The Economics of Recoupment Forgiveness

Can Forgiveness Be Compulsory?

There is a drumbeat starting in some quarters, particularly in the UK, for the government to inject itself into private contracts and cause a forgiveness of unrecouped balances in artist agreements after a date certain–as if by magic.  Adopting such a law would focus Government action to essentially cause a compulsory “sale” by the government of the amount of every artist’s unrecouped balance due to the passing of time for what is arguably a private benefit.

Writing off the unrecouped balance for the artist’s private benefit would essentially cause the transfer to the artist of the value of the unrecouped balance to be measured at zero–which raises a question as to the other side of the double-entry if the government also allows a financial accounting write off for the record company investor  but values that risk capital at zero.  Government action of this type raises Constitutional questions in the U.S., and I suspect will also raise those same types of questions in any jurisdiction where the common law obtains.  We’ll come back to this.  It also raises questions as to why anyone would risk the investment in new artists’ recordings if the time frame for recovery of that risk capital is foreshortened. We’ll come back to this, too.

What’s Wrong with Being Unrecouped?

Remember—being unrecouped is not a “debt” or a “loan”.  It’s just a prepayment of royalties by contract that is conditioned on certain events happening before it is ever “repaid.”   There is no guarantee that the prepaid royalties will ever be earned.

One of the all-time great artist managers told me once that if his artist was recouped under the artist’s record deal, the manager was not doing his job.  The whole point was to be as unrecouped as humanly possible at all times.  Why?  Because it was free money money bet that may never be called.  Plus he would do his best to make the label or publisher bet too high and he was never going to let them bet too low.

Another great artist manager who was representing a new artist who went on to do well before breaking up said that once he realized he was never going to be recouped with the record company it was a wonderfully liberating experience.  He’d talk them into loads of recoupable off-contract payments like tour support, promotion and marketing that made his band successful and that he didn’t share with the label.  Tour support is only 50% recoupable?  How much will you spend if it’s 100% recoupable?

Get the idea?  We’re starting to hear some rumblings about a statutory cutoff for recoupment of a term of years.  First of all, I would bet such a rule in the U.S. if applied retroactively would be unconstitutional taking in violation of due process under the 5th Amendment.  Regardless, whichever country adopts such a rule will in short order find themselves with either no record companies or with vastly different deal points in artist recording agreements subject to their national law.  (See the “$50,000 a year” controversy from 1994 over California Civ. Code §3423 when California-based labels were contemplating leaving the State.  We’re way beyond runaway production now.)

Record Company as Banker

Let’s imagine two scenarios:  One is an unsigned artist trying to finance a recording, the other is a catalog artist with an inactive royalty account.  They each illustrate different issues regarding recoupment.

Imagine you went to a bank to finance your recordings.  You told the banker I do some livestreams, here’s my Venmo account statements and I have all this Spotify data on my 200,000 streams that made me $500 but cost me $10,000 in marketing.  Most importantly of all, your assistant thinks I am really cool, if you catch my drift.

I want to make a better record and I think I could get some gigs if clubs ever reopen.  My songs are really cool.  I need you to lend me $50,000 to make my record and another $50,000 to market it.  (Probably way more.)  I don’t want a maturity date on the loan, I don’t want events of default (meaning it is “non recourse”), you can’t charge me interest, I don’t want to make payments, but you can recoup the principal from the earnings I make for licensing or selling copies of the recordings you pay for.  I’ll market those recordings unless my band breaks up which you have no control over.  As I recoup the principal, I’ll pay you in current dollars for the historical unrecouped balance.  I keep all the publishing, merch and live.  And oh, if you want you can own the recordings, but understand that I will be doing everything I can to try to get you (or guilt you or force you) to give me the recordings back regardless of whether you have recouped your “loan” which isn’t a loan at all.

Deal?

Catalog Fairness

Then consider a catalog artist.  The catalog artist was signed 25 years ago to a term recording artist agreement with $500,000 per LP on a three firm agreement that didn’t pan out.  After tour support, promotion, additional advances to cover income tax payments, the artist got dropped from their label and broke up with a $1,000,000 unrecouped balance.   In the intervening years, the artists went on to individual careers as songwriters and film composers, but none of those subsequent earnings were recoupable as they got dropped and were under separate contracts.  Another thing that happened in the intervening years was the label went from selling CDs at a $10 wholesale price through their wholly owned branch distribution system to selling streams at $0.003 each through a third party platform with probably triple the marketing costs.

The old recordings eventually dwindled below 1,500 CD units a year for a few years, and in 2005 the label cut them out, but continued to service their digital accounts with the recordings as deep and ever deeper catalog.  After a few sync placements, earnings reached zero for a couple years and the royalty account was archived, i.e., taken off line.  Streaming happened and now the recordings are making about $100 a year until one track got onto a Spotify “Gen Z Afternoon Safe Space Tummy Rub” playlist and scored 1,000,000 streams or about $600 give or take.  When the royalty account was archived, it had an unrecouped balance of $800,000 in 1995 dollars.  So the $600 gets accrued in case the catalog ever earns enough to justify the cost of reactivating the account—which means the artist doesn’t get paid for the recordings because they are unrecouped but they also don’t get a statement because they’ve had an earnings drought.  Like most per-stream payments, it would cost more to account for the $600 on a statement than the royalties payable.

Bear in mind that adjusted for inflation—and we’ll come back to that—the $800,000 in 1995 dollars would be worth $1,366,866.14 today.  But because the record company does not charge either overhead, interest, or any inflation charge, the historical $800,000 from 1995 is paid off in ever-inflated current dollars.

As the artist managers said, the artists long ago got the benefit of getting essentially a no-risk lifetime royalty pre-payment (it’s not really correct to call it a “loan” when there’s no recourse, maturity date, payments, interest rate or repayment schedule) and long ago spent the money on a variety of business and personal expenses.  Which potentially enhanced their careers so they could get that film work later down the line.  Or more simply, a bird in the hand.

Do You Really Want Monkey Points?

If you want to see what would happen if this apple cart were rocked, take a good look at a good corollary, the “net profits” definition in the film business, or what Eddy Murphy famously called “monkey points.”  Without getting into the gory details, studios will typically play a game with gross receipts that involves exclusions, deductions, subdistributor receipts, advances, ancillary rights, income from physical properties (from memorabilia like Dorothy’s slippers), distribution fees, distribution and marketing expenses, deferments, gross participation, negative costs, interest on the negative cost, overbudget deductions, overhead on negative cost and marketing costs (and interest on overhead)…shall I go on?  And then there’s the accounting.

The movie industry also has a concept called “turnaround”.  Turnaround happens when Studio A decides (usually for commercial reasons) it is not going forward with a script that it has developed and offers it to other studios for a price that allows it to recover some or all of its development costs usually with an override royalty.  Sometimes it works out well–after a very long time, the project may become “ET.”  Would artists prefer getting dropped or having their contracts put into turnaround?

The point is that while it may sound good to make unrecouped balances vanish after a date certain, people who say that seem to think that all the other deal terms will stay constant or even improve for the artists after that substantial risk shifting.  I seriously doubt that, just like I doubt that venture capitalists who fund the startups that bag on record companies would give up their 2 or 3x liquidation preference, full ratchet anti-dilution protection, registration rights or co-sale agreements.

Should 5% Appear Too Small

But did the unrecouped balance actually vanish?  Not really.  The value was transferred to the artist in the form of forgiveness of an obligation for the artist’s private benefit, however contingent.  That value may be measured in an amount greater than the historic unrecouped balance.  Is this value transfer a separate taxable event?  Must the artist declare the forgiveness as income?  Can the record company write off the value transferred as a loss?  If not, why not?  I can’t think of a good reason.  If anything, valuing the “taking” in current dollars would only correct the valuation issue and could amplify the tax liability of the transfer.

As you can see, wiping out unrecouped balances sounds easy until you think about it.  It is actually a rather complex transaction which immediately raises another question as to when it stops.  Why just signed artists?  Why not all artists?  Songwriters?  Profit participants in motion pictures or television?  Authors?  All of this will be taken into account.

King John and the Barons: Don’t Tread On Me

Setting aside the tax implication, were such government action to take the form of a law to be enacted in the United States, it would prohibit a fundamental right previously enjoyed under the 5th Amendment to the U.S. Constitution (one of the Amendments known as the “Bill of Rights”).  The “takings” clause of the 5th Amendment states “…nor shall private property be taken for public use, without just compensation.”  In fact, such government action would implicate the fundamental rights expressed in the 5th Amendment and applied against the states in the 14th Amendment to the Constitution.  The 5th Amendment derives from Section 39 of Magna Carta, the seminal constitutional documents in the United Kingdom (dating from 1215 for those reading along at home) and was central to the thinking of Coke, Blackstone and Locke who were central to the thinking of the Founders.

In the U.S., such a law would likely be given a once over and strictly scrutinized by the courts (including The Court) to determine if taking unrecouped balances from a select group of artists, i.e., those signed to record companies, is the only way to get at a compelling government interest in promoting culture even though the taking would be pretty obviously for the private benefit of the artists concerned and only benefiting the public in a very attenuated manner. In other words, will treating a select group of pretty elite artists (at a minimum those signed vs. those unsigned) satisfy the strict scrutiny standard applied to a government taking of private property with no compensation.  (This distinction also smacks of a due process violation which is a whole other rabbit hole.)  I suspect the government loses the strict scrutiny microbial scrub and will be required to compensate the record company for the taking at the fair market value of the unrecouped balances.

Because I think this is pretty clearly a total regulatory taking that is a per se violation of the 5th Amendment, I suspect that a court (or the Supreme Court) would be inclined to hold the law invalid on Constitutional grounds and simply stop any enforcement.

Failing that strict scrutiny standard, a court could ask if the zeroing of unrecouped balances with no compensation is rationally related to a legitimate government interest.  I still think that the taking would fail in this case as there a many other ways for the government to promote culture and even to encourage labels to voluntarily wipe out the unrecouped balances at some point such as through a quid pro quo of favorable tax treatment, changing the accounting rules or offsets of one kind or another on the sale of a catalog.

Running for the Exits

If anything, I think that government acting to cut off the ability to recoup at a date certain with no compensation (which sure sounds like an unconstitutional taking in the US) would necessarily make labels start thinking about compensating for that taking by moving out of those territories where it is given effect (or at least not signing artists from those countries).  Such moves might make artists start thinking about moving to where they could get signed.

Or worse yet, it would make labels re-think their financial terms and re-recording restrictions.  Overhead charges and interest on recording costs would be two changes I would expect to see almost immediately.  And that would be a poor trade off.

Iterative Government Choices

The choice that artists make is whether to sign up to an investor like a record company who wants a long-term recoupment relationship against pre-paid royalties.  If you don’t like a place, don’t go there and if you don’t like the deal, don’t sign.

Any government that contemplates taking unrecouped balances must necessarily also contemplate offering artists grants to make up the shortfall due to signing contractions.  This could include for example the host of grant funding sources available in Canada such as FACTOR and the many provincial music grants.  And those grants should not come from the black box thank you very much.

On the other hand, I do see a lot of fairness in requiring on-demand services to pay featured and nonfeatured artists a kind of equitable remuneration like webcasters and satellite radio do, which is paid through on a nonrecoupment basis directly to the artists in the US.  While they may criticize the system that produced the recordings that have made them rich beyond the wildest dreams of artists, songwriters or music executives (except the ones the services hire away), that doesn’t mean that they shouldn’t pay over to creators some of the valuation transfer that made Daniel Ek a multibillionaire while artists get less than ½¢ per stream.

So the takeaways here are:

  1. Wiping out unrecouped balances with no compensation is likely illegal.
  1. Creating a meaningful and attractive tax incentive for record companies to wipe out an unrecouped balance conditioned on that benefit being passed through to artists is worth exploring.  (Why wait 15 years to give that effect?)  This may be particularly attractive in a time of rising taxable income at labels.
  1. Requiring the services to pay a royalty in the nature of equitable remuneration on a nonrecoupment basis is a way to grow the pie and get some relief to both featured and nonfeatured artists.  This new stream is also worth exploring.

Betting on the House: Five Issues that House Judiciary Should Investigate Against Google–End Supervoting Shares for Publicly Traded Companies

The House Judiciary Committee announced yesterday that it was opening an antitrust investigation into “tech giants” including Google.  Chairman Jerry Nadler said:

[T]here is growing evidence that a handful of gatekeepers have come to capture control over key arteries of online commerce, content, and communications…Given the growing tide of concentration and consolidation across our economy, it is vital that we investigate the current state of competition in digital markets and the health of the antitrust laws.

We’re going to look at five issues Chairman Nadler should consider that relate both to Google and to some others, too.  Let’s start with reforming corporate governance and bring eyesight to the willfully blind.

1.   One Share, One Vote, Not Ten:  Anyone in the music business has had just about enough of government oversight, so I don’t recommend it as a solution in general.  But–in the absence of marketplace transparency, the government is about the only place to go to bring reforms to well-heeled corporations.  So rather than ask the government to fix specific problems on an ad hoc basis, the government would do well to ask what causes the market to fail as it clearly has with Google.

The first question to ask is where was the board?  In Google’s case, the core problem is both easy to find and easy to fix.  It lies in the voting structure of the shareholders.  Shareholder rights and corporate charters are state law matters and don’t relate to the federal government, but–the federal government does have a say about who gets to sell shares to the public and has an interest in protecting the shareholders of publicly traded corporations.  It is this nexus that gives the House Judiciary Committee clear oversight authority over the corporate structure of publicly traded corporations.

While anti-coup d’etat provisions might make sense for private companies whose investors are sophisticated financiers, or newspapers seeking to retain editorial independence, once that company is publicly traded a bald discrepancy that simply mandates voting power to the insiders forever seems like it has to go.  And as we have seen with Google, the lack of corporate oversight has resulted in unbelievable arrogance and a complete failure of corporate responsibility.  And worse yet, because Google got away with it, lots of other tech companies follow essentially the same model (including Facebook, Spotify and Linkedin).

It must also be said that stock buybacks approved by a board where insiders who benefit from the buyback have supervoting shares and control the board is a practice that reeks to high heaven.  Buybacks and dual class supervoting shares have been widely criticized including by Securities and Exchange Commission Commissioner Robert Jackson who is also a critic of supervoting shares.

So how did this happen to Google?  The supervoting structure started when Google was a private company as a way for the founders to preserve control and avoid venture capital investors pushing them around.  OK, fine, I understand that.

Google (which is really its parent company, Alphabet) trades under two ticker symbols on the  NASDAQ: GOOGL Class A and GOOG Class C.

Oops.  What happened to Class B?  Ay, there’s the rub.

Class B shares are not publicly traded and are held by insiders only.  But as you will see, they control every aspect of the company.  So why would Google’s insiders want this share structure?  There’s actually a simple answer.  Class A shares (GOOGL) get one vote per share, Class B shares get 10 votes per share and Class C shares (GOOG) get no votes.

That’s right–Class B shares cannot be purchased and their holders get 10 times the voting power of the Class A holders, often called “supervoting” shares, because their super power is…well…voting.

The Class C shares were created as part of a 1:1 stock split that doubled the number of shares, halted the price per share, but resulted in no change of the voting power of the Class A and C shareholders.

When the dust settled, the Google/Alphabet voting capitalization table looked something like this:

Class A: 298 million shares and 298 million votes, or roughly 40% of the voting power with votes counting 1:1.

Class B: 47 million shares and 470 million votes, or roughly 60% of the voting power with votes counting 10:1.

What this also means is that the holders of Class B shares voting as a bloc will never–and I mean never–be outvoted at a shareholder meeting, their board of directors will never be challenged much less replaced and shareholder meetings are a sham.

Who controls the Class B shares?  The people that Commissioner Jackson might call the “corporate royalty“:

Larry Page: 20 million shares (as of 2017)

Sergey Brin: 35,300 Class B shares plus 35,300 Class A shares (as of 2018)

Eric Schmidt: 1.19 million Class B shares, 40,934 Class A shares, and 10,983 Class A Google shares, plus 2.91 million Class B shares through family trusts.

Sundar Pichai: 6,317 Class A shares and no Class B shares.

The House Judiciary Committee has a chance to correct the supervoting system as bad policy and implement a long-term fix across the board for all dual-class companies that want to trade on the public exchanges.

 

 

Minding the Value Gap: The UK Parliament’s Report on Disinformation and Fake News

It’s been a rough couple weeks for Silicon Valley in Europe.  Hard on the heels of an embarrassing lobbying loss in the European Parliament with the Copyright Directive (aka “Article 13”), the UK Parliament issued a damning report on the failings of social media.  The title tells you a lot:  Disinformation and Fake News.  Headline readers will come away from the news reporting with the impression that the report is about the UK government regulating Facebook due to the manipulation of the platform by Russian trolls using active measures.  If you read the report, even just the summary, you will see that it is the work product of an eight-nation committee and it is targeted at all social media platforms and “user generated content” (or “UGC”).

Unlike US-style regulation that these companies simply ignore and pay the paltry fines, it is unlikely that Google, Facebook and others will be able to simply conduct business as usual in the UK or Europe (Brexit or no)–particularly when you see statements like the following from Tom Watson, the Labor Party’s Shadow Culture Secretary:

Labour agrees with the committee’s ultimate conclusion: the era of self-regulation for tech companies must end immediately. We need new independent regulation with a tough powers and sanctions regime to curb the worst excesses of surveillance capitalism and the forces trying to use technology to subvert our democracy.

Few individuals have shown contempt for our Parliamentary democracy in the way Mark Zuckerberg has. If one thing is uniting politicians of all colours during this difficult time for our country, it is our determination to bring him and his company into line.

Tom Watston BASCA

Considering that the corporate bot farming techniques and the corporate comms version of Marcuse-esque messaging that Google and Facebook used against Article 13 are even more insidious than the Russkie election manipulators who were the focus of the Parliamentary report, it’s all pretty breathtaking.

They’ll Take Us in a Rush

Corporate whack a mole is–or was–the ultimate de facto safe harbor and is at the heart of the value gap.  Two truths were obvious from the moment in 2006 when a lawyer from Google’s recently acquired YouTube told a bar association meeting in Los Angeles that they could either make a deal with her for weaponized UGC on YouTube or play whack a mole using the DMCA notice and takedown–that Google and their shills intended to fight every step of the way (see Ellen Seidler’s excellent take down of the take downs).

First, it was obvious that Google executives intended to enrich themselves building a business on the backs of artists and songwriters who couldn’t fight back (what I call the ennui of learned helplessness), and next that Google intended to use those grey market profits and their vast wealth from public markets in a particularly nasty way that would have made Leland Stanford proud.  Google would simply crush any opposition from any rights holder or competitor who stood up to them.  But most of all that UGC is the ultimate front end for the data profiling back end which is where the real money is made.

This 2006 display of corporate molery had special resonance for me.  I spoke at the OECD’s Rome conference on digital stuff early in 2006 where Professor Terry Fisher and Google lawyer-to-be Fred Von Lohmann essentially laid out the strategy of using UGC to overwhelm the system and the abuse of the safe harbors.  That strategy was at the heart of their humiliating loss in the Grokster case and should be seen as implementing Grokster by other means (recall that Fred did a first rate job of articulating the losing argument before the 9th Circuit Court of Appeals that carried the day in the 9th Circuit but failed where it mattered in the U.S. Supreme Court).

During a very spiffy dinner that probably cost enough to have provided fresh water to a million in South Sudan, Professor Fisher told the slightly boozed up crowd of bureaucrats how the world was going to work with UGC.  I was very likely the only one in the room who knew enough about Fisher and Von Lohmann and about Google’s tactics to really get the message.  I whispered to my dinner partner, “They intend to take us in a rush.”

And so they did.

Platforms Are Fit for Purpose but Their Purpose Isn’t Fit

The Parliament’s report on Disinformation and Fake News is a strong rejection of Silicon Valley data miners like Google, Amazon and Facebook.    (You could say a latter day Big Four, but the Big Three won’t let there be a fourth in the best traditions of the Big Four.)

Google is a thought leader among the aristocracy of Silicon Valley’s real-time data miners and subsidizes many other pundits who support its business model in a variety of ways.   It’s not surprising that Facebook followed the path that Google blazed with YouTube since Google got so rich doing it.

In many ways, Facebook is the ultimate UGC profiteer–and blissfully chose to largely ignore the moral malaise that UGC will inevitably bring with it.  Zuckerberg, Paige and Brin ignored these problems because The Boys Who Wouldn’t Grow Up were making too much money–and getting away with it.  The fundamental problem is that these companies care more about enriching themselves than they care about who their users are or the content their users generate–as long as users keep generating.  It is that greed that underlies the studied lack of control designed into Google and Facebook.  It’s not that bad guys exploit a design flaw–it’s that the platforms work exactly as planned.

Nowhere is this more obvious than with the failure of Google and especially Facebook to manage their platforms to prevent bad actors from using the very tools that enriched the Silicon Valley monopolists for very odious disinformation campaigns.

Despite repeated warnings, governments have allowed these nation-state level actors to play their whack a mole game so freely that by the time democracy itself was on the line it has been difficult to regulate the monopolists.

Until now–or so we hope.  The UK Parliament’s Select Committee on Digital, Culture, Media and Sport has rendered its final report on “Disinformation and Fake News.”  While the report nominally focuses solely on Facebook, lovers of democracy should welcome the broader hope for both its methods as well as its findings.

The International Grand Committee

The Select Committee’s methods are refreshing:

We invited democratically-elected representatives from eight countries to join our Committee in the UK to create an ‘International Grand Committee’, the first of its kind, to promote further cross-border co-operation in tackling the spread of disinformation, and its pernicious ability to distort, to disrupt, and to destabilise. Throughout this inquiry we have benefitted from working with other parliaments. This is continuing, with further sessions planned in 2019. This has highlighted a worldwide appetite for action to address issues similar to those that we have identified in other jurisdictions….

[A]mong the countless innocuous postings of celebrations and holiday snaps, some malicious forces use Facebook to threaten and harass others, to publish revenge porn, to disseminate hate speech and propaganda of all kinds, and to influence elections and democratic processes—much of which Facebook, and other social media companies, are either unable or unwilling to prevent. We need to apply widely-accepted democratic principles to ensure their application in the digital age.

The big tech companies must not be allowed to expand exponentially, without constraint or proper regulatory oversight. But only governments and the law are powerful enough to contain them.

Let’s hope so.  In the face of well-financed resistance by some of the biggest corporations and the most devious robber barons in commercial history since the days of the Big Four railroads, our governments and law enforcement have pretty much failed so far.  That’s how we got here and that’s how the problem evolved well past private attorney general-type remedies.

The public attorneys general need to mind the value gap.  Hopefully the European governments have the spine to stand up and show America how it’s done.

 

 

Don’t Get Fooled Again: Piracy is still a big problem

I know it’s not very “modern,” but music piracy is still a huge problem.  As recently as yesterday I had a digital music service executive tell me that they’d never raise prices because the alternative was zero–meaning stolen.

Very 1999, but also oh so very modern as long as Google and their ilk cling bitterly to their legacy “safe harbors” that act like the compulsory licenses they love so much.  Except the safe harbor “license” is largely both royalty free and unlawful.  Based on recent data, it appears that streaming is not saving us from piracy after all if 12 years after Google’s acquisition of YouTube piracy still accounts for over one third of music “consumption.”  The recent victory over Google in the European Parliament indicates that it may yet be possible to change the behavior of Big Tech in a post-Cambridge Analytica world.

It’s still fair to say that piracy is the single biggest factor in the downward and sideways pressure on music prices ever since artists and record companies ceded control over retail pricing to people who have virtually no commercial incentive to pay a fair price for the music they view as a loss leader.  If the Googles of this world were living up to their ethical responsibilities that should be the quid pro quo for the profits they make compared to the harms they socialize, then you wouldn’t see numbers like this chart from Statistica derived from IFPI numbers:

chartoftheday_15764_prevalence_of_music_piracy_n

The good news is that there is a solution available–or if not a solution then at least a more pronounced trend–toward making piracy much harder to accomplish.  It may be necessary to take some definitive steps toward encouraging companies like Google, Facebook, Twitch, Amazon, Vimeo and Twitter to do more to impede and interdict mass piracy.

Private Contracts:  It may be possible to accomplish some of these steps through conditions in private contracts that include sufficient downside for tech companies to do the right thing.  That downside probably should include money, but everyone needs to understand that money is never enough because the money forfeitures are never enough.

The downside also needs to affect behavior.  Witness Google’s failure to comply with their nonprosecution agreement with the Criminal Division of the Department of Justice for violations of the Controlled Substances Act.  When the United States failed to enforce the NPA against Google, Mississippi Attorney General Jim Hood sought to enforce Mississippi’s own consumer protection statutes against Google for harms deriving from that breach.  Google sued Hood and he ended up having to fold his case, even though 40 state attorneys general backed him.

Antitrust Actions:  Just like Standard Oil, the big tech companies are on the path to government break ups as Professor Jonathan Taplin teaches us.  What would have been unthinkable a few years ago due to fake grooviness, the revolving door and massive lobbying spending all over the planet, in a post-Cambridge Analytica and Open Media world, governments are far, far more willing to go after companies like Google, Amazon and Facebook.

Racketeer Influenced and Corrupt Organizations Act Civil Prosecutions:  “Civil RICO” claims are another way of forcing Google, Facebook, Amazon & Co. to behave.  Google is fighting a civil RICO action in California state court.  This may be a solution against one or more of Google, Facebook and Amazon.

As we know, streaming royalties typically decline over time due to the fact that the revenues to be divided do not typically increase substantially (and probably because of recoupable and nonrecoupable payments to those with leverage).  At any rate, the increase in payable revenues is less than the increase in the number of streams (and recordings).

While it’s always risky to think you have the answer, one part of the answer has to be basic property rights concepts and commercial business reality–if you can’t reduce piracy to a market clearing rate, you’ll never be able to increase revenue and music will always be a loss leader for immensely profitable higher priced goods that artists, songwriters, labels and publishers don’t share be it hardware, advertising or pipes.

I strongly recommend Hernando de Soto’s Mystery of Capital for everyone interested in this problem.  The following from the dust jacket could just as easily be said of Google’s Internet:

Every developed nation in the world at one time went through the transformation from predominantly extralegal property arrangements, such as squatting on large estates, to a formal, unified legal property system. In the West we’ve forgotten that creating this system is what allowed people everywhere to leverage property into wealth.

What we have to do is encourage tech companies to stop looking for safe harbors and start using their know-how to encourage the transformation of the extralegal property arrangements they squat on and instead accept a fair rate of return.  My bet is that this is far more likely to happen in Europe–within 30 days of each other we’ve seen Europe embrace safe harbor reform in the Copyright Directive while the United States welcomed yet another safe harbor.

If we’re lucky, the European solution in the Copyright Directive may be exported from the Old World to the New.  And if Hernando de Soto could bring property rights reform to Peru in the face of entrenched extralegal methods and the FARC using distinctly American approaches to capital, surely America can do the same even with existing laws and Google.

Mass NOI Charts: An Update from Royalty Claim — MUSIC • TECHNOLOGY • POLICY

An update on the state of the Copyright Office debacle also known as mass filing of “address unknown” notices under Section 115 (you can see the largely unusable posting of these notices at this link on the Copyright Office site). Here’s some charts you won’t see in the trades or even on the Copyright Office site-Royalty Claim’s Address “Unknown” Mass NOI chart that Royalty Claim measured by number of filings January 1-June 30, 2017.

via Mass NOI Charts: An Update from Royalty Claim — MUSIC • TECHNOLOGY • POLICY

Holding the Line on Tradeoffs for Statutory Damages

It is very likely that we will hear about a move to make significant amendments to the Copyright Act at some point before the beginning of campaign season in 2018.  There are a significant number of copyright-related bills that have been introduced in the House of Representatives in the current session, so brace yourself for an “omnibus” copyright bill that would try to cobble them all together Frankenstein-style.

A Frankenstein omnibus bill would be a very bad idea in my view and will inevitably lead to horse trading of fake issues against a false deadline.  Omnibus bills are a bad idea for songwriters and artists, particularly independent songwriters and artists, because omnibus bills tend to bring together Corporate America in attack formation.

MIC Coaltion
The MIC Coalition

When you consider that Google and Facebook are part of Corporate America (not to mention Apple), the odds of the independent songwriter and artist, but really any songwriter and artist, just holding onto the few crumbs they currently have crash and burn.  The odds of actually righting wrongs or–God forbid–getting rid of the legacy consent decrees that protect Big Business vanish into the limit.

Of course, what certain elements of Big Tech would really like to do is push all licensing of music into one organization that they could then control through consent decrees or other government regulation and supervision by exercise of the massive lobbying and litigation muscle of the MIC Coalition and DIMA.  While I realize that may actually sound anti-competitive, it is typical of monopolists to use the antitrust law to destroy competition (as Professor Taplin has taught us).   That’s certainly what has happened with the PRO consent decrees–reduced competition and lower royalties.  Not to mention such a licensing organization would collapse under its own complexity.  This is probably why the Copyright Office envisioned a “Music Rights Organization” that would combine the PROs and mechanical rights licensing but provided the relief valve of an new opt-out right so that songwriters could escape the madness.  (“Under the Office’s proposal, except to the extent they chose to opt out of the blanket statutory system, publishers and songwriters would license their public performance and mechanical rights through MROs.”  Copyright Office Music Licensing Study at p. 9)

If you want some ideas about the kinds of property rights that Big Tech wants the government to take away from songwriters and artists, just read Spotify’s most recent filing in the songwriter litigation in Nashville where their lawyer tries to define away mechanical royalties (unsurprisingly, the lawyer is a long-time protege of Lessig).  Why?  Because they are being brought to a trial by their peers on statutory damages for copyright infringement and the potential for having to pay the songwriters’ lawyers due to a statutory right to recover attorneys fees.  (Statutory damages for copyright infringement has long been an attack point of Big Tech and we get a preview of where they want it to go in Pamela Samuelson’s “Copyright Principles Project”–essentially abolished.)

One way or another, the Big Tech cartel (which includes all the companies in the MIC Coalition and MIC Coalition member the Digital Media Association which itself has members like Spotify and, curiously, Apple) is very likely going to go after statutory damages and try to create yet another “safe harbor” for themselves with no burdens–a “friction free” way to infringe pretty much at will because the actual damages for streaming royalties will be pennies.

If the cartel succeeds in eliminating statutory damages and attorneys fees awards, this will truly make copyright infringement litigation toothless and entirely eliminate the one tool that independent songwriters and artists have to protect their rights.  It will neuter massive copyright infringement as alleged in all of the Spotify class actions, not to mention cases like Limewire.

Oh, you say–did you just switch from song copyrights to sound recording copyrights by referencing Limewire?  Yes, I did–because that’s exactly what I predict the DIMA and MIC Coalition have in mind.  Why do I say this?  Because that’s what these companies are backing in the radioactive Transparency in Music Licensing and Ownership bill (HR 3350).  And if you blow up all the current separate bills into one omnibus copyright “reform” bill, the pieces may reconstitute in forms you didn’t expect.

But realize that in almost all the many copyright bills currently before the House of Representatives, the other side is trying to bootstrap unjust harm into a negotiation chip to shakedown creators.  And it’s not just pending legislation–the shakedown is especially observable with the millions of notices of intention to rely on statutory mechanical licenses for songs filed with the Copyright Office.  That’s a nice song you got there, it would be a shame if something happened to it.

Big Tech’s basic negotiation method is to rely on a loophole, bootstrap the loophole to build up the pressure on people who can’t fight back, then run the shakedown to get concessions that should never be made.  This is what Google has done with the DMCA and is the same shakedown tactic on mass NOIs taken by Google, Amazon, Pandora, Spotify, and others–but curiously not Apple.  Somehow Apple has made it work with the most successful digital music platform in history.

Let’s go down the issue list:

Bootstrapped Issue

Fix

Bill

Pandora and Sirius stopped paying artists for digital royalties on pre-72 recordings—because of loophole based on federal copyright protection for sound recordings Start paying artist royalties on classic recordings made before 1972 CLASSICS Act
Terrestrial radio created a loophole so they don’t have to pay performance royalties to artists on sound recordings; stop artists from opting out Start paying artist royalties for broadcast radio (with protection for noncommercial and small broadcasters) Fair Pay Fair Play Act, PROMOTE Act
Big tech suddenly started using a loophole to file millions of “address unknown” NOIs with Copyright Office after indie songwriters filed class actions Require Big Tech to use existing databases to look up copyright owners or don’t use the songs or recordings. None
No “central database” that has all songs (but no requirement to actually look up anything), requires double registration If songwriters and artists don’t register, then no statutory damages Transparency in Music Licensing and Ownership Act

Blown up into parts:

–Avoid raising mechanical royalty rate or paying artist royalties on terrestrial at all

–How to use the lack of the mythical “central database” as a bright and shiny object to avoid paying royalties and shirk liability for not doing copyright research, an absurd position for companies that owe much of their wealth to their unprecedented ability to profile people around the world and “organize the world’s information”

–Avoid paying statutory damages

–How to avoid paying royalties that should have paid anyway (pre-72, terrestrial, mass NOI) through distorted interpretations of the law or even safer harbors

–Avoid an obligation to actually look up anything (new databases)

–Use any work they want if all they have to pay is actual damages and no attorneys fees

–Keep songwriters and artists from opting out

–Create biggest black box possible

It should be apparent which way Big Tech is trying to push the creative community.  It is important for creators to understand that any legislative concession that the MIC Coalition or DIMA win against songwriters or artists they will then turn around and try to extract in the next shakedown–authors, photographers, film makers, all the copyright categories.

It is in everyone’s interest to support a healthy creative community that will continue to engage fans and do enough commerce to create value for the tech monopolies.  But–it is crucial to understand that it doesn’t work the other way around.

The purpose of the creative community is not to create value for tech monopolies.  It is to support compelling artists and help them engage with fans, and sometimes it is art for art’s sake alone.  If those artists throw off some commercial gain that the tech monopolies can turn to profit themselves, fine.  But creating profit for these monopolists is not the goal of artists.

Instead of creating fake problems to try to extract concessions that further undermine creators like offering ice in winter, the tech monopolies like Google, Spotify, Amazon and Pandora should identify real problems and work with us toward real solutions–and not a loophole-driven shakedown.

 

 

Don’t Believe the Astroturf: Yet More Regulations Won’t Help Songwriters or Small Business

“[Government] interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding.”

James Madison, The Federalist Papers No. 44

There is a bill in Congress backed by the mega lobbying juggernaut called the MIC Coalition that would force songwriters and artists to “register” with the government in order to protect their rights from the biggest corporations in the world.  Failing to do so would take away the stick of statutory damages and an award of attorneys fees to songwriters or artists who are victorious in copyright infringement litigation.  Statutory damages and attorneys’ fees are the only real protection that the government gives these creators–the smallest of small businesses.

Why?  Because the government does virtually nothing to protect the rights of artists.  If it weren’t for statutory damages and attorneys’ fees there would be nothing between a creator and the ravages of mega-corporations.  Try calling a U.S. Attorney and asking them to prosecute a massive infringer.  If it hasn’t happened yet given the rampant piracy we’ve seen over the last 20 years now, it should tell you that it’s never going to happen with rich corporations that run roughshod over artist rights.

Yet songwriters in particular are some of the most highly regulated workers in America.  The government forces songwriters to license their work and sets the price they can license at–yet does nothing to enforce the “compulsory licenses” it imposes on songwriters.  Not only is the government in their lives at every turn, songwriters are poorly treated by their government.  Why?  One reason is that songwriters are among the smallest of small businesses and have little political clout.

That explains why the government imposes wage and price controls on songwriters through consent decrees and rate courts, but forgets to raise their wages for 70 years.  Can you imagine how that would go down if the government tried doing the same to auto workers or even the minimum wage?

The Rate that Time Forgot

The government first established the “minimum” statutory mechanical royalty in 1909 at 2¢ per copy.  When the government enacted the Fair Labor Standards Act in 1938–twenty nine years later–the government-mandated minimum statutory rate for songs was still 2¢ per copy.  The hourly minimum wage was set at 25¢.

The government didn’t get around to raising the minimum statutory rate until 1978–sixty nine years after it was established in 1909–when they raised it from 2¢ to 2.75¢.  The hourly minimum wage had then been raised from 25¢ to $2.65.  Shortly after, the government started indexing the minimum statutory rate from the rate that time forgot–had the government indexed to the rate of inflation from 1909 to 1978, the rate would have been closer to 13¢, a level it has yet to reach over 100 years after it was first set–today the rate is 9.1¢.  And the government has frozen the rate at 9.1¢ since 2006–eleven years ago.

That’s a cruel mess.

What happens if a music user wants to avail themselves of the statutory license but simply refuses to pay the paltry royalty rate?  Nothing happens.  At least not unless the songwriter or their publisher sues for statutory damages and attorneys’ fees.  If you’ve followed the class action cases brought by David Lowery and Melissa Ferrick against Spotify, you’ll know that these cases only involve small songwriters.  Now there’s two publishers suing Spotify in Nashville–again, small publishers suing for statutory damages and attorneys fees.  Publishers who chose to go it alone rather than take a settlement.

If these plaintiffs didn’t have the statutory damages and attorneys’ fees, do you think anyone in the government would care that the government’s compulsory license was being misused?

We’re From Washington and We’re Here to Help

Individual music users like Amazon, Google, Facebook and Spotify have about as much political clout as any of the other notorious monopolists in history from Standard Oil to United Fruit.  As members of the MIC Coalition lobbying group, these companies have the political clout of Big Tobacco, Big Pharma or Big Bombs.

These companies are all part of the MIC Coalition (or are members of other lobbying groups that are).  The MIC Coalition is all about this new “government list” that’s supposed to protect small business by crushing small business.

MIC Coaltion

Here’s the pitch on the government database from the MIC Coalition:

The lack of an authoritative public database creates problems for venues and small businesses including restaurants, taverns, wineries, and hotels. For example, venues are declining to host live musicians rather than risk potential liability due to lack of up-to-date and actionable licensing information. The lack of a database is also a challenge for local broadcasters and digital music streaming services that rely on accurate copyright information to provide music to millions of consumers.

The assumption behind this legislation is that if the government just forced all the world’s songwriters and artists to register in the government’s list, that music users would actually use that database.  If there’s one common theme in the recent lawsuits against digital services it is that the services don’t seem to use the available data–except to file millions of mass statutory licenses using a loophole in the Copyright Act.  The users spend big bucks to claim they can’t find the copyright owner of the songs they use in the current Copyright Office records and seek the government’s cover from lawsuits as if they were legitimate users.

If they put the same effort into finding the songwriters that they do into filing millions of mass NOIs, these services might not have so many problems.  And instead of removing the loophole, the government now floats this “government list” database idea to create an even more complicated loophole at taxpayer expense.

Reject the 11th Century Solution to a 21st Century Problem

It’s important to realize two key causes for the licensing mess the government has created through over-regulating songwriters, one of which is not entirely the government’s fault.

The Government Should Allow Statutory Licensing by ASCAP and BMI:  Because the government imposes a near-compulsory license through consent decrees against songwriters who are members of the two largest performing rights societies (ASCAP and BMI), a perfect opportunity to streamline the compulsory license is simply lost.  The government’s courts that supervise songwriters actually prohibit ASCAP and BMI from engaging in compulsory licensing.  If these PROs were allowed to issue licenses for all the rights digital services need, that would be a meaningful step forward.

This would make ASCAP and BMI similar to SESAC which can issue both performance rights licenses and mechanical licenses after SESAC’s acquisition of the Harry Fox Agency.  SESAC is not subject to a consent decree.  The MIC Coalition didn’t like that either and complained to the Department of Justice seeking an investigation into stopping an idea that could work.

hesse

Require Music Users to Search the PRO Databases for Song Ownership before Serving Address Unknown Mass NOIs at Taxpayer Expense:  There is nothing in the “government list” bill that actually requires music users to search or document that they have searched this new database.  Current law requires a search of at least the Copyright Office records (which Amazon, Google, Pandora, Spotify, Microsoft, iHeart and others are supposedly doing already by the millions) and in some circumstances permits a search of the performing rights society databases as well (see 37 CFR Sec. 201.10 h/t Richard Perna).

It is a short leap to require music users to search the publicly available databases of ASCAP and BMI as well as the public records of the Copyright Office before serving millions of address unknown NOIs on the Copyright Office.  This will be particularly relevant given the recently announced voluntary cooperative effort between ASCAP and BMI to combine their repertory databases (which could include other PROs).  While there is some complaining from MIC Coalition members that ASCAP and BMI won’t indemnify users of their databases for the accuracy of the data, that dog won’t hunt.

That simply isn’t true for parties to the ASCAP and BMI licenses, which after all is why the databases are created in the first place.  Since ASCAP and BMI have no idea what use anyone may make of the data and if that use is even authorized by the song or recording owners, how could they possibly be expected to indemnify all users for any use in any country of any song?  Those databases are not a search engine.  Nobody else does that, especially not search engines, e.g., Google’s disclaimer:

Our Warranties and Disclaimers

We provide our Services using a commercially reasonable level of skill and care and we hope that you will enjoy using them. But there are certain things that we don’t promise about our Services.

OTHER THAN AS EXPRESSLY SET OUT IN THESE TERMS OR ADDITIONAL TERMS, NEITHER GOOGLE NOR ITS SUPPLIERS OR DISTRIBUTORS MAKE ANY SPECIFIC PROMISES ABOUT THE SERVICES. FOR EXAMPLE, WE DON’T MAKE ANY COMMITMENTS ABOUT THE CONTENT WITHIN THE SERVICES, THE SPECIFIC FUNCTIONS OF THE SERVICES, OR THEIR RELIABILITY, AVAILABILITY, OR ABILITY TO MEET YOUR NEEDS. WE PROVIDE THE SERVICES “AS IS”.

SOME JURISDICTIONS PROVIDE FOR CERTAIN WARRANTIES, LIKE THE IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. TO THE EXTENT PERMITTED BY LAW, WE EXCLUDE ALL WARRANTIES.

If the government wants to tinker with the Rube Goldberg system of music licensing that it has imposed on songwriters, it could start by making these two changes before imposing a 21st Century version of William the Conqueror’s Domesday Book, the Great Survey of England conducted in 1088.

Oh, and if they’re so fired up about forcing people to do things through regulation, why not force music users to license, pay and account in compliance with the law.

 

The Transparency in Music Licensing and Ownership Act: The Domesday Book Meets A Unicorn

Americans are freedom loving people and nothing says freedom like getting away with it.

Long Long Time, written by Guy Forsyth

Longtime PRO opponent Rep. Sensenbrenner introduced a bill entitled “The Transparency in Music Licensing and Ownership Act“, a piece of work that is Dickensian in its cruelty, bringing a whole new meaning to either “newspeak” or “draconian,” take your pick.  It’s rare that the Congress can accomplish the hat trick of an interference with private contracts, an unconstitutional taking and an international trade treaty violation all in one bill.  But I guess practice makes perfect.  And since the MIC Coalition gave the bill a rousing cheer followed by a heaping serving of astroturf, we should not be surprised.  (Read the bill here.)

While this legislation currently applies only to songs and sound recordings, other creators should not feel that they’ve dodged a bullet.  I hear that the House Judiciary Committee staff is planning on closing the loop and making all copyright categories subject to the same “register or lose it” approach favored by Lessig, Samuelson and their fellow travelers.  If you thought that we are in an era of the triumph of property rights, that must be a different Congress you’re thinking of.

The bill perpetuates the myth of the “global rights database” that no one who understands the complexities believes will ever be created.  It sounds logical, right?  We have county recorders for real estate, the DMV for cars, why not a database for music?

That is an 11th century idea being welded onto a 21st century problem, the Domesday Book meets a unicorn.  The problem isn’t knowing who owns a particular work which evidently is either what they believe or want you to believe.

The problem is that the users don’t want to seek permission or beg forgiveness, either.  They want to get away with it.  This bill demonstrates that unassailable fact in colors bold as the Google logo.

Think about it–by the time you finish reading this post, 1000 songs will be written and 500 songs will be recorded somewhere out there in the world.  Or more.  (Not to mention photographs taken,  paintings painted, chapters written and so on.)

Do you think that songwriters around the world are thinking, now I know what lets do, let’s rush to go register that new song in the U.S. Copyright Office–in the database, the registration section, the recordation section?  Otherwise, I’ll never be able to afford the lawyer to sue Spotify if they don’t pay me.  I don’t think they’re thinking that at all and are about to fall into the MIC Association’s trap for the unwary.  Why the MIC Coalition?  We’ll come back to them.

mic-coalition-no-npr
MIC Coalition Members

In a nutshell, the bill requires the extraordinarily heavy burden of requiring all songwriters and recording artists (or their publishers or labels)–all, as in the entire world seeking to sue in the U.S., not just the US writers–to register numerous fields of data in a yet to be created database if they plan on suing for statutory damages:

[I]n an action brought under this title for infringement of the exclusive right to perform publicly, reproduce, or distribute a nondramatic musical work or sound recording, the remedies available to a copyright owner [ANY copyright owner] that has failed to provide or maintain the information [required] shall be limited to…(A) an order requiring the infringer to pay to the copyright owner actual damages for the public performance, reproduction, or distribution of the infringed work; and…(B) injunctive relief to prevent or restrain any infringement alleged in the civil action.

That means if you haven’t undertaken the formality of registering in this new database, then the user has no exposure to statutory damages and will not have to pay the victorious songwriter or artists attorneys’ fees.  And this new safe harbor applies apparently even if that songwriter or artist has filed a copyright registration under existing law.

There is nothing in the bill that actually requires the protected class to actually look up anything in this new database, or actually be in compliance with existing statutory licenses (such as the webcasting or simulcasting licenses).

So who is in the new protected class entitled to the Nanny State’s protection from those collusive and pesky songwriters and artists?  Let’s look at the victimology of the “ENTITLEMENT” paragraph.

Well, actually, there’s no “ENTITLEMENT” paragraph for the entitled, it’s actually called “APPLICABILITY” (see “newspeak”, WAR IS PEACE, etc.).  The connected class includes five different categories of cronies.

First, the defined term “An establishment” gets the new even safer harbor.  “Establishment” is a defined term in the Copyright Act (in Sec. 101 for those reading along at home):

An “establishment” is a store, shop, or any similar place of business open to the general public for the primary purpose of selling goods or services in which the majority of the gross square feet of space that is nonresidential is used for that purpose, and in which nondramatic musical works are performed publicly.

Like the members of this organization, the National Retail Federation:

mic-coaltion-8-15 Retailers

Then another defined term “A food service or drinking establishment”.  Kind of like these people:

mic-coaltion-8-15 Booze

That is, the National Restaurant Association, the American Hotel and Lodging Association  (aka those who put their kids through college thanks to SXSW) and their suppliers, the American Beer, Wine and Spirits Retailers.

Next, “A terrestrial broadcast station licensed as such by the Federal Communications Commission”.  I guess that would include the National Association of Broadcasters, iHeart, Salem and Cox (which of course raises the question of whether this entitlement also applies to Cox’s Internet group), kind of like these people:

mic-coaltion-8-15 radio

Don’t forget “An entity operating under one of the statutory licenses described in section 112, 114 [webcasting and simulcasting], or 115 [mechanical licenses].”  Note–not that the statutory license applies to the particular song or sound recording in the way it is used that is the subject of the lawsuit, just that the entity is operating some part of its business under one of those licenses regardless of whether the service that is the subject of the lawsuit operates under one of these licenses or not.  (Pandora’s on-demand service compared to webcasting, for example, could be out of compliance with its sound recording licenses but claim the safe harbor because it is “operating under” one or more of the statutory webcasting license in the radio service or the statutory mechanical licenses for songs.)

It appears that would include these people:

mic-coaltion-DiMA Members

and don’t forget these people who are DiMA members and need the government’s protection from songwriters and artists:

Amazon logo

white apple logo

Microsoft Logo

Spotify_logo

And then I guess you could throw the Consumer Technology Association and CCIA in there, too.

So I think that’s everyone, right?

Last but not least there’s this group as “belt and suspenders”:

An entity performing publicly, reproducing, or distributing musical works or sound  recordings in good faith as demonstrated by evidence such as [i.e., but not limited to] a license agreement in good standing with a performing rights society or other entity authorized to license the use of musical works or sound recordings.

Note:  The license need not be for the musical works or sound recordings for which the “entity” is being sued, just any license for any musical works or sound recordings.

There are loopholes in the bill that you could drive a fleet of Street View cars through, so you have to assume that the loopholes will be hacked given who is involved.  Don’t let anyone tell you “oh that’s just legislative language, we can fix that.”  The whole thing has to be voted down.

Let’s call this bill what it is:  Crony capitalism, the triumph of the connected class.  The Domesday Book writ large.

It’s some of the biggest companies in the world deciding that they don’t want to hear from songwriters or artists anymore.

So shut up and sing.

 

Save the Date! July 26 in Austin: Chris Castle on Address Unknown NOIs Sponsored by Texas Accountants & Lawyers for the Arts

Big thanks to Texas Accountants & Lawyers for the Arts and Norton Rose Fulbright for hosting my presentation on the “address unknown” loophole and what to do about it.  As MTS and MTP readers will recall, this is a vital issue for songwriters that is a festering sore that no one has addressed.  We appreciate the support from I Respect Music Austin!

All are welcome. One hour of Texas CLE credit pending.

6:15-7:15pm Presentation “Address Unknown: Are You Missing Money from Your Songs”

7:15-8:00pm Mixer with attorneys, artists, managers, and other participants

If you are able to attend, please RSVP for details on Eventbrite.

https---cdn.evbuc.com-images-33068089-87998774455-1-original

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.