How Deep is Pandora’s Financial Hole?

Pandora 6-14-17

Given the recent minority investment from Sirius and sale of Ticketfly, it appears that Pandora is now being governed by the board and not its senior management team.  This should come as no surprise to anyone–the stock is down about 27% for the year, and is down a sharp 30% or so for the last three months.  In fact, it was down almost 5% today alone.  Some Pandora stockholders might have been asking themselves, “Where is the board?”  Hello…it’s them.

Billboard WW P
Remember World War P?

It is important to recognize that despite its checkered history with minuscule payments to songwriters and artists, Pandora does write a pretty big check every year to the industry as a whole.  After all the royalty rate discounts we’ve given to Pandora over the years, most of us feel like investors in the company, so we’d like to see that revenue stream continue for the benefit of the industry as a whole, and especially for collective licensing through SoundExchange and the audits it conducts.

However–the most rudimentary technical analysis of Pandora’s stock shows just how far either the old or new management has to go, and this is before taking into account the dilutive effects of the Sirius investment.  The company’s share price has sunk like a stone through the 200, 100, 50 and 10 day simple moving averages of its share price to close today at $7.58.  Investors Business Daily’s rankings show Pandora outperformed by 91% of other stocks.  A number of analysts have cut their price targets on Pandora since the Sirius investment, which may signal disappointment that there was no sale and Pandora is now stuck with the current management.  We’ll see.

It’s clear that the technical signals show the company has a long, long way to go to dig out of the current ditch it was driven into.  On the other hand, Pandora has just raised a ton of cash, so we hopefully will not see the company coming back to artists and songwriters hat in hand asking for yet another break on royalty rates.

But–with Sirius now holding 19% of the company on an as-if-converted basis and three board seats including the chair, I wouldn’t rule out another stab at getting the artists and songwriters to help finance Pandora’s rich overhead costs and debt service (running at approximately 48% of revenue).  Those Sirius guys ain’t playing.

Barron’s reported on Sirius Chair Greg Maffei’s commentary on streaming:

One notable media executive had some harsh words for streaming music services during a speech at a Deutsche Bank investor conference [in March]. “We think it’s a very unattractive business,” said Liberty Media CEO Greg Maffei, noting the high cost of music rights. “You’ve seen that with Spotify now with 50 million users [and] still not profitable.” [emphasis mine]

Not much interest in getting the overhead down, a whole lot of interest in getting the royalties down.

So fasten your seatbelts kids, it’s going to be a bumpy night.

That’s Sooo 2000: Pandora Dumps Ticketfly Purchase, but Keeps the Integration They Could have Rented

All indications are that Pandora’s management seems to be raising cash and emerging from a latter-day Dot Bomb “money drunk.”  The latest sign is Pandora’s sale of its Ticketfly subsidiary to Eventbrite for a reported $200,000,000.  The sale comes less than two years after Pandora acquired Ticketfly for $335,000,000 in cash—a cash on cash loss of $135,000,000.

And that’s a lot of streams.  One of the problems with startups that suddenly come into the public markets with a pile of cash and inexperienced management is that they lack the cunning patience to spend it wisely and play the long game.  One big difference between the Dot Bomb public company management and the management of a more traditional public company that has operated privately at a sophisticated level for a decade or so is that very lack of sophistication.  And that shortfall of management skills is what can cause stockholders to experience these fits and starts like Pandora’s all cash acquisition and essentially immediate fire sale of Ticketfly.  (None of which is Ticketfly’s fault, by the way.)

If you remember what it was like in 1999, then you can’t forget what happened in 2000, so this should all sound familiar.   For the companies like Pandora who got to the Dot Bomb party late, imagine the disappointment in the management team when the market began crashing back to reality weeks after they formed the company.

But credit where it’s due, the company did manage to survive the long dark night of the Dot Bomb Bubble that followed while the NASDAQ Composite lost 78% of its value.  The question has always been whether Pandora’s management was still mired in the kind of thinking that drove companies over the edge in the Dot Bomb crash.

Pandora’s acquisition of Ticketfly was a prime example of Dot Bomb thinking and the inability to be frugal, patient and strategic with a pile of the stockholders’ cash.  As I’ve often said in discussion with business subscribers, integrating ticketing was a good idea for Pandora that did not require buying a ticketing company and it certainly did not require buying a ticketing company for cash.

The headline on the transaction of course is that Pandora lost money on the deal, but if anything that understates the transaction cost of the wrong turn.  A Ticketfly executive had this to say about the future of the transaction as it affects Pandora:

Our clients will have the best of the best when it comes to technology, and will of course continue to have access to Pandora’s massive audience to promote shows and sell tickets.

While this acquisition will allow Pandora to focus on its core radio and streaming businesses, it isn’t abandoning its live events strategy, and the Ticketfly – Pandora integrations aren’t going away. In fact, Pandora and Eventbrite plan to enter into a partnership to build on the work we’ve done and take it to an even broader audience of promoters, while offering listeners notifications for even more great live events.

Given that the future long term relationship with Pandora post the sale—which presumably had something to do with Pandora’s decision to acquire Ticketfly in the first place—will continue as an integration into Pandora’s platform, do you think that Pandora could have gotten a ticketing company to do that integration without paying $135,000,000 plus the cost of the integration?

Do you think maybe that ticketing company might have paid Pandora something to access Pandora’s user base and as a touch point for the artists on the service?  Wouldn’t that payment might have been a starting point for valuing the original transaction?

Even though ticketing is a potential revenue builder for Pandora, I am still deeply skeptical about how having a ticket selling function helps bands get the shows they already must have in order to be selling tickets in the first place.  Not to mention the fact that Ticketfly quite correctly seems to be focused more on the Wynn Casino that in helping an unknown band get shows outside of their home town.  I understand why Ticketfly needs the Wynn Casino, but it’s not helping independent artists get shows anymore than a heat map of streaming helps convince a talent buyer of much of anything at all.

And I am definitely skeptical if Pandora continues to wring its hands about how royalties stifle innovation as the company seeks ever lower royalties.  What if instead of spending $335,000,000 on Ticketfly, they’d paid some of that money in songwriter or artist royalties?

The question now is will Pandora’s management try to offset that mismanagement by getting the artists and songwriters to pay for it through still lower royalty rates?  I’d assign at least a 50% probability to Pandora doing the usual handwringing about how royalty rates stifle innovation to distract anyone from looking at their financials too closely which put the Bomb in Dot Com.

But this time they have no one to blame but themselves and they need to make up their $135,000,000 loss on the Ticketfly transaction from somewhere else.  Now that the founders have enriched themselves, perhaps instead of attacking the artists and songwriters who provide Pandora with the product that makes the wheels go round, maybe this time they could try to be good allies and stop suing songwriters in rate court, filing over 1,000,000 mass “address unknown” NOIs at the Copyright Office, and generally doing everything humanly possible to make it difficult to support them.

 

The Core Flaw of Blockchain

The truth about blockchain is that at its core, it requires its regime to be enforced on rights owners in order to scale–and that is its essential flaw.

Call me a blockchain skeptic.  I agree with many of the conclusions reached by Alan Graham in his MusicTechPolicy interview, but I also think that at its core, blockchain as currently contemplated fails as an industry-wide rights registry.  Since I understand that its essential purpose is to be a reliable rights registry, it seems obvious to me that blockchain has limited application at best.

I spent a good deal of time helping some very smart people build an independent rights registry around 2005 and have thought about these issues for a long time.  (All the major labels and many indies participated in that registry.)

Based on that experience, I believe that the core value proposition of a rights registry is that it be easy to use; that the information in it be objectively verified and only changed with a proper showing of authority; that it be capable of making or directing the making of royalty payments (which means holding necessary tax information); and that it can be easily and timely updated with information for new releases.  I believe all these elements are essential and that blockchain accomplishes none of them well and some of them not at all.

A quote from Benji Rogers in MusicAlly lays out the core problem very effectively.  (Benji Rogers is a promoter of the blockchain technology and his own company Dot Blockchain–I think I have all the capitalizations in the right place, but forgive me if it’s actually dOt bLK.ch..n or something like that.)  Here’s his quotation (which I doubt that he viewed as a criticism of his product):

“Blockchains force action… If I were to make a statement about a work that I own in a blockchain, and I were to send it to you…you have three choices: yes it’s correct and I agree, no it’s not correct, or ignore it, which means it’s correct.”

What blockchain may bring to the table is something you cannot ignore, because ignoring it is the same as accepting what’s there in the table is truth… A blockchain-based system at scale could force people to work with it, in a way that exposes them to decentralisation and transparency, arguably whether they like it or not.” (emphasis in original)

In other words, organizing the world’s information whether the world likes it or not.  Sound familiar?

It is one thing if blockchain is a voluntary regime that artists and users can decide to participate in–and submit themselves to forced “decentralization and transparency” as Mr. Rogers articulates so well.  But it is entirely another thing altogether if blockchain is enforced by law.

I would not rule out that it is ultimately the goal of the blockchain investors to force songwriters and artists to submit to the blockchain as a matter of law.  This is certainly a familiar refrain if you have followed the various meltdowns over the desire of online retailers and search companies to force songwriters and artists to submit to their exploitation.  We have heard these ideas frequently over the years whether it is even safer harbors, orphan works or massive numbers of unauditable address unknown NOIs under the US compulsory mechanical license.

If you doubt that could happen, realize that two unmovable government agencies are currently allowing millions of songs to be exploited with unverified and dubious authority–the U.S. Copyright Office with mass NOIs and the Department of Justice with 100% licensing.  What’s to stop them taking the next step?

One person’s forced “decentralization and transparency” is another’s eminent domain.  So when you hear about blockchain, imagine if the blockchain bubble had the awesome power of the sovereign forcing someone else’s interpretation of truth on creators.

Especially when the time it takes to correct someone else’s interpretation of the truth as Mr. Rogers suggests their job would become will be even more uncompensated time for another free ride that will probably end the same way that DMCA notices do for the vast majority of independent artists.

They just give up because resistance really is futile.

Will Digital Aggregators Lead the Industry on Transparency with Spotify and Others?

The Music Managers Forum UK have criticized the “secrecy” arounds Spotify’s deals with major labels.  According to Complete Music Update:

The UK’s Music Managers Forum yesterday welcomed the news that Spotify had reached a new deal with Universal Music. However, the trade body criticised the continued secrecy that surrounds the deals made between the major record companies and the streaming services. This secrecy means that artists signed to or distributed by those labels are not allowed to know the specifics of how their music is being monetised.

The same criticism could equally be made of non-statutory, statutory, or direct agreements by digital aggregators like CD Baby, Tunecore, LyricFind, Pledge Music, the Orchard and Loudr, each of which offer varying degrees of transparency of their own books, much less the deals they’ve made with digital services on behalf of the artists, songwriters, labels and music publishers appointing them as agents for relicense of music.  (Loudr, for example, has recently started participating in the most obscure licensing process of all, the mass NOI registrations with the Copyright Office.  Read more about that on another series of MTS posts or my recent article in an American Bar Association journal.  At least with mass NOIs, songwriters know what their royalty is–zero.)

Loudr NOIs
Mass NOI Filings by PK Interactive on behalf of Loudr

It is probably fair to say that there is no disclosure of the actual terms of the direct licenses between these aggregators and the services concerned.  It may also be possible that no one has ever asked the aggregators for the terms of their deals.

That’s a real head scratcher because arguably those aggregators have an even greater obligation to disclose these terms given they cater to many artists, songwriters, music publishers and labels who are unlikely to have the means–even if they have the right–to conduct a royalty examination of any of these companies.  However big a problem anyone has with major labels, every major label artist and major publisher songwriter takes their “audit” rights for granted.

It would be very simple for aggregators to disclose the terms of their deals or to at least summarize them so that artists or songwriters who are considering who to sign with could compare payouts.  It’s fine to tell people what their royalty split, flat fee, or distribution fee might be, but the assumption is that the revenue stream being shared is identical from one aggregator to another.

Also remember that it is common for music services to pay “nonrecoupable” payments to labels–just like it was for record clubs.  This comes in the form of “breakage” or “technology payments” or other ways to keep the money from being called a royalty.  We know this very likely happens with major labels although the amounts are not disclosed–hence the MMF UK’s beef.  We have no way of knowing if it happens with digital aggregators or even what the basic terms of the deals are, which makes it difficult to conduct a desktop audit (the precursor to a full-blown field audit), much less an exhaustive royalty examination.

So let’s not limit the transparency concern to just the major labels.  The digital aggregators could easily lead the way forward by posting the terms of their deals with digital services.  Unless of course the problem lies as much with the digital services as it does with the labels.

 

Senate Introduces Register of Copyrights Selection and Accountability Act (S. 1010)

As the House of Representatives version of the Register of Copyrights Selection and Accountability Act of 2017 passed the House on April 26, a version of that House bill was duly introduced in the Senate on May 2 as Senate Bill 1010.

The Senate bill is identical to the House bill and is sponsored by Senate luminaries Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa), ranking member Dianne Feinstein (D-Calif.), former chairmen Patrick Leahy (D-Vt.) and Orrin Hatch (R-Utah).

Remember that the House bill  passed with an extraordinarily lopsided bipartisan vote of 378-48 demonstrating broad support for the purpose of the bill:   to elevate the position of the head of the Copyright Office to a Presidential appointment (confirmed by the Senate), thus making the office comparable to the U.S. Patent & Trademark Office and certain other legislative branch positions.  The “Register of Copyrights” is currently (and historically) appointed by the Librarian of Congress as would a more junior job, but the Congress decided to upgrade the position after recent controversy illuminated the benefit of that most justified disruption.

The Senate bill was read twice and referred to the Senate Rules Committee (which has direct jurisdiction over the Library of Congress).  If no amendments are offered in the Senate, S 1010 can proceed straight to the President for signature.

Elevating the Register of Copyrights to a Presidential appointment is a long overdue first step toward modernizing the Copyright Office and allowing it to innovate separately from the extraordinary management weaknesses at the Library of Congress identified by the Government Accountability Office in its 2015 report (“Library of Congress Needs to Implement Recommendations to Address Management Weaknesses“).

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Five Things Congress Can Do to Stop Tens of Millions of “Address Unknown” NOIs

Copyright reform is on the front burner again after the passing of the  Register of Copyrights Selection and Accountability Act by a vote of 378-48.   But there’s another problem the Congress needs to fix that won’t require legislation in the short run:  The mass filing of tens of millions of “address unknown” notices under the archaic compulsory license for songs.

I’m going to assume that readers know the general background on the millions of “address unknown” NOIs filed with the Copyright Office under a loophole in the Copyright Act (Sec. 115(c)(1)).   If that is Geek to you, see my recent paper on mass NOIs for more complete analysis (or previous posts on MTS for the armchair version of the story.   The first distinction to remember is that we are only concerned in this post with song copyrights and not the sound recording.  This story implicates songwriters and publishers, not artists and record companies, and it only applies to the government’s compulsory license for songs, a uniquely American invention.

In a nutshell, Amazon, Google, Pandora, Spotify and other tech companies are serving on the Copyright Office tens of millions of “address unknown” notices of intention to obtain a compulsory license to make and distribute recordings of certain types of songs.  Under what can only be called a “loophole” in this compulsory license, a service can serve these “address unknown” NOIs on the Copyright Office if the owner is not identifiable in the Copyright Office public records.  The Copyright Office stands in the shoes of the “address unknown” copyright owner to receive and preserve these notices.

On the one hand companies like Amazon, Google, Pandora and Spotify say that they can’t find these millions of song owners, while at the same time at least some of the same companies brag about how comprehensive and expensive their song databases are (like Google’s Content ID) or their agents puff up the agent’s own massively complete song databases as “the worlds largest independent database of music copyright and related business information.”  And yet, these same companies and their agents can’t seem to find songwriters whose names, repertoire and contact information are well known, or whom they already pay through their own systems or through their agent.

The Database Double Loophole Trick

Here’s the loophole.  First, the loophole requires a very narrow reading of Section 115(c)(1) of the Copyright Act, a 40 year old statute being applied to NOIs served at a scale the Congress never intended.  If the song owner isn’t found in the public records of the Copyright Office, even if the digital service or its agent has actual knowledge of the song copyright owner’s whereabouts, the digital service can say they are not required to look further.

Even if you buy into this willful blindness, these digital services may not be looking at the complete public records of the Copyright Office.  The only digitized records of the Copyright Office are from January 1, 1978 forward, and my bet is those easily searchable records are the only records the services consult.  That omits the songs of Duke Ellington, Otis Redding, The Beatles and five Eagles albums not to mention a very large chunk of American culture.

The Copyright Office records from before 1978 are available on paper, so the pre-78 songs are still in the public records (which is what the Congress contemplated in the Copyright Act).

The identifiers are just not “there” if you decide not to look for them.  However, it is not metaphysical, it is metadata that exists in physical form.  This is the “double loophole”.

The Double Triple:  New Releases

Another category of song copyrights that will never be in the public records of the Copyright Office in their initial release window are new releases with recently filed but not yet finalized copyright registrations.  The Copyright Office itself acknowledges that it can take upwards of a year to process new copyright registrations.  This allows “address unknown” filers to bootstrap a free ride on the back of Congress during that one-year period.

No Liability or Royalties Either:  Trebles All Round

Once a company serves the “address unknown” NOI on the Copyright Office, songwriters are arguably compelled by the government to permit the service to use their songs.  Filing the “address unknown” NOI arguably allows the service to avoid liability for infringement and also–adding insult to injury–to avoid paying royalties.  If the NOI is properly filed, of course.

In current practice, a mass “address unknown” NOI is usually a single notice of intention filed with a huge attachment of song titles with the required fields, such as this one Google filed for Sting’s “Fragile”, the anthem of the environmental movement (which was clearly filed incorrectly as the song was registered long ago):

sting-fragile-google-noi

The number of mass “address unknown” NOIs being posted by the Copyright Office on an almost daily basis suggests that tech companies now view mass “address unknown” NOIs as the primary way to put one over on songwriters and the Congress, too.  Companies like Amazon, Spotify, Google, Pandora and others are using this heretofore largely unused loophole on a scale that flies in the face of Chairman Goodlatte’s many hearings in the last session of Congress on updating the Copyright Act.

This “address unknown” practice also undermines the efforts of Chairman Goodlatte and Ranking Member Conyers to modernize the Copyright Office.  Indeed, based on the very lopsided vote on HR 1695 the Register of Copyrights Selection and Accountability Actit is clearly the desire of the overwhelming majority of Members of Congress, too.

March Spotify NOI Filings

What Can Be Done?

Congress can play a role in in providing immediate relief to songwriters by stopping the mass “address unknown” NOIs or at least requiring the Library of Congress and the Copyright Office to take steps to verify the NOIs are filed correctly.

At the moment, the government takes away property rights from the songwriters by means of the compulsory license without taking even rudimentary steps to assure the public that the “address unknown” NOI process is being implemented correctly and transparently.

Here are five steps the Congress can take to rectify this awful situation.

  1.  Stop Selling Incomplete Data:  Congress should instruct the Library of Congress to stop selling the post 1978 database until due diligence can be performed on the database to determine if it is even internally correct.  It appears that many if not all the mass “address unknown” NOI filers use the LOC database to create their NOIs.  It is also highly unlikely that this database will include new releases.  Congress can simply instruct the Librarian to stop selling the database.loc-prices-databases
  2.  Stop Accepting “Address Unknown” NOIs With Compressed File Attachments: Congress should instruct the Library of Congress and the Copyright Office to immediately cease accepting “address unknown” NOIs with compressed files as attachments for what appears to be a single NOI.  These compressed files are so large in most cases that songwriter can never uncompress them on a home computer to determine if their songs are subject to “address unknown” NOIs.  Google in particular is a major offender of filing huge compressed files.  Each compressed file contains tens of thousands of song titles.Google March NOIs
  3.  Require Accounting Compliance with Copyright Office Regulations:  Long standing regulations require that anyone relying on an NOI must file mostly and annual statements of account reflecting usage of the songs subject to the NOIs.  The tech companies serving mass NOIs are not rendering these statements and thus fail to comply with the transparency requirements of Copyright Act.  All of the “address unknown” NOIs served during 2016 are out of compliance with the regulations, and all “address unknown” NOIs served in the first quarter of 2017 are likewise out of compliance.  Congress should instruct the Copyright Office to require monthly and annual statements of account be filed with the Copyright Office for anyone who has relied on these NOIs as required by the regulations.  All statements of account should be certified in the normal course as required by the regulations, and made available to the public by posting to the Copyright Office website.
  4. Require the Library of Congress to Create a Searchable Database of NOIs:Congress should instruct the Library of Congress to create a single database maintained online that is maintained by an independent third party and is searchable by songwriters in a manner similar to a state unclaimed property office.  That database needs to be updated on a regular schedule.  Given the size of the compressed files served to date, it is essentially impossible for songwriters to determine if NOIs have been filed on their songs.  This is particularly true as the NOIs are served on an effectively random basis, so even if songwriters were able to search, they would essentially have to search all the time.
  1.  Pay Royalties Into A Permanent Trust Account:  Given that it is highly likely that the mass NOIs filed to date have a significant number of errors, it is also likely that songwriters will become entitled to payment of royalties retroactively if these errors are ever caught.  Therefore, the Congress should require that royalties should be paid to a trust account maintained at the Copyright Office and held in perpetuity like a state unclaimed property office.  Of course, it is equally likely that the song copyright owners will be entitled to terminate any purported license under 17 USC Sec. 115(c)(6).  These payments should be based on actual usage and not black box.  This is another reason why the statements for “address unknown” NOIs should be public.

What started in April 2016 as a trickle of NOIs from a handful of companies has now expanded exponentially.  Based on Rightscorp’s analysis in January 2017, some 30 million “address unknown” NOIs had been filed–and that did not include the dozens of “address unknown” NOIs filed by Spotify in March 2017 alone which themselves likely total over a million songs.

NOI Table
Top Three Services Filing NOIs

April, 2016-January 2017

Number of NOIs Per Service
Amazon Digital Services LLC 19,421,902
Google, Inc. 4,625,521
Pandora Media, Inc. 1,193,346

It is rapidly becoming standard practice for tech companies to try to pull the wool over the eyes of the Congress by leveraging an apparent loophole and they are doing it on a grand scale.

As we have seen with everything else they touch from the DMCA to royalty audits, the tech companies will continue this loophole-seeking behavior until they are forced to stop.  Since no one at the Library of Congress seems to have the appetite to right this wrong, the Congress itself must step in.

Ultimately Congress should fix the loophole through legislation, but in the meantime most of the harms can be corrected overnight by policy changes alone.

#irespectmusic and #savesoho Join Forces in London, Tuesday, April 18!

IRM London

BBC 6 Music’s Matt Everitt hosts this very special event.

The Save Soho pop-up venue returns to The Union Club for a special meeting bewteen two artists, both well known for their activism in the music sector. Blake Morgan, from New York – founder of #IRespectMusic and Tim Arnold from London – founder of Save Soho.

This will be a chance to hear both artists perform as well as hear each of them discuss their passion for protecting the rights and freedoms of the creative communities in the UK and the U.S with their campaigns.

The Reservation continues the Soho tradition to support emerging artists.. For this event we are delighted to welcome singer Sara Strudwick in her debut London show.

Make your reservation now….

http://www.seetickets.com/event/save-soho-the-reservation/the-union-club/1064413