What Does the New MLC Candidate Mean for the Copyright Office?

Nate Rau reports in The Tennessean that there is a new group competing to be the “Mechanical Licensing Collective” under the Music Modernization Act.  I would expect there will be at least one more group come forward in the coming weeks.  This competition was easy to expect, but it does call to account the short time frames for setting up the MLC in the Music Modernization Act.  Those time frames fail to take into account the potential delaying effects of competition.

Multiple competitors also suggests that whoever wins the designation of the Copyright Office should be looking over their shoulder before the 5 year review of the MLC’s performance by the Copyright Office.  It’s likely that whoever is the runner-up in that designation pageant will still be around and may be critical of the winner when that 5 year review comes around.

It’s also worth noting that no one seems to be very interested in the music services’ counterpart to the MLC, being the “Digital Licensee Coordinator” or the “DLC”.  Whoever ends up getting to be the DLC is also going to be subject to a 5 year review, likely to be side by side with the MLC’s review.

As it now seems like there may be hard feelings on the part of the runner up for the MLC, this would be a good time for the Copyright Office to come up with objective criteria for both the selection of a winner and the definition of success when the 5 year review comes up.  It appears from the statutory language that Congress intends for the Copyright Office to come up with these criteria, and the clearer and more transparent the criteria, the less likely it will be for hard feelings to result in a meltdown.

The review of both the MLC and the DLC are governed by the same language in the Music Modernization Act:

Following the initial designation of the [mechanical licensing collective/digital licensee coordinator], the Register shall, every 5 years, beginning with the fifth full calendar year to commence after the initial designation, publish notice in the Federal Register in the month of January soliciting information concerning whether the existing designation should be continued, or a different entity meeting the criteria described in clauses (i) through (iii) of subparagraph (A) shall be designated. Following publication of such notice, the Register shall—

“(I) after reviewing the information submitted and conducting additional proceedings as appropriate, publish notice in the Federal Register of a continuing designation or new designation of the [mechanical licensing collective/digital licensee coordinator], as the case may be, and the reasons for such a designation, with any new designation to be effective as of the first day of a month that is not less than 6 months and not longer than 9 months after the date on which the Register publishes the notice, as specified by the Register; and

“(II) if a new entity is designated as the [mechanical licensing collective/digital licensee coordinator], adopt regulations to govern the transfer of licenses, funds, records, data, and administrative responsibilities from the existing mechanical licensing collective to the new entity.

The Congressional mandate to the Copyright Office is very broad–“soliciting information” could mean just about anything even remotely germane.  Given that the Copyright Office is to designate each of these crucially important offices empowered by Congress and to then measure their competency five years from now, it does seem that the Copyright Office would do well to give both the MLC and the DLC notice of what’s expected of each of them, and to do so before the designation is made.

For example, record keeping regarding customer service responsiveness, accuracy of the ownership database, overbudget or underbudget spending, complaints by songwriters, matching rates, number of audits of services undertaken, audit recoveries and distributions and executive compensation might all be relevant in the case of the MLC.

Some of these same criteria might be relevant for the DLC, although the DLC would have its own issues not common to the MLC.  These might include responsiveness of the DLC to potential blanket licensees, confidential treatment of competitive information, fair allocation of the assessment and communication with all licensees, especially the significant nonblanket licensees.

The Copyright Office would do well to recall the “seven anonymous amici” from the Microsoft antitrust litigation who were so dependent on Microsoft and so afraid of retaliation that they could not even use their own names to file an amicus brief in the case.  If the Copyright Office intends to have a candid assessment of either the MLC or the DLC, it might be a good idea to make an anonymous comment process available to competitors who fear retaliation.

If the Copyright Office makes a nonexhaustive list of qualities that constitute a successful completion of the five year trial period at the beginning of that period rather than the end, it might make succesful completion more likely.

Facebook Outage Reveals People Still Read the News Other Ways, Would YouTube Outage Reveal People Still Listen to Music?

I have often said that if I was able to persuade the entire entertainment industry to devote say 10% of their marketing spend to aardvark.com, then aardvark.com could be as big as YouTube.  This, of course, is an aspirational statement that doesn’t take into account how Google would react or how Google games search result, but you get the idea.

Somehow YouTube has managed to convince our marketing folk that they just can’t get along without the views and likes.  But is that really true?  Will people listen to music somewhere besides YouTube if YouTube wasn’t there?

Josh Schwartz writing at Nielman Lab gives us some insight into a somewhat analogous situation with Facebook and news sites:

At Chartbeat, we got a glimpse into that on August 3, 2018, when Facebook went down for 45 minutes and traffic patterns across the web changed in an instant. What did people do? According to our data, they went directly to publishers’ mobile apps and sites (as well as to search engines) to get their information fix. This window into consumer behavior reflects broader changes we see taking hold this year around content discovery, particularly on mobile.

So when YouTube tries to tell us that we can’t get along without them, which is definitely the implication of Google’s most recent charm offensive in the European Parliament, it may not even be a close call.  Particularly when you consider the downside from low royalties, unchecked stream ripping and YouTube’s corrosive safe harbor practices.

Fans found music they loved before YouTube and they will after YouTube, just like they did after Tower Records–and Tower Records didn’t spy on them.  And that’s what the Chartbeat research showed about news sites after the Facebook outage:

Key data points show that when Facebook went down, referrals to news sites fell, as expected — but other activity more than made up for it.

  • Direct traffic to publishers’ websites increased 11 percent, while traffic to publishers’ mobile apps soared 22 percent.

  • Search referral traffic to publishers was also up 8 percent.

  • Surprisingly, there was a net total traffic increase of 2.3 percent — meaning that the number of pages consumed across the web spiked upward in this timeframe.

What if it turned out that YouTube needed us more than we need YouTube?

More Evidence of DPO Conflicts: Is Spotify’s Stock Buyback Plan Taking it to the Shorts?

Spotify is experiencing the joys of being a public company–or at least a quasi public company if you count public companies as ones whose shares are actually held by the public as in Mrs. & Mr. America.  But both analysts and investors have to always remember that Spotify did not conduct an IPO in the traditional sense where an underwriting syndicate of bankers bought a block of shares from the company that the syndicate then resold to the public.  This is why Spotify’s recently announced $1 billion stock buy-back program bears closer scrutiny.

Instead they conducted a DPO, a direct public offering which is unusual and radically different than an IPO.  The DPO has an essential conflict–the sellers of shares are insiders in the issuer and have an incentive to keep the stock price high and to manipulate that stock price however they can.  Like through a stock buy back after less than a year of trading, for example.

From a financial markets point of view, that DPO makes almost everything about Spotify’s stock a different analysis than a market traded IPO–including Spotify’s recently announced stock buy back.  Stock buy backs happen all the time, particularly in declining markets.  But what is unusual is for a company that’s still in its first year of operating as a public company whose shares are largely traded by insiders and is a money losing company to take the odd step of using $1 billion of the shareholders money to buy back stock.

Or maybe not so unusual if the shareholders whose money it is are both the sellers of those shares and the beneficiaries of the stock buy back–as they try to find a bigger fool to sell the shares to in the retail market.  Another core problem with DPOs is that you don’t have an independent body setting the opening price as you would with an underwriting syndicate.  DPOs have to get an opening price from somewhere–so Spotify’s pricing problem started with the SEC and NYSE allowing Spotify to price at its last privately traded price (as some shares of Spotify traded in what used to be called a “Rule 4(a)(1)1/2” exemption for resale of restricted stock, now codified in Section 4(a)(7) of the Securities Act by the FAST [Breakfast at Buck’s] Act–a bit of a gloss but OK for our purposes here).

So by letting Spotify use the private market for restricted stock as a proxy for a market price, at a minimum the SEC and the NYSE assume that the rights, preferences and privileges of an unregistered share of Spotify stock are the same as a share of registered SPOT.  They’re not.  They also assume there are no price distortions from the relatively low number of unlegended restricted shares available in the private market.  They also assume that there’s nothing odd about a company like Spotify–staring down relatively slam dunk infringement lawsuits of significant value and in a money-losing business run from 10 floors of the World Trade Center like it was Apple or something–pricing way above the opening prices of Amazon, Facebook, Google and so on.

If that sounds cynical, it really isn’t once you understand the dynamics of a DPO compared to an IPO.  The DPO produces a market effect that is similar to the business model of Larry Ellison’s famous 1999 “HeyIdiot.com” parody of an Internet company:

HEYIDIOT.COM is tightly focused on selling just one product. Elegantly enough, that product is the stock of HEYIDIOT.COM, which will be offered to you for sale on-line at our web site of the same name. Buying the stock is simple, you can buy as much stock as you want with the only rule being that each new purchase must be executed at a successively higher price.  We call it a cash portal.

We’re seeing the result of the DPO come home to roost in Spotifyland which looks something like this:

 

Spotify 11-16-18 Basic
SPOT 11-6-18

After a run up in the stock price–on low volume and with no meaningful news–the stock retraces its steps and suggests its testing lower lows.  It’s hard to say what “price support” there is for a stock that’s had less then a year of trading, but let’s just say that if it broke through $100 to the downside, there would be rending of garments and closer examination of executive compensation unless Spotify executives could continue to blame artists for “high” royalties.

Also note that three out of four of Spotify’s biggest volume days were to the downside, and that the stock has been trading down, essentially, since August.Spotify 11-16-18 Volume

 

We can also assume that at these low trading volumes, the shares have gradually been accumulating in the trading accounts of Mrs. & Mr. America which also means that there are potentially more and more shares available to short sellers–the buy high sell low crowd that I discussed back in March.

short_sell_example

In fact, there are a few November 30 puts in the $115 range already.  Daniel Ek has announced he’ll be selling Spotify shares with a value of about $20 million on a monthly basis for a while.  You have to notice that those board-approved sales are overlapping with the board-approved Spotify stock buy back that will help to support the higher price point while insiders dump their shares.  This is another inherent conflict problem with the whoe DPO concept–but when you have the 1:10 voting power over your board as does Mr. Ek, many things are possible.

It’s nice work for a “cash portal.”

See SPOT Fall–Does the Decline of Spotify’s Stock Price Mean Anything?

Stocks go up, stocks go down, what does it all mean?  In the very recent declines of the stock price of credible companies, you saw them punished for good quarters but guiding lower.  Even “big tech” stocks like Google and Amazon were punished for revenue misses and cloudy guidance.

And then there’s China–is the US in a trade war or a new cold war?  (Read Mike Pillsbury for the answer.)  Spotify’s has double whammy exposure to China trade woes plus the Ten Cent investment (itself getting hammered by China’s President for Life’s concerns about videogame addiction).

What’s happening with the Spotify stock price?  I would argue the main downward driver for SPOT is much more straightforward–the market is simply catching up to the Spotify DPO and its insider-heavy stock sales.  We won’t really know the hard numbers on insider trades until the SEC starts making those insider Form 4 sales more easily available online.  That should should happen any day now (and none of the mainstream music industry publications seem to be interested enough in the the truth setting them free to actually dig through the SEC Form 4 filings at the source).

But–there could be enough shares out there in the marketplace that SPOT may be starting to trade like an IPO as opposed to an insider cash-out (or DPO).  And once the market really becomes part of the Spotify trading day and trading volume increases, a few things start happening.  One is that as more shares are held by the public, there are an increasing number of shares available to allow the “buy high, sell low” short trading that can cause big swings in a stock’s price due to short covering if nothing else.

SPOT also starts to become more susceptible to the other stocks in its cohort as more retail investors have to answer the question, what will I sell to buy Spotify?  The answer will be different for different people, but if there are more sellers than there are buyers, we know what happens.  That’s why the majors, Sony in particular, were very smart to start selling their holdings almost immediately.

What would you sell to buy Spotify?  Probably not its competitor Apple–whose shares trade almost opposite to Spotify on a relative basis.

 

SPOT Apple Moving averages
SPOT-APPL 11-1-18

 

If you’re looking at the performance of SPOT, you have to ask yourself what about this chart says “buy”?

 

Spot moving averages
SPOT 50 and 100 Day Moving Averages 10-31-18

 

You have a stock that’s broken through both its 100 and 50 day moving averages to the downside as of yesterday, and so far in today’s action is testing lower lows.  And not surprisingly sank like a stone following a “head and shoulders” top technical chart pattern indicating a potential bearish trend that has now been confirmed (as I began watching in June on Music Tech Policy before the stock gave up almost $50 of its share price).

I guess the MMA safe harbor is priced in.

Keep asking yourself that question:  What would I sell to buy SPOT?  If you’re not an insider, that question will eventually guide you (and the market) to the right share price. That will have nothing to do with Spotify’s royalty payouts, how many floors of World Trade Center it rents, or competition with YouTube or Apple.  Don’t let the analysts (or the company) fool you–although some analyists are starting to face the Spotify reality.

That will be–I would suggest–a problem with the insider-controlled Direct Public Offering structure and the SEC’s decision to allow Spotify to price at a meaninglessly high number.  What goes up on fantasy comes down hard on reality.

Buckle your chin strap.

Ethical Pool: More for few or fewer for more – The Results of a Comparative Study on Pro Rata and User Centric Distribution Models from Finland

I call my version of “user centric” royalties the “ethical pool”.  Since I posted my short paper on the ethical pool, I’ve been hearing from people who were interested in the method.

If you’re interested in a deeper dive on the topic, our friends at the Finnish Musicians Union sent a link to a study they commissioned comparing the differences between the user centric model and what we call the “Big Pool” or the prorata distribution model.

In the alternative user centric model, the right holder’s compensation is based on the number of listening times of an individual user: how many different tracks the user is listening and how many times. If the user concerned would listen to only one track, would his/her whole monthly fee be paid to the track’s right holders. Therefore, the difference compared to the pro rata model is that it would, in principle, increase the compensation of the right holders of less listened tracks, and, on the other hand, reduce the compensation of the most listened music….

The study was carried out during April–October 2017 by Dr. Pradeep Durgam of Aalto University. The writing of the report and some further analysis was done by Consultant, Dr. Jari Muikku of Digital Media Finland.

Spotify provided the research material, which consisted of premium users’ listening times in March 2016. The user data was completely anonymous and was only given to the researcher Pradeep Durgam. The study concerned only the so-called premium user service, and the researcher did not have information about the compensation paid by the advertisers.

One difference between the Ethical Pool and the Big Pool approach is that while the Big Pool would be the default if a fan did nothing, subscriber revenue for fans electing the Ethical Pool would be removed entirely from the Big Pool at the election of the subscriber and the music available in the Ethical Pool would be selected by the artist.

There is no reason why the artist could not be in both, but with different recordings.  That “extended windowing” could be offered to artists who want to stay in the Big Pool with some tracks but also want to be in the Ethical Pool with other tracks.

So even though the “More for Few” study doesn’t take these wrinkles into account, it is extremely valuable research and statistical analysis on the user-centric model.

You can read the study itself at this link.   A big thank you to Lottaliina Pokkinen who is the Head of Legal Affairs for the Finnish Musicians Union whom I met at the recent AFM/FIM Streaming Economy conference in Los Angeles.  That conference was one of the best I’ve participated in.   It was also the only one I’ve been to that focused on the effect of streaming on performers.  Kudos to Ray Hair of the American Federation of Musicians and John Smith of the International Federation of Musicians for having the over-the-horizon vision to host the two-day event.

Save the Date! NYC Music Business & Law Conference November 16

I’m honored to be included in a panel at the New York State Bar Association’s annual Music Business & Law Conference on November 16 with truly awesome panelists.

11:50am-12:50 pm      Music Modernization Act (US) / International Developments

The Music Modernization Act could be the most consequential copyright legislation in a generation. This panel will describe what it does, what it doesn’t do, how it affects current business and legal practices, and its effect on domestic and international copyright holders.  Bring your questions.

Panelists:
Marc Jacobson, Esq. (Moderator)
Chris Castle, Esq. – CC Legal Firm and Music Tech Solutions Blog
Charlie Sanders, Esq. – Counsel-Songwriters Guild of America
Alexander Ross, Esq. – Wiggin LLP (UK)
Christine Pepe, Esq. (IP, Music, and Digital Law Consultant)

Read Highlights of Managing Change Under the Music Modernization Act’s Music Licensing Collective in the current issue of the Texas Entertainment & Sports Law Section Journal by Chris Castle.

Read Meet the New Boss:  Tech Giants Rely on Loopholes to Avoid Paying Statutory Royalties with Mass Filings of NOIs at the Copyright Office from the American Bar Association, Entertainment & Sports Lawyer (Spring 2017) by Chris Castle.

 

Saddle Up: The Role of the Copyright Office Examiners in the “Noncommercial Use” of Pre-1972 Recordings under the Music Modernization Act

Now I never said that Music Modernization Act was a self-licking ice cream cone.  That was someone else.  Neither did I say it was the gift that keeps on giving.  That wouldn’t have been me–it’s just getting started, after all.  Too soon.

We are now having a look at the first of what will no doubt be many, many regulations to be issued by the Copyright Office that will actually implement the MMA.  Wakey wakey.

Thanks to Senator Ron Wyden’s last minute looney tunes shakedown when the MMA was limping across the finish line in the Senate,  the Copyright Office has circulated a notice of inquiry for the first MMA regulations promulgated by the Copyright Office.  This time it’s regulations under Title II of the MMA for the new “license” request for “noncommercial” uses of pre-72 sound recordings.   Never heard of this “license” before?  Didn’t know it was in the MMA?  Get used to it.  If you’re like most people, you didn’t read the 200 page MMA before it passed, but you would do well to read it very carefully now that it is the law of the land.

The coming wave of regulations to be released by the Copyright Office will be your last chance to eject from the twilight zone–but file it under “M” for “maybe”.  Because the die is cast and the Rubicon is crossed.

It must be said, of course, that the only reason we are having this discussion is because Google’s data farming Senator Ron Wyden threatened to put a hold on the MMA literally at the 11th hour and conducted an entirely predictable but no less grotesque legislative shakedown that is so typical of his Wydeness.

This didn’t come from the members of the House of Representatives who voted unanimously for the pure CLASSICS Act and it didn’t come from the other 99 members of the Senate who would have voted for the same House bill.  No, this came from Senator Wyden and his motley crew from Public Knowledge, aka the Google shillery, the nutty professors and, we must assume, with the blessing of at some of the members of the Digital Media Association.

I want you to remember that after the entire industry burns thousands of productivity hours (not to mention lawyer time) in trying to define this stick in the eye.  This is pure Google and pure, unadulterated Wyden.  (We might call this the “Wyden loophole” but when it comes to loopholes, Senator Wyden is as fecund as the shad so that description wouldn’t narrow it down much.)  Plus it’s the kind of “registration-based” thinking that is straight out of the Samuelson “Copyright Principles Project” and the much ballyhooed American Law Institute Restatement of Copyright, not to mention Lessig and Sprigman.  But after all the handwringing, the pre-72 license is a big victory for the Restatement crowd and it’s the law of the land.

So–the MMA includes a Google “license” request for pre-72 recordings that allows a sound recording owner of a pre-72 recording to approve or disapprove a request for a noncommercial use of that recording.  Sounds simple, right?  Not so simple as the Copyright Office notice of inquiry confirms.  It’s a ridiculously complicated loophole that may ultimately lead to no license being issued–and that’s when the handwringing will really begin.

However ridiculous this whole thing is, it is the law, so we must deal with it.  We will have more to say about the proposed regulation in coming days, but a couple points jump right out–most importantly, the obligation on the user to clear the song in the recording before burdening either the Copyright Office or the sound recording copyright owner with a no-money clearance request.

Realize that there are at least two copyrights in any sound recording–the song being performed (the “©”) and the recording of that song (the “℗”).  The “pre-72” issue only applies to the sound recording copyright–which did not enjoy federal copyright protection prior to 1972.  (The MMA gives a partial federalization of state law copyright–beyond the scope of this post.)

But–musical works (aka songs) enjoyed all kinds of federal copyright protection prior to 1972, so the fact that a sound recording might be subject to the new loophole created by Senator Wyden says nothing about the song.  So how does this fit together?

First, the Copyright Office needs to play a real vetting role in this process before the sound recording copyright owner even receives the request and there should be no direct communications between user and copyright owner.  Let’s not repeat the mass “address unknown” NOI mistake.

Recall that the Copyright Office failed to vet any of the millions of “address unknown” NOIs for compulsory song licenses which allowed many of those notices to be filed improperly (in the millions, I would guess which sure sounds like a crime).   This was such a debacle that it gave Big Tech a leg up in passing the MMA, rather than fix the mistake.  We do not need a repeat performance of that catastrophe or even a curtain call.

But perhaps more importantly, there is no reason for anyone to spend a minute on these requests unless the user requesting the pre-72 license for a pre-72 sound recording can show that they have already obtained the rights for any musical work embodied in the pre-72 sound recording.  All those hidden costs were well-covered in the CBO review of the MMA…oh, wait.  They weren’t at all.

And, of course, when the MMA’s super-duper global rights database for every musical work ever written or that ever may be written is up and running in less than two years from now, it will be super duper easy to find these pre-72 songs, right?  For free?

So why should anyone spend any time on a sound recording request if the song rights have not already been obtained since the sound recording is unusable without the song clearance and the song license is not included in the Wyden loophole? (So presumably an arms length market rate unless a compulsory license applies depending on the use, say sync or mechanical.)  And there’s certainly no reason for a user to pay a Copyright Office examiner to review an application that cannot be consummated because the user has been unable to obtain the song rights.  That would be unfair to the user.

If the user wishes to assert fair use as a defense to the rights of the song owner, then presumably they’d also assert fair use against the sound recording owner, too, so they problaby would not even apply.

Hence every application for the pre-72 use would almost by definition require a song license unless the work is already in the public domain (such as recordings of the traditional classical repertoire).  Determining whether the song is in the public domain is exactly the kind of work the user should be paying the Copyright Office examiner to confirm.

So I’d say this “song first” approach makes sense, although I’m willing to be educated otherwise.