Pandora Sells “Radio Loophole” at a Loss, But Sells It

In another sign that the adults may finally be in charge at Pandora, the company sold South Dakota radio station KXMZ for a reported $300,000 (after purchasing the station in 2015 for $600,000).  Why did Pandora buy KXMZ (or as it came to be known, “Radio Loophole”?)

At the time, which was during Pandora’s bad old days of what Billboard called “World War P”, Pandora was suing songwriters to lower royalty rates for their one product–music.   According to Pandora, they were not treated fairly because terrestrial radio paid lower rates to songwriters then did they as webcasters.   Apple, meet orange.  Pandora’s strong move was to buy a relatively inexpensive radio station so it could try to pass itself off as a broadcaster which it clearly wasn’t.   Hence, Radio Loophole.

Some speculated at the time that Pandora’s board might have gotten confused that the station was in South San Francisco rather than South Dakota as it is unlikely any of them had ever been to South Dakota (and it’s almost as equally unlikely they’d ever been off the 101 in South San Francisco, for that matter).

But Pandora plopped down $600,000 of the stockholder’s cash (Old Pandora’s preferred form of tender for acquisitions it seems) and then went to get the blessing of the rate court.  Kind of a knucklehead move that also unnecessarily stoked the battle fires of World War P.

Billboard WW P

Here’s a tip–there’s this thing called a “post closing condition”.  In the case of Radio Loophole, it would go something like, “I’m only buying your station if I can use it to lower what I pay to songwriters and it’s worthless to me unless I can.  So this transaction will not close until I get the rate courts’ approval which I have to accomplish within 12 or 18 months.  And here’s 10% of the purchase price for you to keep for having to stand still long enough for me to find out.  Deal?”  Not that different than a transaction being subject to FTC merger approval.

A post closing covenant (or “post closing condition”) is the precaution you take if it’s your money or you take your duty to your shareholders very seriously.  But what happens to inexperienced management with hundreds of millions of someone else’s money burning a hole in their pocket is hard to explain.

Let the Old Pandora’s disastrous acquisition of Radio Loophole and Ticketfly be examples to entrepreneurs of the honeytrap of cash in the bank.  And that loophole seeking behavior eventually catches up to you, so why do it in the first place?

With Pandora’s endorsement of the CLASSICS Act that would change the law to require webcasting royalty payments to artists whose recordings were released prior to 1972, I have to say that it feels like there’s a far more enlightened leadership at Pandora just in the last few weeks.   Not to look the gift horse in the molars, but it would be really nice if Pandora didn’t wait for the bill to pass and just started paying the statutory rate on a go-forward basis at least.

Either way, three of the gargantuan unintelligible blunders of Old Pandora are being put right–Ticketfly, pre-72 and now the sale of Radio Loophole.  Fingers crossed we have more good news to come.

 

 

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

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

James Madison, The Federalist Papers No. 44

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

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

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

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

The Rate that Time Forgot

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

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

That’s a cruel mess.

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

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

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

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

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

MIC Coaltion

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

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

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

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

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

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

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

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

hesse

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

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

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

Our Warranties and Disclaimers

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

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

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

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

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

 

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

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

Long Long Time, written by Guy Forsyth

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

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

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

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

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

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

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

mic-coalition-no-npr
MIC Coalition Members

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

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

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

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

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

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

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

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

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

mic-coaltion-8-15 Retailers

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

mic-coaltion-8-15 Booze

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

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

mic-coaltion-8-15 radio

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

It appears that would include these people:

mic-coaltion-DiMA Members

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

Amazon logo

white apple logo

Microsoft Logo

Spotify_logo

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

So I think that’s everyone, right?

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

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

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

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

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

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

So shut up and sing.

 

How Deep is Pandora’s Financial Hole?

Pandora 6-14-17

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

Billboard WW P
Remember World War P?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

The Database Double Loophole Trick

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

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

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

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

The Double Triple:  New Releases

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

No Liability or Royalties Either:  Trebles All Round

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

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

sting-fragile-google-noi

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

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

March Spotify NOI Filings

What Can Be Done?

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

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

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

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

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

NOI Table
Top Three Services Filing NOIs

April, 2016-January 2017

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

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

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

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