local police or other governmental authorities investigating the force majeure event.  Delays may result during the pendency of the investigation.

A force majeure event is generally thought to be an intervening event of a great magnitude outside the control of the parties.  The event may make performance impossible, as in the case of the venue that burns, or so difficult it will be deemed to be impossible if the parties bargained for that relief, such as if the venue were flooded due to a hurricane or condemned  due to an earthquake.

A fire that destroys a venue seems like the simple case compared to the coronavirus.  What about an epidemic?  How do you know that there is an “epidemic” in the first place?  One way might be to refer to a declaration of a government body, such as the World Health Organization.  That’s not always helpful.  For example, WHO declared on January 31, 2020 that the coronavirus constitutes a “public health emergency of international concern.”  Is that the same as an “epidemic”?

As we saw with the cancellation of SXSW, economic harm can occur even If there are no cases of coronavirus in your city, state or region, so is what WHO says even relevant in the force majeure analysis for you?  When the Mayor of Austin announced a “local state of disaster” and cancelled the event as a matter of social isolation, it was not because of something that had happened at that time, but rather because of something that might happen and a potential contagion which was anticipated to have dire consequences.  Including political consequences which should not be overlooked.

At the same time as the Mayor cancelled SXSW, the head of the Austin Health Authority acknowledged there was no clear scientific consensus on the effectiveness of cancelling mass gatherings.  While the Mayor’s action clearly affected interstate (and international) commerce and the lack of scientific consensus may seem arbitrary, no Constitutional challenges have yet been mounted (such as the Commerce Clause as well as substantive and procedural due process challenges to geographical quarantines, travel restrictions or “voluntary” social isolation).

In the case of Austin in particular, the city has long branded itself as the “Live Music Capitol of the World”.  The harm of the City’s decision to shut down SXSW could be extensive and long lasting and may result in a political reordering of the city if social isolation becomes the rule.

The question then becomes what is the force majeure event that produces the economic harm?  Is it the presence of the virus somewhere in the world?  The country?  The state?  The county?  The city?  The venue?  Or is the event actually the action of a government authority that may turn out to be an overreaction?  This may be important for analyzing the force majeure clause in a contract, and ultimately for interpreting an insurance policy.

It is well to consider the larger impact on the wider music business if venues start getting shut down, tours cancelled and festivals sidelined.  Record deals are made in anticipation of artists promoting their records, publishing deals may be contingent on record deals being in place, sponsorships may require live appearances at events and so on.  If the touring business is essentially shut down, the ripple effect could be substantial.  Social media alone will not replace touring.

It also must be said that Big Tech has tried for years to get us to believe that digital piracy actually helps artists and songwriters because it drives fans to shows.  Digital music services would have us believe that the artist data they can generate helps with routing tours and that benefit makes up for low royalties.  However stinky that assertion is, if there’s no touring or touring is severely cut back, then piracy and streaming income becomes even more important.

We will review various typical categories of insurance policies and then consider a few actions government could take to offset decisions to foreclose opportunities to work by local musicians and also to essentially shut down local venues.  Since insurance is likely to be unavailing, we will emphasize the importance of working with local musicians and venues to preserve the creative class in cities like Austin.  Because the City of Austin took the action to cancel SXSW, this role falls on government agencies devoted to the commercial music business, such as the Austin Music Office, but also other boards and commissions such as the Austin Music Commission.

I understand that the Mayor believed himself to be acting prudently in cancelling SXSW, and I neither commend nor criticize his decision.  Yet there are consequences from his decision that he has set in motion, and the Mayor needs to deal with those consequences, too.

Insurance

A typical way to address impossibility or force majeure is through insurance of various types.  Unfortunately, in the overwhelming majority of cases, diseases (and therefore epidemics) are excluded unless you have taken specific steps to include an endorsement for that purpose—assuming an endorsement is even available or available at a realistic price.  According to press reports, even SXSW did not have epidemic insurance endorsements to their wide ranging risk coverage.

Let’s consider different types of common insurance policies, but let’s also remember the cynic’s guiding principle of insurance—insurance companies exist to charge you a premium so they can deny coverage.  Almost every case will require policy interpretation and probably litigation.  My bet is there’s going to be lots and lots of litigation due to insurance claims being denied regarding the coronavirus.

Homeowners and Umbrella Personal Liability Coverage:  In a standard “HO3” homeowners policy, transmission of a communicable disease causing bodily injury or property damages is probably excluded (check the “Liability Coverages” paragraph).  Umbrella policies may cover communicable disease other than STDs, so it’s worth checking that coverage.  Travel insurance may cover cancellation due to emergency medical treatment for the traveler but you need to read that policy closely because coverage will turn on definitions as epidemics are probably excluded.

Cancellation Or Non-Appearance Coverage:  Traditional event cancellation or non-appearance insurance is offered by companies like Beazley or K&K/Aon and covers expenses and/or profits from a wide variety of events and perils.  (AEG famously insured its costs for Michael Jackson’s non appearance at 50 shows for the O2 Arena in London.)  These are often big-ticket policies which typically cover power failure, damage to leased or rented venues,  lack of access to the venue, failure of public transport facilities or denial of access (such as a terrorist attack or explosion), earthquakes, labor strikes, inability to erect facilities or staging at the venue, failure of broadcasts, and other previously unforeseen cause that is not the subject of an exclusion.   The policy also can cover both cancellation and non-appearance of key personnel for reasons of death or illness, as well as disease outbreak if not excluded, or just nonappearance. Larger policies are usually written through Lloyds of London or use Lloyds as a “reinsurance” guarantor.  It is almost certain that coronavirus will be excluded for policies written after January 2020, and of course these policies will have force majeure clauses.  Because these insurance contracts are essentially bespoke risk coverage for particular events, they will usually be very clear about what the carrier does and doesn’t cover.

Civil Authority Coverage:  If a shutdown of operations occurs due to a government order, civil authority coverage may be extended to include a disease outbreak.  This coverage was sold during the 2014 Ebola outbreak to cover losses from a government ordered shutdown of your business, a supply chain disruption, or a government ordered shutdown of common carriers such as airlines, ferries, trains and the like.  Those Ebola-related coverages were typically sold as an endorsement to a commercial property program.  If the harm can be shown to be the result of government action, it’s possible that civil authority coverage may offer some relief.

Commercial General Liability:  CGL policies may include “disease” in the definition of “bodily injury.”  Unless otherwise excluded, a venue with CGL might be covered if it did not take adequate precautions that helped spread the coronavirus.  Exclusions could be direct exclusion of communicable diseases, excluding pollution, or other exclusions.

Commercial Property Coverage:  Probably not covered unless a specific endorsement.

Business Interruption Coverage:  If your business closes because your employees are ill due to a disease outbreak, economic losses are probably not covered.  But—if the presence of disease on your business property constitutes “pollution”, you may have coverage for physical property damage due to the disease.

Contingent Business Interruption Coverage:  Usually coverage for you if your customer or vendor fails, but again if that loss is due to a disease outbreak, you are probably not covered absent a specific endorsement.

Environmental Insurance:  These policies may cover losses for bodily injury, clean up and property damage caused by “pollution” which may include viruses and bacteria.  However, it’s common to specify particular bacteria such as Legionella bacteria.

Supply Chain Insurance:  We are beginning to understand the strategic impact of locating so many elements of the U.S. supply chain in China.  Supply chain risk coverage typically would not require losses to physical property, just economic loss due to a supplier’s shut down or other disconnect.

Sovereign Disaster Risk:  Just for reference, the World Bank issues a parametric catastrophe bond that covers pandemic risks as part of its Pandemic Emergency Financing Facility.  The World Bank also sells pandemic risk swaps.  The International Bank for Reconstruction and Development also issues “capital at risk notes” designed to transfer the pandemic risks of low income countries to the global capital markets.  If this has a “Big Short” feel to it, let’s hope not.

Economic Development Action

It is unlikely that insurance is going to help solve the economic loss from cancellation of major tours, concerts and festivals.  Therefore when a government takes action that creates a sudden economic contraction, government should also be prepared to take ameliorative action that helps support local businesses.  In the case of SXSW, there are many downtown businesses that make their year during SXSW, or a good portion of their annual revenues.

If those businesses, especially venues, cannot make payroll or rent, they will close.  As we saw from the Austin Music Census, landlords already are trying to raise rents beyond what venues can reasonably pay, so we have to assume that they will be more than happy to let venues out of their leases—never to return.  If enough venues close—already an endangered species in Austin—then there will be less and less reason to brand Austin as the “Live Music Capitol of the World” and the entire character of the city may change.

Economic Stimulus:  “Affected Venues” and “Affected Musicians” should be criteria based categories of individuals who would be eligible for relief.  State and local governments have some economic levers available to them such as utilities and tax relief.  The Mayor of Austin and mayors of other affected cities should take steps to obtain any federal disaster relief funding available for Affected Venues and Affected Musicians relating to coronavirus (perhaps as part of the federal coronavirus funding).

Tax Relief:  Restaurants large and small, hotels, and others in the hospitality industry as well as supermarkets have no doubt stored large stockpiles of perishable foods in anticipation of SXSW visitors.  There are a lot of hungry people in Central Texas–just ask the Central Texas Food Bank.  Austin has more nonprofits per person than any other city in the country.  These restaurants know where to take their unused food, but give them extraordinary and immediate tax reduction for giving away this food.

Revision of Quarantine Laws:  If decisions are taken by state and local authorities to exercise state police powers to give effect to quarantines or quarantine zones, it is likely that their will be a wave of new legislation to target those powers as most existing quarantine laws have been on the books over 50 years due to the decline in infectious disease.  (A review of quarantine authority was listed as a priority for state governments in the President’s 2002 National Strategy for Homeland Security, but it’s doubtful much was done.)

I will return to this topic in coming weeks and months, but I think a few conclusions are obvious:  First, there may well be a cascading effect of a wide variety of entities reviewing and potentially exercising any force majeure rights they have in existing agreements.  Force majeure clauses will be closely scrutinized in future agreements.  Like force majeure rights in contracts, insurance policies will be closely scrutinized and coverage will likely be litigated.

But the most obvious conclusion is that state and local governments wishing to preserve the cultural and economic base of their cities and regions once this contagion passes must be proactive with alternatives if they are going to order an entire industry to shut down.

 

 

 

Copyright Office Unclaimed Royalties Study Meeting 12/6/19

 

One of the loose ends from Title I of the Music Modernization Act is how the Congress is going to permit the Mechanical Licensing Collective and the Digital Licensee Coordinator to process the “black box” or unclaimed royalties.   It’s common to hear people using the experience with various private settlements as a guide for how to handle the MLC’s black box.  It is said that a small percentage of the black box was actually claimed, so it’s the fault of those who failed to make their claim that they missed out.

There may be a kernel of truth in that, but the real question is why was there such a small percentage claimed in the first place?  Wouldn’t the administration of settlements with poor claiming history be an example of what not to do in the future?  Certainly with a government mandate forcing the issue?

Congress clearly recognized their oversight role on the black box by mandating the Copyright Office conduct an unclaimed royalties study to develop best practices:

Not later than 2 years after the date on which the Register of Copyrights initially designates the mechanical licensing collective…the Register,in consultation with the Comptroller General of the UnitedStates, and after soliciting and reviewing comments and relevant information from music industry participants and other interested parties, shall submit to the Committee on theJudiciary of the Senate and the Committee on the Judiciary of the House of Representatives a report that recommends best practices that the collective may implement in order to—

(A) identify and locate musical work copyrightowners with unclaimed accrued royalties held by thecollective;

(B) encourage musical work copyright owners to claimthe royalties of those owners; and

(C) reduce the incidence of unclaimed royalties.

The Copyright Office held the first public consultation on the study last December, and posted a video of the meeting that is well worth watching.  As I noted in an MTP post last year:

There are two currently existing standards that the Copyright Office can reference for examples of industry best practices-the SoundExchange unclaimed royalty search for new members and the Lowery-Ferrick Spotify class action Songclaims portal powered by Crunch Digital.  It seems inescapable that these claiming standards should be guideposts for both the Copyright Office and the Copyright Royalty Judges.

Having such clear cut standards–already operational so not theoretical–is fortunate because it seems obvious that the Congress is both concerned with the black box distributions not being gamed and also intends to exercise its statutory authority to retain oversight over the Mechanical Licensing Collective’s operations.  In fact, Senator Grassley specifically stated in his questions for the record following the Copyright Office oversight hearing that:

“The success of the Music Modernization Act (MMA) will depend, to a large extent, on the effective and efficient operation of the Mechanical Licensing Collective (MLC). The MMA included provisions to ensure that there was robust ongoing oversight of the MLC by both the Copyright Office and Congress, and that the new MLC would be accountable to the stakeholders.”

We’re All In It Together: Independents File “Friend of the Court” Brief in Google v. Oracle

 

Helienne Lindvall of the Ivors Academy, David Lowery of Cracker and Camper Van Beethoven, Blake Morgan of #irespectmusic and the Songwriters Guild of America joined in a friend of the court brief supporting Oracle in Google’s appeal of its losing argument in a copyright case involving Google’s taking of Oracle’s Java code without a license.  Oracle won the case on two different occasions at the Federal Circuit, but Google appealed to the Supreme Court which of course is their right.

I got to co-write the brief as co-counsel with my friend Charles Sanders, long time counsel for SGA.  You can read it here.

SCOTUS Brief Cover Page

Oracle had nice things to say about our brief:

There will also be numerous Amicus Briefs filed shortly on the side of strong copyright protection for expressive and creative works including computer software. One brief, filed by the Songwriters Guild will state: “There are untold riches in running the Internet of other people’s things.” Only a songwriter could so eloquently capture the essence of this case, and Google’s business practices. We wish we would have thought of that line ourselves, but we didn’t, so we repeat it here (with credit and permission).

One of the accomplishments in our brief was that we were able to bring the words of artists and songwriters like Zoë Keating, Kerry Muzzey and the indefatigable artist advocate and five-time Grammy winner Maria Schneider before the Court.  All of them have written eloquently of the reality of being an independent up against the biggest corporations in the world.  We were happy to put their voices before the highest court in an important copyright case.

Stay tuned.  Google’s reply brief is coming soon and oral argument is scheduled for March 24.