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.)
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.
When you drill down on exactly what goes into tracking and accounting for songs and recordings on streaming services one thing becomes apparent: No matter how much you automate, those systems are expensive and the royalties are minuscule. This is in large part because of the revenue share method of royalty payments that creates a vastly more complex accounting world than a simple per-use penny rate would require. It’s time to make that change to simplify the reporting.
It’s easy to figure out how much an artist made. But if you want to figure out how much each collaborator is owed from each stream… now you’re looking at millions of rows in hundreds of royalty reports from dozens of sources — every month.
Payments are paid in fractions of cents.
Did I say fractions? I meant 20 decimal places.
Did I say cents? I meant 30 different currencies.
Did I say 30 different currencies? I meant a 350-row exchange rate lookup table. “Customer currency: Swedish Krona, royalty currency: Ukrainian Hryvnia” is a thing (and so on, and so on).
Did I say a 350-row exchange rate lookup table? I meant a different table every month — from every streaming provider.
This gives you a look under the hood of the number of transactions that are inherent in a royalty system that pays every time an end user listens to a track. It also informs why artists and especially songwriters are royally cheesed about the sharp decrease in the size of their royalty payments.
The hidden transaction costs of the configuration shift from album bundles to singles with the coming of iTunes was challenging but was at least manageable. The shift from singles to individual streams is cost multiplier of significant proportion above the shift from albums to digital singles. I would submit that not only is the cost not manageable, but when distributors promote themselves based on their ability to handle twenty decimal places to the right, it probably never will be.
When a firm’s costs exceed revenue, the firm must either take on debt, sell equity or shut down the insolvent business or business unit–or delay paying royalties, more about that later. Royalty accounting is, of course, a core business function of distributors, but it is also a core function of the parties receiving those royalties out to twenty decimal places to the right–record companies and music publishers. There are even more accounting costs incurred by the labels and publishers in calculating the artist or writer shares and their own share of revenue, which will cause the decimal places to increase–to the right.
What this means is that in order to stay in business, be able to meet contractual obligations and pay their artists or writers, royalty systems must be able to handle a new level of complexity they were never before required to process. Sound expensive?
Add to this complexity that many digital music services use the compulsory mechanical license that requires monthly statements and a true-up annual accounting signed by a CPA and no audit right–instead of quarterly or semi-annual accounting with an audit right. Even if a publisher is accounted to monthly and pays writers quarterly or semi-annually, the publisher still bears the cost of processing the monthly accounting. The frequency of ingesting these monthly payments may compound the transaction costs at the publisher and songwriter level.
One technique employed in the Pandora on-demand song license (paragraph 6(a)) is to defer both payment of mechanicals and royalty statements until the revenue payable is $50. While this may seem reasonable on its face, it’s not–for largely the same reasons that the Copyright Office rejected this approach (37 CFR Sec. 210.16(g)(6)). Pandora’s license is clearly a variation on the law, which limits the deferral to $5 (not Pandora’s $50) and requires that Pandora pay any deferred royalties on the Annual Statement of Account.
That means that the service cannot write itself an indefinite interest free loan with the songwriters money and not tell the songwriter it is doing so. And, of course, you can’t audit statements you don’t receive.
Holding these sums is one way to finance the cost of running these accounting systems that deliver ever-smaller fractions of a penny paid to songwriters and artists. That should sound familiar–new money used to pay old obligations. Does the name Madoff come to mind?
It’s also important to note that in a revenue share world where money is allocated based on a core calculation of uses of your catalog divided by all songs used on the service in a month, that fraction will produce an ever smaller share of revenue if the rate of change in your catalog titles is less than the rate of change in the number of all songs on the service. (This will likely be true even if the service revenue increases, because your share of it will decline on a relative basis.)
So what is twenty decimal places today, could be even more decimal places in a year or two.
Where the industry went wrong was in the beginning when services got us to buy into the idea that getting something was better than piracy and that we owed the services a chance to find an audience. When the revenue shared was low and higher margin goods were the focus, that was one thing.
The current state of plays is another thing altogether and revenue share deals for per listen payments require a level of complexity we can’t continue to support.
As we saw in parts 1 and 2 of this post, New Boss companies like Google are playing on a loophole in the Copyright Act’s compulsory license for songs to shirk responsibility for song licensing from the songwriters or other copyright owners, get out of paying royalties and stop songwriters from auditing.
Not only have Google targeted long tail titles, but also new releases and songs by ex-US songwriters who are protected by international treaties. This is exactly the kind of rent seeking behavior by crony capitalists that gives Big Tech a bad name in the music community.
Google are doing this on a grand scale and at great expense, reportedly using “millions” of “address unknown” NOI filings with the Copyright Office that are supposed to be reserved for bona fide situations where the copyright owner cannot be found after a reasonably diligent search. Amazon is doing the same.
Through a quirk in the law (which needs to be fixed pronto) Google and Amazon are paying astonishing sums in filing fees to send the “address unknown” NOIs to the Copyright Office for songs that have not been registered for U.S. copyright or otherwise recorded with the Copyright Office. “Address unknown” NOIs are intended to be used when you really can’t find the address of the copyright owner after a diligent search of relevant records, although the Copyright Act limits the search to the public records of the Copyright Office. That limitation on records to be searched is a legacy echo from the 1909 revision of the Copyright Act which required registration and renewal for copyright to attach in the U.S.
So far, the overwhelming majority of “address unknown” NOIs are filed by Google. Spot checking the Amazon filings shows that Amazon filed a handful of titles.
Google apparently accomplishes this by manipulating a data dump from the Library of Congress that was never designed for filing mass NOIs and comparing the metadata in the data dump song title to their own list of sound recording titles that they want to exploit on their services.
Moral Hazard Revisited, DMCA Style
If you have a recording you want to use, you need to clear the song. You take that song title from the recording and look it up in the Library of Congress data dump. If it’s not there, you file the “address unknown” NOI. Wash, rinse, repeat 1,000,000 times or more. See how that works?
As if by magic, you don’t have to pay mechanical royalties until the songwriter figures out what you have done by checking the NOI submissions page at the Copyright Office (assuming anyone knows it’s there or knows their song might be listed) and then…does what?
This approach is fraught with moral hazard for largely the same reasons that plague the DMCA safe harbor–the party who benefits from avoiding both royalties and copyright infringement liability by sending the “address unknown” NOI is also the party who decides whether they qualify for the “address unknown” NOI. The Copyright Office clearly lacks the resources to cross check. Sounds kind of like DMCA notices, right?
The excuse the services give for this approach is that they can’t find the copyright owner for “long tail” and new releases.
The long tail part you can understand, but of course you have to ask yourself if a title is so obscure that you can’t find the song copyright owner, then why use it at all? Holding a track off of a service is far more likely to get the songwriter to come forward than sneaking around through the back door.
The New Release Scam Illustrated
It’s with new releases that Google runs the true arbitrage play. This is the part that makes no sense, particularly for songs written or owned by people with whom Google does repeat business. By relying on the “address unknown” NOI filings for new releases, even for songs that may be subject to a direct license, Google is using a loophole to appropriate value to themselves that should rightly go to the songwriters.
Let’s take another Sting example.
Sting released the song “50,000”, apparently as a single from his new 57th & 9th LP. “50,000” is an introspective Sting-style tribute to David Bowie and Prince. The album release date was September 23, 2016 and the single debuted around September 17. Google must have gotten the track around the same time as it is listed in Google’s September 16, 2016 mass NOI filing on line 626.
“50,000” is a particularly good example of how bogus Google’s approach is to “address unknown” NOIs. Google’s basis for filing the NOI on “50,000” apparently is that “50,000” is not included in either a copyright registration or other recording in the public records of the Copyright Office at the moment that Google looked for it. What this evidently means is that “50,000” wasn’t in the Library of Congress data dump sometime prior to September 16 when Google filed its mass NOI.
It is important to remember that there is no requirement for anyone to register their works or otherwise record their works in order to enjoy the rights of a copyright owner–such as mechanical royalties. This is true under international copyright law, not just in the U.S., so this quirk in U.S. copyright law is probably illegal and possibly unenforceable (which is why the “address unknown” NOI filing needs to be amended or eliminated–more about that below).
So simply put–how can you take away rights from a copyright owner based on a registration requirement that the copyright owner is not required to comply with because it is a formality that is actually prohibited by law? Sound Kafka-esque to you? It does to me.
In Sting’s case, Google knows who Sting is. They have other songs by Sting for which they probably sent an NOI. They may even have a direct license with Sting’s publisher that may actually supersede or be in lieu of a statutory license. In other words–they very well may have actual knowledge of Sting’s publisher. Wouldn’t that be a good place to start?
Yet because a new release has not yet shown up in the Copyright Office records, Google sends an NOI and will not be required to pay royalties until–if ever–the song is included in the Library of Congress data dump. Even though Sting is not required to register the song, Sting’s publisher may decide to register the copyright in order to take advantage of statutory damages and attorneys fees for infringement actions.
Getting a conformed copy of a copyright registration can take months–so for a single or an album, any mechanical royalties from Google under a statutory license during the new release window will never be paid. And if any direct license does not expressly prohibit including titles in mass NOIs, there’s a good chance no new release will get mechanical royalties from Google.
What Is To Be Done?
So now we know what the problem is, how to stop it? Not so easy to do.
1. Anticompetitive: It should not be lost on anyone that the government has created an opportunity for companies with market power to use their leverage to the disadvantage of their competitors as well as songwriters. It takes considerable capital to pay the filing fees to the Copyright Office and purchase data from the Library of Congress in order to arbitrage this loophole.
2. Take Down the Recordings: There are any one of a number of ways that the terms of a typical interactive music service license can be interpreted to allow the sound recording owner to pull recordings by at least current roster artists, especially new releases written by artist/songwriters (including co-writes) who complain to their labels.
3. Take Down the Songs: Direct licenses from music publishers presumably have some clause that will allow the publishers to stop mass NOI filings for their catalog, particularly of the type that creates a nonexistent distinction between versions of a song that have been retititled–not by the songwriter or publisher but by the artist or record company because the versions of the recording are different even though the song remains the same.
4. Counterfeits or Bootlegs (including stream rips): Statutory licenses are only available for sound recordings distributed under the authority of the copyright owner. There are a number of NOIs that look suspiciously like bootlegs or counterfeits, some of which may have been stream ripped. As Google is presumably sending NOIs for YouTube Red or other on-demand service.
5. Congressional Investigation to Stop the Library of Congress Selling Data for NOIs: The LOC has no business selling what is obviously incomplete data or misleading data to a user who so obviously is using it for a harmful purpose. The LOC could stop that immediately if they were so instructed by the Congress, and in any event the Congress should investigate.
6. Use Webform to Update or File Your Address Including Excel File Link: The Copyright Office has a webform for email contact by the public available here. You can use this to file your address and link to your catalog in an Excel file (hosted on your website or blog). Such correspondence is likely subject to FOIA (and therefore part of the public records of the Copyright Office), but you can also state in your webform that you are submitting the information with the intention that it become public and demand that your information be provided to anyone submitting a mass NOI as part of the LOC data dump.
The point that seems to have escaped Google and Amazon is that this loophole will surely be stopped, but what won’t be stopped is the complete lack of moral compass that would drive megacorporations to run roughshod over songwriters that they so aptly demonstrate.
As noted in Part 1 of this post, Google, Amazon and others are filing what are reportedly “millions” of “address unknown” NOIs with the U.S. Copyright Office. I fully expect that Pandora will eventually do the same for its on-demand service and Spotify is likely to do the same. Note–this type of carpet bombing of NOIs would not have helped Spotify in the David Lowery litigation because David Lowery registered his copyrights that are the subject of that litigation.
If you click here, you will find the most recent iteration of these massive NOIs, which apparently are being posted on a regular basis. The screenshot above is the first page of these filings on the Copyright Office site, most of which came this month (September 2016).
Each Excel file can be downloaded–a word of warning, even the zipped files are large and may take a while to open on an average home computer.
Remember what you are looking at in these files–this is the list that results from comparing the list of sound recordings that the services are using to the data dump that the service purchases from the Library of Congress. Take a tip–you’ll never find the page on the LOC website unless you know where to look, which is right here.
Willful Blindness on Song Titles
This is an overwhelming amount of data, so in order to have any idea what is really going on, spot checking will be required. And since it’s Google, you know there’s a scam afoot, your challenge is just to figure out which scam it is this time. (Of course the entire exercise is a scam, but leave that to one side for now.)
Scam # 1 appears to be treating any song title that has any text in it other than the actual song title as a song for which the owner cannot be identified. Here’s two examples from Sting in the Google 9/16/16 NOI file:
Of course, the song “Fragile” is registered, but Google’s filing claims that there is a different song “Fragile (Live)” that is not registered by that title. Google has, no doubt, sent another NOI for the song “Fragile” (or has a direct license) and if so has actual knowledge of the song copyright owner.
And here’s the loophole–by claiming that “Fragile (Live)” is an “unknown” song, Google can try to get out of paying for the live version. (Because how would you know that “Fragile” performed by Sting for which you know the copyright owner is the same as “Fragile (Live)” performed by Sting for which you now claim to be shocked that is the same song–unless, oh, maybe if you listened to the two?) The government’s compulsory license says this:
If you search for live recordings in Google’s NOI filings, you will find many, many live recordings by artists such as Bob Dylan, Heart, Quincy Jones, Lynyrd Skynyrd and Chicago. And then there’s the medleys like “Hotel California Dreaming” which lists the Eagles writers with John and Michelle Phillips of the Mamas and the Papas.
Not to mention a ton of foreign songwriters who are under no obligation to register their songs with the U.S. Copyright Office.
Let’s also set aside for the moment whether the recordings that Google has listed on their certified filing are all lawfully distributed–some certainly look like bootlegs to me. Of course “bootlegs” these days have to include illegal live recordings posted on YouTube and then stream ripped into mp3 files to be distributed through Tunecore, CD Baby or someone else who doesn’t pay much attention to where the recordings come from and then subsequently distributed through Google–who invented the game.
So what appears to be happening is that Google and Amazon (which has hired MRI, I believe) are playing the willful blindness game. What can be done about it?
If the music-tech industry has one major failing from which all of their messaging and legal problems flow, it is their fascination with loopholes that predictably harm creators. Whether it’s YouTube’s nefarious reliance on a tortured interpretation of the DMCA safe harbors that bears no relation to the law, Pandora and SiriusXM’s bone headed refusal to pay statutory royalties on pre-72 sound recordings (not to mention Pandora’s purchase of a radio station in a failed attempt to pay songwriters lower royalties), Spotify’s absurdly unnecessary collision with Taylor Swift over windowing, the MIC Coalition’s ridiculous manipulation of the Department of Justice on 100% licensing, or Amazon’s bizarre fascination with compulsory licenses for which songwriters have no audit right, these companies rival each other in the undignified pursuit of loopholes.
And in particular, loopholes that hurt songwriters who can’t afford the litigation and lobbying machine that is always the not-so-veiled threat brought by all these companies. The latest debacle is no different–mass filings of NOIs to avoid paying mechanical royalties because of a loophole that is detritus left over from the 1909 Copyright Act that is being manipulated to benefit the rich Silicon Valley companies at the expense of songwriters.
Yes, that’s right. They’d rather pay enormous sums in filing fees that vastly exceed any royalties payable just to get out of paying royalties at all. You have a better chance of recovering an old utility deposit from a state unclaimed property office than you have of getting mechanicals once you fall victim to this latest move.
I have been reliably informed that Google, Amazon and Music Reports among others are filing “millions” of “address unknown” NOIs with the Copyright Office based on a database that these companies are purchasing for tens of thousands of dollars from the Library of Congress (remember that the Copyright Office is under the jurisdiction of the Library of Congress). And by the way–once they file this NOI, they don’t pay royalties until the copyright owner can be identified in the records of the Copyright Office. Regardless of how easily the copyright owner could be found in other readily accessible databases.
Mystified? I will explain. Rest assured, you’re not the only one who is surprised. And remember that bit about the utility deposit, we’ll come back to that one.
As you read this post, remember one thing–it didn’t have to be this way. This is all happening for the same reason. Google, Amazon, Spotify, and likely soon Pandora (for its yet-to-be-launched on demand service) are all far more likely to take the legalistic and aggressive route rather than reach out to the songwriting community to work cooperatively to find a solution.
One music tech executive told me, we decide what’s fair and then we jam it down your throat.
That doesn’t work.
Mechanical Licensing and the Compulsory License
For one reason or another, the U.S. Government has a tradition of being very interested in regulating songwriters. The Copyright Act of 1909 established the baseline rules that compel songwriters to license their songs and sets the terms on which those songs are licensed including the royalty rate.
Even if you are not troubled by this degree of attention that is probably the original wage and price control, it would be nice if the USG is going to pay enough attention to songwriters that they set the price at which they can license their work, that the same USG not forget to raise that rate for 60-odd years.
That’s right–the government set the mechanical rate in 1909 at 2 cents and refused to raise it until 1978 (as part of the 1976 Copyright Act revision). Adjusted for inflation, that 2 cent rate would now be about 80 cents. Instead, it’s been 9.1 cents for the last 10 years.
The current compulsory license law was crafted in 1909 and slightly amended in 1976, and amended again a couple times to include the concept of “digital phonorecord deliveries” which essentially makes that compulsory applicable to streaming.
The 1976 Act also got rid of the copyright registrations that formed the basis of copyright under the 1909 Act with the exception of requiring a registration to sue for statutory damages and attorneys fees in a copyright infringement lawsuit. (Not quite that straight a line, but that’s where we ended up.)
But here’s the twist–the compulsory license rules are a notice based system. A music user who intends to use a song that is subject to the compulsory license must send a notice to the copyright owner. These notices are called a “notice of intention” or “NOI”. If you’re going to require an NOI, then how do you deal with copyright owners who cannot be found?
There was an easy answer to this that derives from the registration requirements–look them up in the Copyright Office. If the copyright owner can’t be identified in the records of the Copyright Office, then the music user can send a notice to the Copyright Office which the Copyright Office then publishes. Just like when your state publishes a list of unclaimed utility deposits, closed bank account balances, etc.
Now we all know that nobody uses the records of the Copyright Office to find a copyright owner, or if they use those records they don’t use them exclusively. Most people will look first at the PRO databases, cue sheets, publisher websites, other materials like that. When all else fails, then they look at the Copyright Office. This is partly due to the lag time between filing a copyright registration and receiving a conformed copy of that registration (which is when it is “official”).
There is also another public record maintained by the Copyright Office called the “recordation section”. This is where people file documents relating to works of copyright, such as a notice of assignment or a mortgage of copyright (which is kind of like a UCC-1 financing statement). The recordation section requires paper filings and typically only ingests a handful of titles from a large acquisition. That results in a filing of “‘Yesterday’ and 10,000 other songs” or something along those lines.
In other words, the recordation section is not all that reliable either–and neither is dispositive because there hasn’t been a registration requirement for decades. Is it a good practice to register? Yes. Is it required to have valid copyright? No.
And it’s particularly not required for non-US songwriters. In fact, there’s a good argument that a registration requirement in order to enjoy your rights (such as the statutory mechanical royalty, however poorly handled by the government) is actually barred by the Berne Convention’s prohibition on formalities.
Yet, the U.S. Copyright Act allows a valid compulsory license to issue for a copyright owner who may be listed in the PRO databases, may be a foreign copyright owner, or be under license (even direct license) for other songs with the same music user–if that copyright owner of a particular song cannot be identified from the public records of the Copyright Office–as determined by the music user.
Now why is this a moral hazard that should not be resolved by the music user?
Because the Copyright Act also provides that the music user filing that “address unknown” NOI is not required to pay royalties until that copyright owner is identifiable in the public records of the Copyright Office.
And who decides if the NOI is properly filed for the right song title? That’s right–the music user. Who is incented to play games with the song metadata? That’s right–the music user.
So what comes next should be of no surprise given the bad advice that these giant companies receive about their artist and writer relations.