Emmanuel Legrand prepared an excellent and important study for the European Grouping of Societies of Authors and Composers (GESAC) that identifies crucial effects of streaming on culture, creatives and especially songwriters. The study highlights the cultural effects of streaming on the European markets, but it would be easy to extend these harms globally as Emmanuel observes.
For example, consider the core pitch of streaming services that started long ago with the commercial Napster 2.0 pitch of “Own Nothing, Have Everything”. This call-to-serfdom slogan may sound good but having infinite shelf space with no cutouts or localized offering creates its own cultural imperative. And that’s even if you accept the premise the algorithmically programed enterprise playlists on streaming services should not be subject to the same cultural protections for performers and songwriters as broadcast radio–its main competitor.
[This] massive availability of content on [streaming] platforms is overshadowed by the fact that these services are under no positive obligations to ensure visibility and discoverability of more diverse repertoires, particularly European works….[plus] the initial individual subscription fee of 9.99 (in Euros, US dollars, or British pound) set in 2006, has never increased, despite the exponential growth in the quality, amount of songs, and user-friendliness of music streaming services.
Artists working new recordings, especially in a language other than English, are forced to fight for “shelf space” and “mindshare”–that is, recognition–against every recording ever released. While this was always true theoretically; you never had that same fight the same way at Tower Records.
This is not theoretically true on streaming platforms–it is actually true because these tens of millions of historical recordings are the competition on streaming services. When you look at the global 100 charts for streaming services, almost all of the titles are in English and are largely Anglo-American releases. Yes, we know–Bad Bunny. But this year’s exception proves the rule.
And then Emmanuel notes that it is the back room algorithms–the terribly modern version of the $50 handshake–that support various payola schemes:
The use of algorithms, as well as bottleneck represented by the most popular playlists, exacerbates this. Furthermore, long-standing flaws in the operations of music streaming platforms, such as “streaming fraud”, “ghost/fake artists”, “payola schemes”, “royalty free content” and other coercive practices [not to mention YouTube withholding access to Content ID] worsen the impact on many professional creators….
This report suggests solutions to bring greater transparency in the use of algorithms and invites stakeholders to undertake a review of the economic models of streaming services and evaluate how they currently affect cultural diversity which should be promoted in its various forms — music genres, languages, origin of performers and songwriters, in particular through policy actions.
MTS readers will recall my extensive dives into the hyperefficient market share distribution of streaming royalties known as the “big pool” compared to my “ethical pool” proposal and the “user centric” alternative. As Emmanuel points out, the big pool royalty model belies a cultural imperative–if you are counting streams on a market share basis that results in the rich getting richer based on “stream share” that same stream share almost guarantees that Anglo American repertoire will dominate in every market the big streamers operate.
Emmanuel uses French-Canadian repertoire as an example (a subject I know a fair amount about since I performed and recorded with many vedettes before Quebecoise was cool).
A lot of research has been made in Canada with regards to discoverability, in particular in the context of French-Canadian music, which is subject to quotas for over the air broadcasters which however do not apply to music streaming services. The research shows that while the lists of new releases from Québec studied are present in a large proportion on streaming platforms, they are “not very visible and very little recommended.”
It further shows that the situation is even worse when it is not about new releases, including hit music, when the presence of titles “drops radically.” It is not very difficult to imagine that if we were to swap Québec in the above sentence with the name of any country from the European Union [or any non-Anglo American country], and even with music from the European Union as a whole, we could find similar results.
In other words, there may be aggregators with repertoire in languages other than English that deliver tracks to streamers in their countries, but–absent localized airplay rules–a Spotify user might never know the tracks were there unless the user already knew about the recording, artist or songwriter. (Speaking of Canada, check the MAPL system.)
This is a prime example of why Professor Feijoo and I proposed streaming remuneration in our WIPO study to allow performers to capture the uncompensated capital markets value to the enterprise driven by these performers. Because of the market share royalty system, revenues and royalties do not compensate all performers, particularly regional or non-featured performers (i.e., session players and singers) who essentially get zero compensation for streaming.
Emmanuel also comments on the imbalance in song royalty payments and invites a re-look at how the streaming system biases against songwriters. I would encourage everyone to stop thinking of a pie to be shared or that Johnny has more apples–when the services refuse to raise prices in order to tell a growth story to Wall Street or The City, measuring royalties by a share of some mythical royalty pie is not ever going to get it done. It will just perpetuate a discriminatory system that fails to value the very people on whose backs it was built be they songwriters or session players.
The Securities and Exchange Commission is formalizing ESG disclosures for public companies like Spotify, stating that “[a]s investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach” and has taken many actions to require ESG disclosures. It was only a short step for the government to turn disclosure into violations and then turn violations into enforcement:
The Securities and Exchange Commission today announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The task force will be led by Kelly L. Gibson, the Acting Deputy Director of Enforcement, who will oversee a Division-wide effort, with 22 members drawn from the SEC’s headquarters, regional offices, and Enforcement specialized units.
Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.
So how does streaming music score on the ESG scale? Let’s take Spotify as an example. (This post brings together several others that readers will recognize.). How bad is Spotify’s ESG competence? Seems pretty bad to me, but probably nothing that Spotify bankers at Goldman Sachs and Spotify’s never ending team of revolving door lobbyists and toadies in the Imperial City can’t get them out of with the right amount of campaign contributions.
Spotify has an ESG problem, and a closer look may offer insights into a wider problem in the tech industry as a whole or at least the streaming business that Spotify dominates. (Another 14% of market share and Spotify will hit that Herfindahl-Hirschman Index sweet spot for those keeping score at home–assuming there’s no change in the number of their competitors.)
If the Spotify decade of destroying artist and songwriter revenues isn’t enough to get your attention, maybe the Neil Young and Joe Rogan imbroglio will. But a minute’s analysis shows you that Spotify was already an ESG fail well before Neil Young’s ultimatum. They give a lot of happy talk about “net zero admissions” and their public messaging is full-on Davos as one would expect from a globalist like Daniel Ek, but streaming is their core business and streaming will only get so green. (It’s unlikely that the FAANG companies (Facebook, Apple, Amazon, Netflix and Google) will allow too much to be made out of the dirty data issue because it blows back directly on them. Neither will Senator Ron Wyden from Oregon the data center concierge–wonder why?)
Streaming is an Environmental Fail
I first began posting about streaming as an environmental fail years ago in the YouTube and Google world. While not as existential as Google’s streaming problems, Spotify is equally sanctimonious about how wonderful Spotify is.
It all comes down to this: The Internet in general and streaming in particular are huge electricity hogs.
Like so many other ways that the BIg Tech PR machine glosses over their dependence on cheap energy right through their supply chain from electric cars to cat videos, YouTube did not want to discuss the company as a climate disaster zone. To hear them tell it, YouTube, and indeed the entire Google megalopolis right down to the Google Street View surveillance team was powered by magic elves dancing on appropriate golden flywheels with suitable work rules. Or other culturally appropriate spin from Google’s ham handed PR teams.
Greenpeace first wrote about “dirty data” in 2011–the year Spotify launched in the US. Too bad Spotify ignored the warnings. Harvard Business Review also tells us that 2011 was a demarcation point for environmental issues at Microsoft following that Greenpeace report:
In 2011, Microsoft’s top environmental and sustainability executive, Rob Bernard, asked the company’s risk-assessment team to evaluate the firm’s exposure. It soon concluded that evolving carbon regulations and fluctuating energy costs and availability were significant sources of risk. In response, Microsoft formed a centralized senior energy team to address this newly elevated strategic issue and develop a comprehensive plan to mitigate risk. The team, comprising 14 experts in electricity markets, renewable energy, battery storage, and local generation (or “distributed energy”), was charged by corporate senior leadership with developing and executing the firm’s energy strategy. “Energy has become a C-suite issue,” Bernard says. “The CFO and president are now actively involved in our energy road map.”
If environment is a C-suite issue at Spotify, there’s no real evidence of it in Spotify’s annual report (but then there isn’t at the Mechanical Licensing Collective, either). “Environment” word search reveals that at Spotify, the environment is “economic”, “credit”, and above all “rapidly changing.” Not “dirty”–or “clean” for that matter.
The fact appears to be that Spotify isn’t doing anything special and nobody seems to want to talk about it. But wait, you say–what about the sainted Music Climate Pact? Guess who hasn’t signed up to the MCP? Any streaming service. There is a “Standard Commitment Letter” that participants are supposed to sign up to but I wasn’t able to read it. Want to guess why?
That’s right. You know who wants to know what you’re up to because they are damn sure not signing up.
Spotify’s ESG Fail: Social
I started to write this post in the pre-Neil Young era and I almost feel like I could stop with the title. But there’s a lot more to it, so let’s look at the many ways Spotify is a fail on the Social part of ESG.
Before Spotify’s Joe Rogan problem, Spotify had both an ethical supply chain problem and a “fair wage” problem on the music side of its business, which for this post we will limit to fair compensation to its ultimate vendors being artists and songwriters. In fact, Spotify is an example to music-tech entrepreneurs of how not to conduct their business.
Treatment of Songwriters
On the songwriter side of the house, let’s not fall into the mudslinging that is going on over the appeal by Spotify (among others) of the Copyright Royalty Board’s ruling in the mechanical royalty rate setting proceeding known as Phonorecords III. Yes, it’s true that streaming screws songwriters even worse that artists, but not only because Spotify exercised its right of appeal of the Phonorecords III case that was pending during the extensive negotiations of Title I of the Music Modernization Act. (Title I is the whole debacle of the Mechanical Licensing Collective and the retroactive copyright infringement safe harbor currently being litigated on Constitutional grounds.)
The main reason that Spotify had the right to appeal available to it after passing the MMA was because the negotiators of Title I didn’t get all of the services to give up their appeal right (called a “waiver”) as a condition of getting the substantial giveaways in the MMA. A waiver would have been entirely appropriate given all the goodies that songwriters gave away in the MMA. When did Noah build the Ark? Before the rain. The negotiators might have gotten that message if they had opened the negotiations to a broader group, but they didn’t so now they’ve got the hot potato no matter how much whinging they do.
Having said that, you will notice that Apple took pity on this egregious oversight and did not appeal the Phonorecords III ruling. You don’t always have to take advantage of your vendor’s negotiating failures, particularly when you are printing money and when being generous would help your vendor keep providing songs. And Mom always told me not to mock the afflicted. Plus it’s good business–take Walmart as an example. Walmart drives a hard bargain, but they leave the vendor enough margin to keep making goods, otherwise the vendor will go under soon or run a business solely to service debt only to go under later. And realize that the decision to be generous is pretty much entirely up to Walmart. Spotify could do the same.
Is being cheap unethical? Is leveraging stupidity unethical? Is trying to recover the costs of the MLC by heavily litigating streaming mechanicals unethical (or unexpected)? Maybe. A great man once said failing to be generous is the most expensive mistake you’ll ever make. So yes, I do think it is unethical although that’s a debatable point. Spotify has not made themselves many friends by taking that course. But what is not debatable is Spotify’s unethical treatment of artists.
Treatment of Artists
The entire streaming royalty model confirms what I call “Ek’s Law” which is related to “Moore’s Law”. Instead of chip speed doubling every 18 months in Moore’s Law, royalties are cut in half every 18 months with Ek’s Law. This reduction over time is an inherent part of the algebra of the streaming business model as I’ve discussed in detail in Arithmetic on the Internet as well as the study I co-authored with Dr. Claudio Feijoo for the World Intellectual Property Organization. These writings have caused a good deal of discussion along with the work of Sharky Laguana about the “Big Pool” or what’s come to be called the “market centric” royalty model.
Dissatisfaction with the market centric model has led to a discussion of the “user-centric” model as an alternative so that fans don’t pay for music they don’t listen to. But it’s also possible that there is no solution to the streaming model because everybody whose getting rich (essentially all Spotify employees and owners of big catalogs) has no intention of changing anything voluntarily.
It would be easy to say “fair is where we end up” and write off Ek’s Law as just a function of the free market. But the market centric model was designed to reward a small number of artists and big catalog owners without letting consumers know what was happening to the money they thought they spent to support the music they loved. As Glenn Peoples wrote last year (Fare Play: Could SoundCloud’s User-Centric Streaming Payouts Catch On?,
When Spotify first negotiated its initial licensing deals with labels in the late 2000s, both sides focused more on how much money the service would take in than the best way to divide it. The idea they settled on, which divides artist payouts based on the overall popularity of recordings, regardless of how they map to individuals’ listening habits, was ‘the simplest system to put together at the time,’ recalls Thomas Hesse, a former Sony Music executive who was involved in those conversations.
In other words, the market centric model was designed behind closed doors and then presented to the world’s artists and musicians as a take it or leave it with an overhyped helping of FOMO.
As we wrote in the WIPO study, the market centric model excludes nonfeatured musicians altogether. These studio musicians and vocalists are cut out of the Spotify streaming riches made off their backs except in two countries and then only because their unions fought like dogs to enforce national laws that require streaming platforms to pay nonfeatured performers.
The other Spotify problem is its global dominance and imposition of largely Anglo-American repertoire in other countries. The company does this for one big reason–they tell a growth story to Wall Street to juice their stock price. In fact, Daniel Ek just did this last week on his Groundhog Day earnings call with stock analysts. For example he said:
The number one thing that we’re stretched for at the moment is more inventory. And that’s why you see us introducing things such as fan and other things. And then long-term with a little bit more horizon, it’s obviously international.
Both user-centric and market-centric are focused on allocating a theoretical revenue “pie” which is so tiny for any one artist (or songwriter) who is not in the top 1 or 5 percent this week that it’s obvious the entire model is bankrupt until it includes the value that makes Daniel Ek into a digital munitions investor–the stock.
Debt and Stock Buybacks
Spotify has taken on substantial levels of debt for a company that makes a profit so infrequently you can say Spotify is unprofitable–which it is on a fully diluted basis in any event. According to its most recent balance sheet, Spotify owes approximately $1.3 billion in long term–secured–debt.
You might ask how a company that has never made a profit qualifies to borrow $1.3 billion and you’d have a point there. But understand this: If Spotify should ever go bankrupt, which in their case would probably be a reorganization bankruptcy, those lenders are going to stand in the secured creditors line and they will get paid in full or nearly in full well before Spotify meets any of its obligations to artists, songwriters, labels and music publishers, aka unsecured creditors.
Did Title I of the Music Modernization Act take care of this exposure for songwriters who are forced to license but have virtually no recourse if the licensee fails to pay and goes bankrupt? Apparently not–but then the lobbyists would say if they’d insisted on actual protection and reform there would have been no bill (pka no bonus).
Right. Because “modernization” (whatever that means).
But to our question here–is it ethical for a company that is totally dependent on creator output to be able to take on debt that pushes the royalties owed to those creators to the back of the bankruptcy lines? I think the answer is no.
Spotify has also engaged in a practice that has become increasingly popular in the era of zero interest rates (or lower bound rates anyway) and quantitative easing: stock buy backs.
Stock buy backs were illegal until the Securities and Exchange Commission changed the law in 1982 with the safe harbor Rule 10b-18. (A prime example of unelected bureaucrats creating major changes in the economy, but that’s a story for another day.)
Stock buy backs are when a company uses the shareholders money to buy outstanding shares of their company and reduce the number of shares trading (aka “the float”). Stock buy backs can be accomplished a few ways such as through a tender offer (a public announcement that the company will buy back x shares at $y for z period of time); open market purchases on the exchange; or buying the shares through direct negotiations, usually with holders of larger blocks of stock.
A stock buyback is basically a secondary offering in reverse — instead of selling new shares of stock to the public to put more cash on the corporate balance sheet, a cash-rich company expends some of its own funds on buying shares of stock from the public.
Why do companies buy back their own stock? To juice their financials by artificially increasing earnings per share.
Spotify has announced two different repurchase programs since going public according to their annual report for 12/31/21:
Share Repurchase Program On August 20, 2021, [Spotify] announced that the board of directors [controlled by Daniel Ek] had approved a program to repurchase up to $1.0 billion of the Company’s ordinary shares. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized at the Company’s general meeting of shareholders on April 21, 2021. The repurchase program will expire on April 21, 2026. The timing and actual number of shares repurchased depends on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program is executed consistent with the Company’s capital allocation strategy of prioritizing investment to grow the business over the long term. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The Company uses current cash and cash equivalents and the cash flow it generates from operations to fund the share repurchase program.
The authorization of the previous share repurchase program, announced on November 5, 2018, expired on April 21, 2021. The total aggregate amount of repurchased shares under that program was 4,366,427 for a total of approximately $572 million.
Is it ethical to take a billion dollars and buy back shares to juice the stock price while fighting over royalties every chance they get and crying poor?
I think not.
Spotify’s ESG Fail: Governance
Spotify has one big governance problem that permeates its governance like a putrid miasma in the abattoir: “Dual-class stock” sometimes referred to as “supervoting” stock. If you’ve never heard the term, buckle up. I wrote an extensive post on this subject for the New York Daily News that you may find interesting.
Dual class stock allows the holders of those shares–invariably the founders of the public company when it was a private company–to control all votes and control all board seats. Frequently this is accomplished by giving the founders a special class of stock that provides 10 votes for every share or something along those lines. The intention is to give the founders dead hand control over their startup in a kind of corporate reproductive right so that no one can interfere with their vision as envoys of innovation sent by the Gods of the Transhuman Singularity. You know, because technology.
Google was one of the first Silicon Valley startups to adopt this capitalization structure and it is consistent with the Silicon Valley venture capital investor belief in infitilism and the Peter Pan syndrome so that the little children may guide us. The problem is that supervoting stock is forever, well after the founders are bald and porky despite their at-home beach volleyball courts and warmed bidets.
Spotify, Facebook and Google each have a problem with “dual class” stock capitalizations. Because regulators allow these companies to operate with this structure favoring insiders, the already concentrated streaming music industry is largely controlled by Daniel Ek, Sergey Brin, Larry Page and Mark Zuckerberg. (While Amazon and Apple lack the dual class stock structure, Jeff Bezos has an outsized influence over both streaming and physical carriers. Apple’s influence is far more muted given their refusal to implement payola-driven algorithmic enterprise playlist placement for selection and rotation of music and their concentration on music playback hardware.)
The voting power of Ek, Brin, Page and Zuckerberg in their respective companies makes shareholder votes candidates for the least suspenseful events in commercial history. However, based on market share, Spotify essentially controls the music streaming business. Let’s consider some of the implications for competition of this disfavored capitalization technique.
Commissioner Robert Jackson, formerly of the U.S. Securities and Exchange Commission, summed up the problem:
“[D]ual class” voting typically involves capitalization structures that contain two or more classes of shares—one of which has significantly more voting power than the other. That’s distinct from the more common single-class structure, which gives shareholders equal equity and voting power. In a dual-class structure, public shareholders receive shares with one vote per share, while insiders receive shares that empower them with multiple votes. And some firms [Snap, Inc. and Google Class B shares] have recently issued shares that give ordinary public investors no vote at all.
For most of the modern history of American equity markets, the New York Stock Exchange did not list companies with dual-class voting. That’s because the Exchange’s commitment to corporate democracy and accountability dates back to before the Great Depression. But in the midst of the takeover battles of the 1980s, corporate insiders “who saw their firms as being vulnerable to takeovers began lobbying [the exchanges] to liberalize their rules on shareholder voting rights.” Facing pressure from corporate management and fellow exchanges, the NYSE reversed course, and today permits firms to go public with structures that were once prohibited.
Spotify is the dominant streaming firm and the voting power of Spotify stockholders is concentrated in two men: Daniel Ek and Martin Lorentzon. Transitively, those two men literally control the music streaming sector through their voting shares, are extending their horizontal reach into the rapidly consolidating podcasting business and aspire soon to enter the audiobooks vertical. Where do they get the money is a question on every artists lips after hearing the Spotify poormouthing and seeing their royalty statements.
The effects of that control may be subtle; for example, Spotify engages in multi-billion dollar stock buybacks and debt offerings, but has yet makes ever more spectacular losses while refusing to exercise pricing power.
So yes, Spotify is starting to look like the kind of Potemkin Village that investment bankers love because they see oodles of the one thing that matters: Fees.
On the political side, let’s see what the company’s campaign contributions tell us:
Spotify has also made a habit out of hiring away government regulators like Regan Smith, the former General Counsel and Associate Register of the US Copyright Office who joined Spotify as head of US public policy (a euphemism for bag person) after drafting all of the regulations for the Mechanical Licensing Collective;
Whether this is enough to trip Spotify up on the abuse of political contributions I don’t know, but the revolving door part certainly does call into question Spotify’s ethics.
It does seem that these are the kinds of facts that should be taken into account when determining Spotify’s ESG score.
What about the SEC investigation?
I suppose time will tell how the SEC handles its announced investigations into ESG “violations” whatever those might be (particularly in light of the SCOTUS West Virginia v. EPA holding and other “major questions” rulings recently).
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:
Wiping out unrecouped balances with no compensation is likely illegal.
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.
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.
Livestreaming was intended to be temporary. It was a bridge between a pre and post COVID reality. But it’s not. The biggest of Big Tech companies intend it to be permanent and they mean to control it. And you have to believe that a very high percentage of venues may not be coming back.
Live music venues are closing permanently at a rapid clip. Cities like Austin and festivals like SXSW and ACL Fest are changed forever. We know that the real estate developers are licking their chops at the idea of dumping those live music venues and onboarding Uber Eats, Google, Facebook or something really important. (See “I Don’t Need Another Email Whining About COVID“) But they are not the only ones who have no intention of helping live music recover in a venue-free future.
Facebook/Instagram is probably leading the way on this Great Step Forward, followed closely by TikTok and of course YouTube. Facebook in particular is adopting policies to limit DJ-type listening parties on the platform. (This very well may backfire.) The elephant in the room is that Facebook seems to have gotten religion on music licensing after a 17 years growth binge of shredding artist rights. While asserting “You are responsible for the content you post” Facebook also tells us “Unauthorized content may be removed.” Why not track it and monetize it? Because they can’t be bothered. It does seem that Facebook intents to permit artist-branded live-streaming events which is nice of them, but it also seems like the new policy clears the way for Facebook to monetize live streaming events and take their cut.
It has become obvious that whenever audiences decide to come out of the lock down, there may not be any venues for them to go to. (Or restaurants for that matter.) As I have said almost from the beginning of the pandemic, Austin is about to become another college town with a Google/Facebook campus and the City government itself is just thrilled about that expanded tax base. Cynical? Not really. Spend a little time getting condescended to by the City of Austin and you will get the idea that they would just as soon that live music was in the rear view mirror. If that happens to Austin, which had styled itself as “The Live Music Capital of the World” to the great gnashing of teeth by almost every other sector starting with tech, it will happen in a host of cities around the world.
Of course Big Tech cannot be seen to be leading the charge to live music oblivion. That would be quite impolitic (if not actionable). But the vibe from governments in the erstwhile “music cities” like Austin, Denver, Seattle, and even San Francisco is similar to the efforts of Spotify, Facebook, Google & Co. to support the venues that create the value and the fan base that drives traffic to the live streams they think are the future. These politicians and Big Tech companies want to be seen to be helping, but not too much. They don’t want to help so much that most of the venues might actually recover.
Evidence? Talk to anyone at Facebook who has contact with artists and labels. (And if you ever wondered who doesn’t click “Skip Ads”, it’s them.)
Facebook certainly is building its “Stars” tip jar model that is in closed beta but will be rolled out soon. That’s partly because Facebook views live streaming as a permanent part of the data mining ecosystem that Facebook is uniquely positioned to control. Facebook Stars will prove to be a key component of the venue free future after the COVID and Facebook duo deliver the venue DNR. And in case you didn’t quite get how Facebook values music, a Star is worth 1¢. That’s right–one penny. (Which will make it easier to switch Stars scrip to Facebook Bucks aka Libra.)
Don’t forget, Tencent led the way on this “gifting” concept. Tencent allows users (all users, subscription or ad-supported service) to make virtual gifts in the form of micropayments directly to artists they love. (The feature is actually broader than cash and applies to all content creators, but let’s stay with socially-driven micropayments to artists or songwriters.)
Tencent, of course, makes serious bank on these system-wide micropayments. As Jim Cramer noted in “Mad Money” :
“Tencent Music is a major part of the micropayment ecosystem because they let you give virtual gifts,” Cramer said. “If you want to tip your favorite blogger with a song, you do it through Tencent Music. In the latest quarter we have numbers for, 9.5 million users spent money on virtual gifts, and these purchases accounted for more than 70 percent of Tencent Music’s revenue.”
And that’s real money. Tencent actually made this into a selling point in their IPO prospectus:
We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion copyright protection-because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.
So in case you were wondering why we haven’t seen Big Tech really step up to contributing money to support venues in line with the value of the data they scrape from all the fans driven to live streaming, it’s because they don’t want live music venues to be sustainable. They’ve been trying to break down live music for a decade and the pandemic presented the disruption opportunity for them to actually do it.
Facebook and their counterparts are getting all kinds of free content (and the corollary free data) from desperate bands in the latest example of pandemic price gouging. Those desperate artists are now forced to consider the option of the Data Lords coin of the realm–advertising and brand integration. The effect may well be that the only artists who survive the venue DNR are those willing to take the King’s shilling. Welcome to the company store.
The Data Lords have finally found a way–fear of death–to get fans to substitute away from live music. There’s nothing quite as disruptive as the threat of dying. If you ever thought that the live experience was the last stronghold of authenticity against the onslaught of Silicon Valley disruption, you probably never thought that fear of mortality would drive the nail in the coffin of the backstage pass or burn the velvet rope. Stars in every pot and a drone-delivered Big Box on every doorstep.
But you’d be wrong. As we slip into the twilight days of live music and festivals, Facebook stands ready with their venue DNR orders. And live-streaming will be driven by desperation to be the Data Lords’ venue free meal ticket.
Why is this bad? Because if you talk to any of the label relations types at Facebook, Google or TikTok it is a name droppers paradise. They don’t really understand how to do the careful spadework that is necessary to break an artist to have an actual career. They have major artists handed to them after that work has already been done, and done long ago in many cases. There may be the odd “influencer” who gets a movie or a commercial, but the jury is out on whether these platforms can build careers. (Or whether there will be many movies for influencers to get a role in.)
Not so of venues. We know what they do and they’ve been doing it for a long, long time. But we have to face the harsh reality that unless something changes very quickly, the Data Lords may have just piggybacked the massive income transfer of their DMCA and 230 safe harbors into another takeover of our business. And they’ll do it in a way that could leave the entire live music economy and workers flopping like fish on a beach.
“Fair Use Industries” is Google’s spin to cover its predatory practices against creators. The SGA joined Chris Castle in filing an amicus brief supporting Oracle which is suing Google over alleged copyright violation stemming from Google's use of Java APIs. #protectcreatorspic.twitter.com/nm1vVAsWb2
Helienne Lindvall of the Ivors Academy, David Lowery of Cracker and Camper Van Beethoven, Blake Morgan of #irespectmusic and the Songwriters Guild of America joined in a friend of the court brief supporting Oracle in Google’s appeal of its losing argument in a copyright case involving Google’s taking of Oracle’s Java code without a license. Oracle won the case on two different occasions at the Federal Circuit, but Google appealed to the Supreme Court which of course is their right.
I got to co-write the brief as co-counsel with my friend Charles Sanders, long time counsel for SGA. You can read it here.
There will also be numerous Amicus Briefs filed shortly on the side of strong copyright protection for expressive and creative works including computer software. One brief, filed by the Songwriters Guild will state: “There are untold riches in running the Internet of other people’s things.” Only a songwriter could so eloquently capture the essence of this case, and Google’s business practices. We wish we would have thought of that line ourselves, but we didn’t, so we repeat it here (with credit and permission).
One of the accomplishments in our brief was that we were able to bring the words of artists and songwriters like Zoë Keating, Kerry Muzzey and the indefatigable artist advocate and five-time Grammy winner Maria Schneider before the Court. All of them have written eloquently of the reality of being an independent up against the biggest corporations in the world. We were happy to put their voices before the highest court in an important copyright case.
Stay tuned. Google’s reply brief is coming soon and oral argument is scheduled for March 24.
Google is finally getting some pushback from the nation state. Texas Attorney General Ken Paxton is leading a broad coalition of state attorneys general into Google’s business practices starting with violations of state antitrust laws.
The states’ investigation is led by Texas’ Paxton and seven other attorneys general, four Democrats and four Republicans in total. Every state except Alabama and California, the home of Silicon Valley, so far has signed onto the bipartisan effort, as have Puerto Rico and the District of Columbia. A spokeswoman for California’s attorney general did not immediately respond to a request for comment. [Gee, I wonder why?]
…Another group of 11 state attorneys general — led by New York’s Letitia James — has begun their own probe against Facebook, exploring whether it violates competition laws and mishandles consumers’ personal information.
Google also disclosed in an 8-K filing with the SEC that they’d received a “civil investigative demand” from the Department of Justice:
On August 30, 2019, Alphabet received a civil investigative demand from the DOJ requesting information and documents relating to our prior antitrust investigations in the United States and elsewhere. We expect to receive in the future similar investigative demands from state attorneys general. We continue to cooperate with the DOJ, federal and state regulators in the United States, and other regulators around the world.
Sending a CID is how these things usually start. A CID is a discovery request that is similar to a demand for production of documents, oral testimony or answers to interrogatories. How did this whole state AG thing evolve? A little context.
Mississippi Attorney General Jim Hood tried a similar approach with Google in 2014 and was immediately set upon by Google’s lawyers and the “policy” groups it funds like the Electronic Frontier Foundation, R Street, Engine Advocacy and others. While General Hood didn’t exactly win that, he didn’t really lose it either.
General Hood invited me to be on a panel he moderated at the 2013 summer conference of the National Association of Attorneys General. The panel topic was “Intellectual Property Crimes Online: Dangerous Access to Prescription Drugs and Pirated Content”. General Hood spoke on “Google Guiding Consumers Down Illegal Paths.” My topic was “Protecting Consumers and Advertisers from Unfair Trade Practices,” which was essentially a briefing on how Google played a central role in brand-sponsored piracy by duping advertisers on both pirate sites and Google’s own properties like YouTube (starting with duped advertiser #1, President Barack Obama).
I have to say that speaking to 50 AGs at the same time is a rather sobering experience. As our panel presented the case against Google, it was probably the first time that I realized my standing joke that Google opposed the nation state actually wasn’t a joke. At all.
After talking with some of the AGs who attended our panel, it became apparent that some of them were learning for the first time of the company’s profits from piracy and selling ads against recruitment videos on YouTube for salafi jihadism. When Google called out all of the dogs on General Hood a few months later to get an injunction that stopped enforcement of Mississippi’s CID, the company’s antics only confirmed to the AGs that it would take a village to challenge the most powerful media company in commercial history.
That epiphany led to 40 attorneys general filing an amicus brief supporting General Hood in the appeal of the aptly titled case of Google v. Hood that crystalized the issue before the 5th Circuit:
This is a case about the authority of state Attorneys General to exercise one of their fundamental powers: the ability to investigate potential violations of state law. What should be a routine discovery dispute in Mississippi state courts, resolved under established state procedures…has instead evolved into a contrivance for a company doing business in the state of Mississippi to invoke federal jurisdiction by asserting potential affirmative defenses to claims that have never been filed.
One of Google’s worst policy nightmares is that state attorneys general will wake up to their obligation under state laws to protect both consumers and advertisers from Google’s overreach. This would potentially force Google to answer for its actions in 51 jurisdictions–some state laws that are essentially common to all 50 states plus the federal government. These state laws include consumer protection statutes and unfair competition or state antitrust rules that are not overriden (or “preempted”) by simultaneous federal jurisdiction.
Since General Hood got the Full Google (the only thing missing was the fake petitions and Open Media tools), there have been a few efforts by state AGs like Josh Hawley (now Senator Hawley). While the current case may seem to come out of the blue, it is really the next step in the evolution of the response of dealing with Google as a white collar crime law enforcement matter.
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).
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.
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.
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.
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:
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.
[Editor Charlie sez: Great analysis of Google’s “United Masters” adventure by Robert Levine.]
Stop me if you’ve heard this one before: Record labels are irrelevant because they’ve been disrupted by a venture-funded technology start-up. The major labels exploit artists, who can now distribute their music directly to consumers online, plus get the data they need to make money playing concerts, selling merch or doing sponsorships. Sound familiar?
Music Tech Solutions 