Author: Chris Castle

Unrealized Losses and the Black Box Investment Policy

The “risk free rate” is often thought of as the rate of interest paid on US government bonds. That interest rate is thought of as risk free because it is backed by the full faith and credit of the United States. Want to know where you can find that full faith and credit? Look in the mirror.

When you ask around about what collective management organizations do with their “black box” monies while they are waiting to match money with songwriters or at least copyright owners, you often hear that the money is invested in very safe instruments, like U.S. treasury bonds. This might be particularly true of CMOs that are required to pay interest on black box because that interest has to come from somewhere.

But–and here it is–but, as we have learned from the Silicon Valley Bank collapse and the number of federal government officials in the mumble tank about why these banks are failing and why they are getting bailed out by, you know, the full faith and credit of the United States, “risk free” seems to be a relative concept. When you buy US government bonds, there are a number of different maturity dates available to you, kind of like buying a certificate of deposit. A common maturity date is the 10-year bond and the two-year bond, both of which were recently down sharply.

But–there is a connection between the interest rate that the bond pays, the price of the bond, and the maturity date of that bond. When bond interest rates increase, the face price tends to decrease. So if you paid $100 for a bond with a interest rate of say .08% and that rate then increased to say 4.5%, the face price of that bond will no longer be $100, it will be less. If that increase happens fairly quickly, you can have difficulty finding a buyer. The good news is that when the Federal Reserve raises the interest rate, there is about as much news coverage of the event as it is theoretically possible to have, both before during and after the rate increase, not to mention the Federal Reserve chair testifying to Congress. It’s very public. Closely watched doesn’t really capture that level of attention.

When bond prices decline, holders only “realize” the loss or gain if they sell the bond unless the bond is marked to market so the firm has to disclose the amount of what the loss would be if they sold the bond. Hence the concept of “unrealized losses,” “maturity risk,” or “interest rate risk.” Some think that US banks currently have $620 billion in unrealized losses due to interest rate risk. And don’t forget, these are your betters. These are the smart people. These are the city fellers.

This interest rate risk issue is not limited to banks, however. It is also present anytime that an entity tasked with caring for other people’s money invests that money in treasury bonds, crypto, or whatever. You don’t have to be Wall Street Bets to end up losing your shirt or something in this environment.

So the point is that the same problem of interest rate risk and unrealized losses could apply to CMOs, such as The MLC, Inc. because of their undisclosed “investment policy” of investing the $424 million of black box they were paid by the services. They don’t disclose what the investment policy is and they don’t disclose their holdings so we don’t really know what has happened, if anything. The money could be perfectly safe.

Or not.

Silicon Valley Bank Shuts Down–Crash or Comeuppance?

“It’s the economy as a whole,” Ashley Tyrner said. “It’s not just that they made investments that went the wrong way. It’s also that VCs are not writing checks to startups and deposits are not coming into the bank. So that’s the bigger piece here than just that they made a bad investment. They’re not getting deposits because venture capital is not funding startups like they were two years ago.”

The first time I ran across Silicon Valley Bank I thought it was a little too good to be true. When I met executives from SVB it was very much like the Harvard MBAs in the mail room at one of the big Hollywood talent agencies. A little too well groomed, a little too nice a car, a little too networked. And making deals that really made no sense other than keeping Sandhill Road happy.

Startups would end up with a perk-filled banking relationship and a multimillion dollar credit line with no top line revenue. And the so-called CFOs would promptly draw down that credit line (a secured credit line by the way) with no idea how it would ever be repaid. Even if the startup IPOd it probably would just rolled over into an even bigger credit line.

I don’t know if she realized what she was saying, but Ashley Tyrner described it perfectly. The VCs are cutting back on startup investing and “deposits are not coming into the bank”–to pay for those multimillion credit lines and the bridges to nowhere. No new money coming in to pay off the old commitments…sound familiar Mr. Madoff?

The reality is when the “risk free” interest rate on government bonds is approaching 5% with all signs pointing to a significant recession in our future, investors are not clamoring for a return as they were even a year ago, certainly two years ago.

So that’s just about right–the smart money starting pulling back right about two years ago. Remember, the venture funds are limited partnerships. When you hear that a venture fund has “raised” X billion, that means that they have funding commitments for X billion. They actually get that money through “capital calls” when their limiteds have to actually pony up. And sometimes–like in the Dot Bomb meltdown–limiteds tell them to F right the F off because their kids are going to college thank you very much. They won’t burn any more money on the Silicon Valley feeding frenzy.

The next Elizabeth Holmes is not going to get billions thrown at her. And that means that for some institutions in Silicon Valley, the music just stopped.

Will Songwriters Wish they had Gotten Inflation Protection on Streaming Mechanicals?

When the dust settled after the last mechanical royalty rate setting we saw the Copyright Royalty Board approving two different settlements for mechanical royalties. The royalty rate for physical mechanicals and permanent downloads get a significant rate increase and the royalty rate for streaming mechanicals got a theoretical rate increase. However, only physical mechanicals and downloads got both a rate increase and a cost of living adjustment (or “inflation protection”). Streaming mechanicals did not get inflation protection–could have but did not.

This means that the same writers on the same song in the same recording will get inflation protection when that song is sold in physical formats (such as the surging vinyl configuration) or downloads, but will not when that song is sold in streaming formats. What is the logic to this? One difference is that record companies are paying on the physical and download side and the lived experience of record companies necessarily puts them closer to songwriters than the services. And the lived experience of streaming companies is…well, breakfast at Buck’s, Hefner level private jets, warmed bidets and beach volleyball courts at home with imported sand. (Although Sergey Brin has a real beach in his Malibu home. Surf’s up in geekville. Maybe he’ll send DiMA to represent him at the Malibu city council meetings if Malibew-du-bumbum is ready for Silicon Valley style lobbying to decide who can surf Sergey’s beach and the color scheme of their boards. Kind of like the Palo Alto Architectural Review Board with a tan.)

The Big Google

We heard that inflation was transitory, which may prove true–or not. Transitory or not, that’s not an argument against treating songwriters equally on two versions of the same mechanical license; rather, it’s a reason why it should be easy to afford if you cared about sustaining songwriters at least as much as investing in ChatGPT to replace them.

However, in one of the great oopsies of the 21st Century, it doesn’t look much like inflation is all that transitory. Based on some of the posts I wrote starting in 2020, I think we can see that inflation is way worse on the items that count for songwriters like “food at home,” rent, utilities and gasoline. Very often the number of Americans working a job is used to counter the lived experience of the high number of people who believe the economy is tanking. But what about that jobs report? More jobs equals good times, yes? There’s something weird about the math of the jobs report which should make you wonder about whether that’s such a great argument.

If I still have your attention after the “math” word, there are two standard surveys of the economy used to measure jobs that measure different components of the jobs created in a given measurement period. These data are the “Establishment Payroll Survey” which measures the total number of jobs in the U.S. economy. That’s the number most people refer to with the “jobs report” you hear so much about. (More formally titled the “Current Establishment Statistics (Establishment Survey).”)

There’s another number called the “Household Survey” that measures the total number of jobs per household (more formally titled the Current Population Survey).

Note that the Establishment survey measures all jobs; the Household survey measures jobs per household. If you had two or three jobs, the Household survey would count you as “employed”; the Establishment survey would count the number of jobs you had. Now note that there is currently 2.7 million job difference between the two. Why?

I’m not really sure, but it would appear that there are more jobs than households. That difference may occur from time to time, but it’s quite a big difference at the moment and seems to be a trend that’s confirmed by another statistic: the surge in part-time jobs as shown in this chart:

So what’s missing is how many jobs that are counted in the Establishment survey are held by any one or two household members in the Household survey. If you were to draw the conclusion that every job in the Establishment survey is a full time job held by the primary source of support in a household and that when the Establishment number is rising things are looking up, that may be a leap unsupported by evidence. That may be one of the things you’d want to know if you were trying to predict how well the government’s songwriter royalties would hold their value over the five year rate period.

The sharp increase since June in the number of part time workers may suggest that more people are working multiple jobs and not that more people are working. In fact, the total number of full time workers seems to have declined by a bit over the same period.

That’s not to say that inflation protection is not a serious requirement of everyone who relies on the government for their livelihood. While the inflation rate has declined a bit recently, possibly due to the Federal Reserve abandoning its zero interest rate policy, it is still significant. In my view, nothing in the employment report suggests otherwise and continues to highlight the importance of songwriters being accorded the same inflation protection on streaming as they are on physical and downloads.

Just because the physical rate is paid by the record companies and the streaming rate is paid by the richest corporations in history does not excuse the distinction. Each should be protected equally.

The Enemy Gets a Vote: How will Big Tech respond to “CRB Reform”?

You may recently have heard the term “CRB reform” tossed around by various music industry entities. The term usually means changes to the law or regulations governing the Copyright Royalty Board in the interests of the lobbyists or the big music publishers. And yes, so far it has just been the publishers raising “CRB reform” aside from the odd comment of A2IM filed with the CRB that would, if adopted, create a massive change to the Copyright Act and make controlled composition clauses even more pernicious. (As I explained in my reply comment, I don’t think the CRB has the authority to make the change A2IM asked nor do I think they have the inclination for self-surgery judging by their opinion concluding the “Subpart B” proceeding in Phonorecords IV.)

What you don’t hear, what you never hear, is how the music users will respond, particularly the Big Tech companies that participate in the Phonorecords proceedings for streaming mechanicals. You don’t even hear speculation about that little issue, which ignores the very important fact that the enemy gets a vote. (If you don’t think Amazon, Apple, Google, Pandora and Spotify are the enemy, then ask yourself why they brought 26 lawyers to the Phonorecords IV streaming mechanical proceeding and conducted a scorched earth discovery campaign in that proceeding. Not to mention dragging out Phonorecords III as long as they possibly could without remorse. And then there’s UGC 2.0 called AI and ChatGPT designed to take the human out of transhumanism. That’s not how friends treat each other.)

The fact that you don’t hear anything about how Big Tech views “CRB Reform” suggests one of two things is happening. Either there is no deal in place with the services or worse yet there is a deal but it just hasn’t been surfaced yet. That would be in keeping with the disastrous 2006 S1RA legislation (“Section 115 Reform Act“) the first version of the Harry Fox Preservation Act that failed, but eventually became Title I of the Music Modernization Act.

The way that one worked was Big Tech woke up and said, oh, you want to amend the Copyright Act? We have some things we want, too. (Big Tech in those days mostly Google led by their many proxy NGO front groups including the person of Gigi Sohn who is now unbelievably an FCC commissioner). So not only could Big Tech bring their considerable lobbying muscle to bear on any statutory “reform” (which usually means a further consolidation of power in the ruling class by closing loopholes favorable to the people), but they might make it actually worse.

For example, it would not be difficult for Big Tech to leverage their superior numbers and legal geographical advantage by expanding the discovery and appeal rights in CRB proceedings. That will essentially be the death knell of songwriters ever being able to defend themselves. Both the publishers and Big Tech would probably like to make certain that there is never again a George Johnson figure appearing in the proceedings much less 50 George Johnson’s (apologies for the casual objectification, but you get the idea). The lobbyists and lawyers on both sides share that special Washington moral hazard of wanting everything involving the government to be as complicated and lengthy as possible. Boy have they done that with the impenetrable streaming mechanicals calculations and expensive negotiations to keep it complicated so only the big guys can afford the accounting systems to use the government’s license.

How would anyone keep Big Tech from slurping at that trough if you opened up the CRB statutes and regulations? You can’t stop them–except one way.

If our side in the proceedings found voluntary changes everyone could agree to that would not require amending the statutes, then for better or worse we would be able to operate on the status quo. For example, the publishers could agree that there would be an independent songwriter advocate who would be included in the negotiations. They could agree any one of a number of things that would result in better treatment of songwriters. As long as we are stuck with the compulsory license, we could at least make it more representative.

But what no one wants is to have Big Tech leverage disagreements inside our house over the length of our table to come up with even more limitations and exceptions to copyright. To my knowledge, there is no agreement from the other side to stay out of this issue. If there is such a deal, I’d really like to know what was given up to get it. If there isn’t, I’d love to hear the plan from the smart people.

I’m all ears.

Are Songwriters and Artists Financing Inflation With Their Credit Cards?

Recent data suggests that songwriters and artists are financing the necessities in the face of persistent inflation the same way as everyone else–with their credit cards. This can lead to a very deep hole, particularly if it turns out that this inflation is actually the leading edge of stagflation (that I predicted in October of 2021).

According to the first data release for the US Census Bureau’s recent Household Plus survey, over 1/3 of Americans are using credit cards to finance necessities at an average interest rate of 19%. Credit card balances show an increase that maps the spike in inflation CPI over the same time period. This spike results in a current debt balance of $16.51 trillion (including credit cards). There’s nothing “transitory” about credit card debt no matter the helping of word salad from the Treasury Department. Going into the Christmas season (a bit after this chart) U.S. credit card debt increased to the highest rate in 20 years

According to the Federal Reserve Bank of New York:

These balance increases, being practically across the board, are not surprising given the strong levels of nominal consumption we have seen. With prices more than 8 percent higher than they were a year ago, it is perhaps unsurprising that balances are increasing. Notably, credit card balances have grown at nearly double that rate since last year. The real test, of course, will be to follow whether these borrowers will be able to continue to make the payments on their credit cards. Below, we show the flow into delinquency (30+ days late) grouped by zip code-income. Here, it’s clear—delinquency rates have begun increasing, albeit from the unusually low levels that we saw through the pandemic recession. But they remain low in comparison to the levels we saw through the Great Recession and even through the period of economic growth in the ten years preceding the pandemic. For borrowers in the highest-income areas, delinquency rates remain well below historical trends. It will be important to monitor the path of these delinquency rates going forward: Is this simply a reversion to earlier levels, with forbearances ending and stimulus savings drying up, or is this a sign of trouble ahead?

What does it mean for artists and songwriters? It is more important than ever that creators work is valued and compensated. When it comes to government-mandated royalty rates like webcasting for artists and streaming for songwriters, due to the long-term nature of these government rates, it is crucial that creators be protected by a cost of living adjustment. (Remember, a cost of living adjustment or “COLA” is simply an increase in a government rate based on the rise of the Consumer Price Index, also set by the government.)

Thankfully, the webcasting rates (set in “Web V”) are protected by the benchmark cost of living adjustment, as are the mechanical royalty rates paid to songwriters for physical and download.

The odd man out, though, is the streaming mechanical rate which has no cost of living adjustment protection. This is troubling and exposes songwriters to the ravages and rot of inflation in what we continue to be told is the most important income stream for songwriters. If it’s the most important royalty, why shouldn’t it also have the most protection from inflation?

Applying a Cost of Living Adjustment to Streaming Mechanicals

You are no doubt aware that the Copyright Royalty Judges handed down a final rule adopting the settlement covering streaming mechanicals reached by the major publishers and the richest and most dominant corporations in the history of Planet Earth: Apple, Amazon, Google, Pandora and Spotify. There are many who are dissatisfied with the negotiated rate, no doubt. There are many who are disappointed that the Judges perpetuated the mind-numbing complexity of the royalty calculation methodology (which probably costs more to account on a per-stream basis than the payable royalty).

That’s all true, but is a byproduct of the discriminatory practices frozen in time at the CRB, a libertarian hell-scape preserved in amber. As if taking a trip to Jurassic World (or at least 2009) wasn’t bad enough, the Judges refused even to place a toe onto the arc of the moral universe as they just did in the Subpart B rate setting in the same proceeding (i.e., the Phonorecords IV rates that abandoned the frozen mechanical and adopted an annual cost of living adjustment for physical and permanent download configurations).

I discuss this in more detail in a post on MusicTechPolicy in which I question whether a hidebound adoption of rates that fail to apply a COLA equally and treat likes alike in the same proceeding is lawful, much less good policy. While the Judges focus on giving the negotiating parties, aka the rich people, what they want and ignore the notorious unfairness of the Copyright Royalty Board whose rulings apply to all songwriters in the world who ever lived or may ever live regardless of representation, I argue that applying the same COLA calculation to streaming as to Subpart B configurations solves the problem. This post will lay out a simple method of implementing a COLA for streaming.

The policy goal would be to apply the COLA formula to streaming. Because the streaming formula is so unduly complex, it’s easy to understand the resistance to adding still another step. Remember that the greater than/lesser of monthly calculation is a series of steps that gets to a per-play rate of sorts. All of the greater of/lesser than calculations have been fought and salivated over by dozens of lawyers (literally) so changing any one of them is probably not productive and in my mind is not necessary to give effect to the COLA. Remember that in the history of the government’s mechanical rate, the COLA was applied to a rate as an uplift, not as a way to calculate a rate. The point of a COLA is always to preserve the value of the government’s rate and recognizes that the songwriter will not have a chance to revisit the rate for five year tranches and a lot can happen in five years.

The easiest way to apply a COLA to streaming is to derive the per-play rate given the current formula and then uplift it with a COLA. The Judges already have a COLA based on CPI-U . The Judges need only apply the COLA as a legal modification to the streaming mechanical and accept the base line rates in the negotiated settlement. Otherwise, the exact same songs with the exact same songwriters for the exact same recording in the exact same proceeding will have a COLA when exploited by record companies and none when exploited by the rich people. This result just seems arbitrary. The labels having shown the way to a fair result should be followed by the DSPs.

We raised this approach in a Phonorecords IV comment I filed for David Lowery, Helienne Lindvall and Blake Morgan:

Applying the COLA to Section 115 may actually have a simple solution. The Judges already have a COLA formula. That formula can simply be applied as a step (5) in 37 CFR §385.21(b). This way the negotiated settlement terms are not re- opened.

Adding a COLA uplift to the applicable royalty calculation is simple. First, determine the applicable payable royalty for the accounting period concerned under the negotiated rates. Then apply the COLA formula derived by the Judges as an uplift to the payable royalties as a last step in the royalty calculation. The COLA could be calculated either annually or monthly although monthly seems more appropriate and accurate.

The uplifted amount (after any uplifted overtime adjustment to plays) would then be reflected on the applicable Copyright Owner’s royalty statement as the payable royalty for that accounting period.

This seems like a simple solution that brings the streaming mechanical out of Jurassic World and into the Era of the Songwriter.

Just a Story: Netflix Corporate Biopic of Daniel Ek

FRANKIE FOUR FINGERS

It’s a nice story, but it’s just that. Just a story.

from Snatch, written by Guy Richie

You may have noticed that there is a multi-part Netflix miniseries called “The Playlist” that is based on this book:

“The Spotify Play: How CEO and Founder Daniel Ek Beat Apple, Google and Amazon in the race for audio dominance” is an English translation of Spotify Inifrån, the Swedish book that all of this is based on, which I understand is loosely translated as “Spotify Untold” or as the inside story of Spotify. How it got from “Spotify Untold” to a title straight out of a corporate comms department of failed English majors is anyone’s guess. But notice that the book has now been refocused on the really important story–ahem–of how Daniel Ek crushed the competition and secured his monopoly on global music, or as he calls it “audio”.

For these authors to refer to music as “audio” is very much in line with the story of Spotify’s business model that Daniel Ek tells to Wall Street (which is, in all likelihood, the important audience for all this from Spotify’s perspective). Listen to any Spotify earnings call and you’ll hear what I mean.

The somewhat maniacal focus on global dominance is also interesting when you think about the fact that Daniel Ek uses the 10:1 voting stock he retains to be in global control of music streaming which may explain why Spotify’s algorithms always seem to say “Bieber.” He might want to be a bit careful about the “dominance” word.

Just in time for the Netflix debut, Spotify’s stock has tanked. Which begs the question of why Spotify was ever a public company to begin with. But that’s a story for another day. Here’s what “beating” Apple, Google and Amazon looks like (the straight red line across the bottom of the chart is where Spotify closed on its first day of trading):

You’ll notice that this chart is the relative growth on a percentage basis of all these stocks measured over the same time period. Spotify briefly outperformed the others during COVID, but now is easy to find because it is the one with the minus sign in front of its growth rate.

The Publisher’s Weekly review of the book kind of sums it up:

The authors display more enthusiasm toward Ek than readers are likely to have (they call frequent lies in his personal life “entrepreneurial hustle,” and spend pages writing about the “headaches” behind his multimillion-dollar homes), and let some of his surprising claims slide as quirks, as with an account of Ek insisting Steve Jobs was calling him to breathe over the phone and intimidate him. 

I think if you do the timeline of this Steve Jobs anecdote, you will find it particularly odd because Steve was kind of busy at that time. He was busy dying. Which makes the anecdote both troubling and kind of sick.

I happened to have a chat with a Hollywood film executive–let’s call him/her “Bubba”–about the Netflix miniseries and the odd way that a book in Swedish was set up for production at Netflix at lightning speed without ever being on a best seller list or gaining an audience.

“Smell that?” said Bubba, doing an impression of Robert Duvall in Apocalypse Now. “Nothing else in the world smalls like that. Smells like…astroturf.”

Really? I said. Which part?

“All of it,” Bubba said. “But look, it’s just a story. A bunch of workers got paid to tell a story that some rich guy wanted told a certain way. Those workers may go on to do something important like send their kid to college or write the next Citizen Kane or Chinatown. Or Dirty Harry for that matter. But this month they could pay for gas and their mortgage. Just another day in Hollywood. Let’s get the steak tartare.”

So lots of questions about how this book came to be written and miniseries came to be made. The solution is likely the same as it is for radio payola–disclosure.

Streaming Remuneration:  An answer to global cultural dominance by European/US Streaming Services

Streamers Lack of Local Cultural Contribution

Look at Spotify’s “Global Top 50” playlist on any day and the world’s biggest music service will show all or nearly all English language songs. With few exceptions these songs are performed by Anglo-American artists released by major record companies.  

These “enterprise” playlists largely take the place of broadcast radio for many users where Spotify operates and Spotify competes with local radio for advertising revenue on the free version of Spotify.

Spotify’s now former general counsel told the recent inquiry into the music streaming economy conducted by the UK Parliament’s Digital, Culture, Media and Sport Committee, “Our job is sucking users away from radio”[2] and Spotify uses its market power to do just that.  

However, Spotify has not been subject to any local content protections that would be in place for local radio broadcasters.  Enterprise playlists that exclude local music contributes to the destruction of music economies, including performers.  Local performers struggle even more to compete with Anglo-American repertoire, even in their own countries.  

Due to this phenomenon, local artists are forced to compete for “shelf space” with everyone in their local language and then the Anglo-American artists and their record companies.  This also means that local artists compete for a diminishing share of the payable royalties.  The “big pool” revenue share method of royalty compensation is designed to overcompensate the English-language big names and reduce payments to artists performing in other languages in their own country.

Local Content Rules 

Many countries implement local content broadcast rules that require broadcasters to play a certain number of recordings performed by local artists or indigenous people, songs written by local songwriters in local languages, or recordings that are released by locally-owned record companies.

Because streaming playlists, especially Spotify enterprise playlists or algorithmically selected recordings, are an equivalent to broadcast radio, there is a question as to whether national governments should regulate streaming services operating in their countries to require local content rules.  Implementing such rules could benefit local performers and songwriters in an otherwise unsustainable enviornment.

The Fallacy of Infinite Shelf Space

Because Spotify adds recordings at a rate of 60,000 tracks daily (now reports of 100,000 tracks daily) and never deletes recordings, there is a marked competitive difference between a record store and Spotify.  In the record store model, artists had to compete with recordings that were in current release; in the Spotify model, artists have to compete will all recordings ever released.  

Adding the dominant influence of Anglo-American recordings on Spotify, the “infinite shelf space” simply compounds the competitive problems for non-English recordings.

Streaming Remuneration Helps Solve the Sustainability Crisis

The streaming remuneration model requires streaming services—not record companies—to pay additional compensation to nonfeatured and featured performers.  Streaming remuneration would be created under national law and is compensatory in nature, not monies in exchange for a license.  Existing licenses (statutory or contractual) would not be affected and remuneration payments could not be offset by streamers against label payments or by labels against artist payments.

Each country would determine the amount to be paid to performers by streaming services and the payment periods.  Payments would be made to local CMOs or the equivalent depending on the infrastructure in the particular country.

European Corporate Dominance 

It must also be said that the two founders of Spotify hold a 10:1 voting control over the company through special stock issued only to them.  This means that these two Caucasian Europeans control 100% of the dominant music streaming company in the world.  For comparison, Google and Facebook have a similar model, while Apple has a 1 share 1 vote structure as does Amazon (although Jeff Bezos owns a controlling interest in Amazon).  

The net effect is that the entire global streaming music industry is controlled by six Caucasian males of European descent.  This demography also argues for local content rules to protect local performers from these influences that have produced an English-only Global Top 50 playlist.

Local governments could consider whether companies with the 10:1 voting stock (so-called “dual class” or “supervoting” shares) should be allowed to operate locally.

Countries Can Respond to Streaming’s Homogenized Algorithmic Playlist Culture

Many national cultural protection laws have a history of sustaining local culture and musicians in the face of the Anglo-American Top 40 juggernaut. There is no reason to think that these agencies are not up for the task of protecting their citizens in the face of algorithms and neuromarketing.

Thinking Outside the Pie: @legrandnetwork Study for GESAC Highlights Streaming Impact on Choking Diversity and Songwriter Royalties

Emmanuel Legrand prepared an excellent and important study for the European Grouping of Societies of Authors and Composers (GESAC) that identifies crucial effects of streaming on culture, creatives and especially songwriters. The study highlights the cultural effects of streaming on the European markets, but it would be easy to extend these harms globally as Emmanuel observes.

For example, consider the core pitch of streaming services that started long ago with the commercial Napster 2.0 pitch of “Own Nothing, Have Everything”. This call-to-serfdom slogan may sound good but having infinite shelf space with no cutouts or localized offering creates its own cultural imperative. And that’s even if you accept the premise the algorithmically programed enterprise playlists on streaming services should not be subject to the same cultural protections for performers and songwriters as broadcast radio–its main competitor.

[This] massive availability of content on [streaming] platforms is overshadowed by the fact that these services are under no positive obligations to ensure visibility and discoverability of more diverse repertoires, particularly European works….[plus]  the initial individual subscription fee of 9.99 (in Euros, US dollars, or British pound) set in 2006, has never increased, despite the exponential growth in the quality, amount of songs, and user-friendliness of music streaming services.

Artists working new recordings, especially in a language other than English, are forced to fight for “shelf space” and “mindshare”–that is, recognition–against every recording ever released. While this was always true theoretically; you never had that same fight the same way at Tower Records.

This is not theoretically true on streaming platforms–it is actually true because these tens of millions of historical recordings are the competition on streaming services. When you look at the global 100 charts for streaming services, almost all of the titles are in English and are largely Anglo-American releases. Yes, we know–Bad Bunny. But this year’s exception proves the rule.

And then Emmanuel notes that it is the back room algorithms–the terribly modern version of the $50 handshake–that support various payola schemes:

The use of algorithms, as well as bottleneck represented by the most popular playlists, exacerbates this. Furthermore, long-standing flaws in the operations of music streaming platforms, such as “streaming fraud”, “ghost/fake artists”, “payola schemes”, “royalty free content” and other coercive practices [not to mention YouTube withholding access to Content ID] worsen the impact on many professional creators….

This report suggests solutions to bring greater transparency in the use of algorithms and invites stakeholders to undertake a review of the economic models of streaming services and evaluate how they currently affect cultural diversity which should be promoted in its various forms — music genres, languages, origin of performers and songwriters, in particular through policy actions.

MTS readers will recall my extensive dives into the hyperefficient market share distribution of streaming royalties known as the “big pool” compared to my “ethical pool” proposal and the “user centric” alternative. As Emmanuel points out, the big pool royalty model belies a cultural imperative–if you are counting streams on a market share basis that results in the rich getting richer based on “stream share” that same stream share almost guarantees that Anglo American repertoire will dominate in every market the big streamers operate.

Emmanuel uses French-Canadian repertoire as an example (a subject I know a fair amount about since I performed and recorded with many vedettes before Quebecoise was cool).

A lot of research has been made in Canada with regards to discoverability, in particular in the context of French-Canadian music, which is subject to quotas for over the air broadcasters which however do not apply to music streaming services. The research shows that while the lists of new releases from Québec studied are present in a large proportion on streaming platforms, they are “not very visible and very little recommended.” 

It further shows that the situation is even worse when it is not about new releases, including hit music, when the presence of titles “drops radically.” It is not very difficult to imagine that if we were to swap Québec in the above sentence with the name of any country from the European Union [or any non-Anglo American country], and even with music from the European Union as a whole, we could find similar results.

In other words, there may be aggregators with repertoire in languages other than English that deliver tracks to streamers in their countries, but–absent localized airplay rules–a Spotify user might never know the tracks were there unless the user already knew about the recording, artist or songwriter. (Speaking of Canada, check the MAPL system.)

This is a prime example of why Professor Feijoo and I proposed streaming remuneration in our WIPO study to allow performers to capture the uncompensated capital markets value to the enterprise driven by these performers. Because of the market share royalty system, revenues and royalties do not compensate all performers, particularly regional or non-featured performers (i.e., session players and singers) who essentially get zero compensation for streaming.

Emmanuel also comments on the imbalance in song royalty payments and invites a re-look at how the streaming system biases against songwriters. I would encourage everyone to stop thinking of a pie to be shared or that Johnny has more apples–when the services refuse to raise prices in order to tell a growth story to Wall Street or The City, measuring royalties by a share of some mythical royalty pie is not ever going to get it done. It will just perpetuate a discriminatory system that fails to value the very people on whose backs it was built be they songwriters or session players.

We must think outside the pie.

What to do with the MLC’s interest “float” on the black box?

MusicTechPolicy readers will have seen my post about the interest rate paid by the MLC on the rather sizable black box of “unmatched” funds sitting at a bank account (rumored to be City National Bank in Nashville).

That rate was modernized in the Music Modernization Act to be a floating rate: The Federal short term interest rate essentially set by the Federal Reserve. In fact, that particular federal rate is one of the lowest interest rates set by the Federal government and is the kind of interest rate you would want to be obligated pay–very low–if you knew you’d be in the business of holding large sums of money that you wanted to earn interest on yourself and make money on the spread, often called “the float.” (The black box is usually free money, so it’s actually an improvement.). For example, the bank prime loan rate is currently 5.5% that may be a good indicator of what you could get in the way of relatively risk free interest for a big lump sum–if not better for a really big lump sum, say $500,000,000.

The MLC is not, after all, the government, however much that fact might be lost on them. Why should the lowball government rate apply to the MLC instead of a competitive bank rate? Particularly when it comes to the substantial unmatched funds that songwriters and publishers are forced by the government to allow the MLC to hold and for which they control distribution–a bit of the old moral hazard there.

Indeed, you could also express that rate of involuntary saving as “prime plus x” where “x” is an additional money factor like 1%, so the rate floats upward to the songwriters’ advantage. Get some inspiration for this by looking at your credit card interest rate.

You probably have heard that the Federal Reserve is increasing the federal funds rate, and therefore all interest rates that are a function of the federal funds rate including the short term rate that the MLC is required by law to pay on the black box. The Federal Reserve is expecting to keep making significant increases in the federal interest rates in an effort to get inflation under control, which means that the MLC’s black box interest rate will also continue to increase significantly.

A quick recap: The MLC’s short term interest rate was 0.44% in January in keeping with then-prevailing Zero Interest Rate Policy (or the “lower bound”) of the Fed for the easy money years since the crash of 2008. But in August 2022 (that is, now) the MLC’s rate has increased to 2.84% monthly. The modern black box holding period in the Music Modernization Act is pretty clear:

Also recall that the black box is to be held for an arbitrarily modern period of time while the MLC attempts to locate the rightful recipients as is their statutory burden under the MMA. Different numbers are thrown around for this holding period, but a three year holding period seems to be popular and has the benefit of having been modernized in the Music Modernization Act itself (see above). Bear in mind that the first tranche of “historical” black box (“historical” means “late” in this context) was $424,384,787 and was paid in February of 2021–nearly 18 months ago.

Also recall that we were not given any information that I am aware of as to when the services paying this rather large sum of other people’s money first accrued the black box. People who line up on the shorter holding period side of the argument generally favor rapid market share distributions which tends to help the majors; people on the longer holding period of time generally favor redoubled efforts to find the people who are actually owed the money.

The third group is that the MLC should simply find who is owed the money, have the money being held earn the highest rate of risk-free interest possible, and pay all of the interest money to the correct people when found and not have this cutesy limitation on the money factor paid out for holding OPM. Their argument goes something like your government takes away my right to negotiate my own rates, tells me how much I can charge, then makes it difficult to find me but easy to use my song and now you also want to take away the money you say I’m owed and give it to rich people I don’t know before I’ve had a change to claim it and pay yourselves to not do your jobs?

So we are at the midpoint of the three year statutory holding period. Although remember that this is a two pronged holding period of the earlier of 3 years after the MLC got the cash or 3 years after the date the service started holding the money that it subsequently transferred–a different holding period which would likely end sooner than the date the money was transferred to the MLC.

Although we know the date that the money was transferred in the aggregate to the MLC we may not know exactly when the money was accrued without auditing (although you would think that the MLC would release those dates since the timing of the accrual is relevant to the MMA calculation).

According to my reading of the statute, the modernized interest rate would likely attach from the time the money was accrued by the service, so should have been transferred to the MLC with accrued interest, if any. This may be in lieu of or in addition to a late fee. Very modern.

This leaves us with a couple questions. Remember that after the holding period, the black box is to be transferred on a market share basis to all the copyright owners who could be identified based on usage, which includes usage under voluntary licenses that are not administered by the MLC.

So this raises some questions:

  1. Why should the black box be divided up amongst copyright owners who have voluntary licenses and who are not administered by the MLC? They presumably have the most accurate books and statements and may have already had a chance to recover.
  2. What happens to the accrued interest at the time of distribution? Why should the market share distribution include interest on money that didn’t belong to the recipients?
  3. The statute takes the position that the MLC must pay the interest rate but is silent on how much interest the MLC can earn from the bank holding the substantial deposit of the unmatched monies. There’s nothing that requires the MLC to pay over all earned interest.

    Here’s a rough justice calculation of 3 years compound interest at current rates with steadily increasing black box. While the holding period started at the .44% rate, I ran the numbers at the 2.84% rate because it was easier–but also left out an estimate of the increase in rates that is surely to come. Since we are at the midpoint of the holding period already, this gives you an idea:

Hypothetical chart of growth rate of unmatched funds (historical and current) over a three year period at 2.84% compounded monthly interest rate