Whenever someone is holding your money, you kind of want to a lot of about it, don’t you? You want to know how much, where they hold it, and when you get it back, right? Seems reasonable. But not only does the MLC hold what is likely to be hundreds of millions in black box money, they don’t really tell you these attributes, do they?
Plus they tell you that somehow the Music Modernization Act authorizes them to invest your money in the open market to obtain some theoretical government mandated rate of return, yet the Copyright Act says nothing of the kind.
They then refuse to disclose how they intend to invest OPM and who bears any losses and makes any profit from these open market transactions. They don’t just refuse to tell songwriters, because why tell them whose money it is, they don’t just refuse to tell the Copyright Office who is tasked by Congress with overseeing their operations, they also dodge answering questions from the very Congressional committee that oversees the MLC.
The other problem is that the longer the MLC delays in distributing the black box to the correct copyright owners, the more likely it is that the MLC will choose the nuclear option–market share distribution to the copyright owners who are overrepresented on the MLC’s board without regard to copyright ownership. And just to be clear what that means, it means the black box money is going to get shared with people who aren’t entitled to it thus leaving lots of hungry people.
Many people believe that this is exactly the intent and that the market share distribution will happen right after the MLC gets redesigned to operate for another five years at the punchbowl. Why? Because when the market share distribution happens it very likely will tip off an aggressive no-shit backlash against the MLC that would likely argue they can’t be trusted with much of anything at all.
It’s entirely possible that if the MLC has been this secretive about the amount of black box money in its grasp, the lobbyists never came clean with Congress about just how much the services were paying for their retroactive safe harbor in the form of undisclosed and unallocated monies. Remember the big scramble to deny a press report that the black box was over $1 billion? Maybe that press report wasn’t so far off after all.
Fortunately, there is a simple solution. Congress needs to take away any control or decision making about the unallocated black box money from the MLC. This could be as simple as a technical amendment forcing the MLC to act in a transparent manner and disclose the current investments of the black box money, any desposits and withdrawals, and to force distributions to occur when claimed by the correct owner.
The entire concept of a market share distribution should be eliminated from the Copyright Act because it creates a perverse incentive not to find the true owners by the people who benefit from the market share distribution. This moral hazard was obvious from the time the lobbyists drafted Title I of the Music Modernization Act and it should come as no surprise that it has failed miserably.
There’s no time like the present to fix it. Decisions about the black box should be taken away from the MLC and placed far, far outside if its orbit of the network of interlocking boards, consultants, accountants and companies surrounding the MLC and its confederates.
One of the few things Congress got right in Title I of the Music Modernization Act is the five-year review of the mechanical licensing collective. Or more precisely, whether the private company previously designated by the Copyright Office to conduct the functions of the Mechanical Licensing Collective should have another five years to continue doing whatever it is they do.
Impliedly, and I think a bit unfairly, Congress told the Copyright Office to approve its own decision to appoint the current MLC or admit they made a mistake. This is yet another one of the growing list oversights in the oversight. Wouldn’t it make more sense for someone not involved in the initial decision to be evaluating the performance of the MLC? Particularly when there are at least tens of millions changing hands as well as some highly compensated MLC employees, any one of whom makes more than the Copyright Royalty Judges.
What happens if the Register of Copyright actually fires The MLC, Inc. and designates a new MLC operator? The first question probably should be what happens to the vaunted MLC musical works database and the attendant software and accounting systems which seem to be maintained out of the UK for some reason.
I actually raised this question in a comment to the Copyright Office back in 2020. In short, my question was probably more of a statement: ‘‘The musical works database does not belong to the MLC or The MLC and if there is any confusion about that, it should be cleared up right away.” The Copyright Office had a very clear response:
While the mechanical licensing collective must ‘‘establish and maintain a database containing information relating to musical works,’’ the statute and legislative history emphasize that the database is meant to benefit the music industry overall and is not ‘‘owned’’ by the collective itself….Any use by the Office referring to the public database as ‘‘the MLC’s database’’ or ‘‘its database’’ was meant to refer to the creation and maintenance of the database, not ownership. [85 FR at 58172, text accompanying notes 30 and 31.]
So if the current operator of the MLC is fired, we know from the MMA and the Copyright Office guidance that one thing The MLC, Inc. cannot do is hold the database and its attendant systems hostage, or demand payment, or any other shadiness. These items do not belong to them so they must not assert control over that which they do not own.
Which would include the hundreds of millions of black box money that the MLC, Inc. has failed to distribute in going on four years. I’ve even heard cynics suggest that the market share distribution of black box will occur immediately following The MLC, Inc.’s redesignation and the corresponding renewal of HFA’s back office contract which seems to be worth about $10 million a year all by itself.
What would also have been helpful would be for Congress to have required the Copyright Office to publish evaluation criteria for what they expected the MLC’s operator to actually do as well as performance benchmarks. Like I said, it’s a bit unfair of Congress to put the Copyright Office in the unprecedented position of evaluating such an important role with no guidance whatsoever. Surely Congress did not intend for the Copyright Office to have unfettered autonomy in deciding what standards to apply to their review of a quasi-governmental agency like the MLC, yet seems to have defaulted to the guardrail of the Administrative Procedures Act or some other backstop to sustain checks and balances on the situation.
TikTok users swarmed over the Capitol to protest and impede a Congressional vote that would force the sale of the ubiquitous TikTok. Can Camp Pelosi redux be far behind? Well, no, because this was a digital swarm which is just different, you see. It’s just different when Big Tech tries to protect an IPO.
TikTok’s tactics are very reminiscent of Google’s tactics with SOPA or Napster’s tactics with Camp Chaos.
But not even Napster had the brass to go to full on papal indulgences. Yes, that’s right: NunTok will save the IPO.
Nuns good, TikTok bad!
I wonder which Washington lobbyist thought of NunTok? Perhaps this guy:
Some generative AI platforms are trying to make users believe that the company will actually protect them from copyright infringement claims. When you drill down on what the promise actually is, it’s pretty flimsy and may itself be consumer fraud.
The MLC announced it was auditing 49 users of the blanket mechanical license, a massive undertaking. This announcement sent me back to the audit provisions of Title I of the Music Modernization Act to review what the role of the auditor actually is for audits of music users by the MLC as opposed to audits of the MLC by copyright owners. As often happens when reviewing little-used code sections that abruptly become important, I was reminded of a couple nuances that were obviously flawed when drafted. The key nuance is how can a royalty examiner be looking for overpayments against the interest of the party that hired her but still be independent?
How qualified is qualified?
The first issue is with the definition of a “qualified auditor”, a glitch that I’ve harped on a few times. The term “qualified auditor” comes up in two different contexts in the MMA–first, a qualified auditor who prepares the MLC’s audited financial statements. The definition of qualified auditor is in 17 USC § 115(e)(25) as “an independent, certified public accountant with experience performing music royalty audits.” The reason why this term is a drafting error is two fold–first, you don’t need a CPA to conduct music royalty audits and there is nothing on the CPA licensure exams that requires any knowledge of “music royalty audits.” Second, you do need a CPA to prepare audited financial statements if the books are maintained according to generally accepted accounting principles particularly if a financial audit requires an opinion as an attest service, but that role does not require knowledge of royalty audits. So the defined term has an internal contradiction.
The Gaap, ruler of 25 legions of spirits from the Munich Manual of Demonic Magic grimoire
Not only is the definition hinky but it’s common knowledge (outside of the Imperial City, I guess) that many if not most royalty auditors are not CPAs. (There’s also a long-standing assumption among artist lawyers when this concept comes up in record or publishing deals that a CPA requirement for audits is intentionally punitive. The assumption is that CPAs charge more making the cost of auditing more burdensome (therefore less likely to happen), which remains to be proven but is pretty widely accepted.) So the definition should be limited to requiring a CPA for the MLC’s audited financial statements and the common alternate definition of “experienced royalty auditor” for the audit clauses. But let’s put that to one side.
Overpayments and Independence
The MMA rule for auditing digital music providers states:
The qualified auditor shall determine the accuracy of royalty payments, including whether an underpayment or overpayment of royalties was made by the digital music provider to the mechanical licensing collective, except that, before providing a final audit report to the mechanical licensing collective, the qualified auditor shall provide a tentative draft of the report to the digital music provider and allow the digital music provider a reasonable opportunity to respond to the findings, including by clarifying issues and correcting factual errors.
Realize that the MLC and the services monitor payments and make frequent adjustments to royalties (which may be reflected on your royalty statement if you can find them). That’s different than an auditor who works for a client going and seeking out an overpayment as part of their audit report. Relieving the auditor of this conflict does not preclude the service from claiming an overpayment which is an ongoing part of invoicing (see, e.g., 37 CFR §210.27(d)(2)(ii)). You would not be creating a windfall for the party receiving the overpayment.
I would interpret the statute as not requiring the auditor to seek an additional overpayment not previously invoiced, but rather confirming the accuracy of any adjustments made for overpayments or underpayments already reflected on the statements that are the subject of the audit. That’s quite a different thing.
What makes an auditor independent is that they do not have a conflict of interest as to their client, in this case the MLC. The royalty auditor is intended to be an advocate for their client (who pays them) and they are hired to look for ways that the other side has failed to account to their client properly to their client’s disadvantage. Improper payments are most commonly underpayments, i.e., the music user has failed to pay all that the client is entitled to receive. Royalty statements are regularly recalculated for a host of reasons in the normal course of business without regard to the presence or absence of any audit. This is not to say that somehow the MLC (and eventually the copyright owners) get some kind of windfall because the services missed something if any auditor is not seeking out an overpayment. That’s particularly true since there will likely be multiple sets of eyes on the field work and draft audit report. And trust me, they will all be trying to find somebody else’s mistake.
Or said another way, copyright owners don’t receive a windfall that was somehow missed by the largest corporations in commercial history who can determine what floor of which building you are on at what time of day at what address, e.g., sporting goods or children’s toys, so they can serve ads to your phone. Are we really worried about these little lambs getting lost in the woods?
@Helienne Explains the EU’s Cultural Protections Against Streaming Monopolists
We were lucky to get an interview with ESCA President Helienne Lindvall about the European Parliament’s report on cultural protections against streaming monopolies. This is a very important development and something we could use in the United States where this focus is sadly lacking.
@MikeHuppe Made an Important Comment on AI Justice for Creators
SoundExchange CEO Mike Huppe’s comment on AI justice is welcome from a rights platform.
Spotify has announced they are “Modernizing Our Royalty System.” Beware of geeks bearing “modernization”–that almost always means they get what they want to your disadvantage. Also sounds like yet another safe harbor. At a minimum, they are demonstrating the usual lack of understanding of the delicate balance of the music business they now control. But if they can convince you not to object, then they get away with it.
Don’t let them.
An Attack on Property Rights
There’s some serious questions about whether Spotify has the right to unilaterally change the way it counts royalty-bearing streams and to encroach on the private property rights of artists.
Here’s their plan: Evidently the plan is to only pay on streams over 1,000 per song accruing during the previous 12 months. I seriously doubt that they can engage in this terribly modern “stream discrimination” in a way that doesn’t breach any negotiated direct license with a minimum guarantee (if not others).
That doubt also leads me to think that Spotify’s unilateral change in “royalty policy” (whatever that is) is unlikely to affect everyone the same. Taking a page from 1984newspeakers, Spotify calls this discrimination policy “Track Monetization Eligibility”. It’s not discrimination, you see, it’s “eligibility”, a whole new thing. Kind of like war is peace, right? Or bouillabaisse.
According to Spotify’s own announcement this proposed change is not an increase in the total royalty pool that Spotify pays out (God forbid the famous “pie” should actually grow): ”There is no change to the size of the music royalty pool being paid out to rights holders from Spotify; we will simply use the tens of millions of dollars annually [of your money] to increase the payments to all eligible tracks, rather than spreading it out into $0.03 payments [that we currently owe you].”
Yep, you won’t even miss it, and you should sacrifice for all those deserving artists who are more eligible than you. They are not growing the pie, they are shifting money around–rearranging the deck chairs.
Spotify’s Need for Living Space
So why is Spotify doing this to you? The simple answer is the same reason monopolists always use: they need living space for Greater Spotify. Or more simply, because they can, or they can try. They’ll tell you it’s to address “streaming fraud” but there are a lot more direct ways to address streaming fraud such as establishing a simple “know your vendor” policy, or a simple pruning policy similar to that established by record companies to cut out low-sellers (excluding classical and instrumental jazz). But that would require Spotify to get real about their growth rates and be honest with their shareholders and partners. Based on the way Spotify treated the country of Uruguay, they are more interested in espoliating a country’s cultural resources than they are in fairly compensating musicians.
Of course, they won’t tell you that side of the story. They won’t even tell you if certain genres or languages will be more impacted than others (like the way labels protected classical and instrumental jazz from getting cut out measured by pop standards). Here’s their explanation:
It’s more impactful [says who?] for these tens of millions of dollars per year to increase payments to those most dependent on streaming revenue — rather than being spread out in tiny payments that typically don’t even reach an artist (as they do not surpass distributors’ minimum payout thresholds). 99.5% of all streams are of tracks that have at least 1,000 annual streams, and each of those tracks will earn more under this policy.
This reference to “minimum payout thresholds” is a very Spotifyesque twisting of a generalization wrapped in cross reference inside of spin. Because of the tiny sums Spotify pays artists due to the insane “big pool” or “market centric” royalty model that made Spotify rich, extremely low royalties make payment a challenge.
Plus, if they want to make allegations about third party distributors, they should say which distributors they are speaking of and cite directly to specific terms and conditions of those services. We can’t ask these anonymous distributors about their policies if we don’t know who they are.
What’s more likely is that tech platforms like PayPal stack up transaction fees to make the payment cost more than the royalty paid. Of course, you could probably say that about all streaming if you calculate the cost of accounting on a per stream basis, but that’s a different conversation.
So Spotify wants you to ignore the fact that they impose this “market centric” royalty rate that pays you bupkis in the first place. Since your distributor holds the tiny slivers of money anyway, Spotify just won’t pay you at all. It’s all the same to you, right? You weren’t getting paid anyway, so Spotify will just give your money to these other artists who didn’t ask for it and probably wouldn’t want it if you asked them.
There is a narrative going around that somehow the major labels are behind this. I seriously doubt it–if they ever got caught with their fingers in the cookie jar on this scam, would it be worth the pittance that they will end up getting in pocket after all mouths are fed? The scam is also 180 out from Lucian Grange’s call for artist centric royalty rates, so as a matter of policy it’s inconsistent with at least Universal’s stated goals. So I’d be careful about buying into that theory without some proof.
What About Mechanical Royalties?
What’s interesting about this scam is that switching to Spotify’s obligations on the song side, the accounting rules for mechanical royalties say (37 CFR § 210.6(g)(6) for those reading along at home) seem to contradict the very suckers deal that Spotify is cramming down on the recording side:
Royalties under 17 U.S.C. 115 shall not be considered payable, and no Monthly Statement of Account shall be required, until the compulsory licensee’s [i.e., Spotify’s] cumulative unpaid royalties for the copyright owner equal at least one cent. Moreover, in any case in which the cumulative unpaid royalties under 17 U.S.C. 115 that would otherwise be payable by the compulsory licensee to the copyright owner are less than $5, and the copyright owner has not notified the compulsory licensee in writing that it wishes to receive Monthly Statements of Account reflecting payments of less than $5, the compulsory licensee may choose to defer the payment date for such royalties and provide no Monthly Statements of Account until the earlier of the time for rendering the Monthly Statement of Account for the month in which the compulsory licensee’s cumulative unpaid royalties under section 17 U.S.C. 115 for the copyright owner exceed $5 or the time for rendering the Annual Statement of Account, at which time the compulsory licensee may provide one statement and payment covering the entire period for which royalty payments were deferred.
Much has been made of the fact that Spotify may think it can unilaterally change its obligations to pay sound recording royalties, but they still have to pay mechanicals because of the statute. And when they pay mechanicals, the accounting rules have some pretty low thresholds that require them to pay small amounts. This seems to be the very issue they are criticizing with their proposed change in “royalty policy.”
But remember that the only reason that Spotify has to pay mechanical royalties on the stream discrimination is because they haven’t managed to get that free ride inserted into the mechanical royalty rates alongside all the other safe harbors and goodies they seem to have bought for their payment of historical black box.
So I would expect that Spotify will show up at the Copyright Royalty Board for Phonorecords V and insist on a safe harbor to enshrine stream discrimination into the Rube Goldberg streaming mechanical royalty rates. After all, controlled compositions are only paid on royalty bearing sales, right? And since it seems like they get everything else they want, everyone will roll over and give this to them, too. Then the statutory mechanical will give them protection.
To Each According to Their Needs
Personally, I have an issue with any exception that results in any artist being forced to accept a royalty free deal. Plus, it seems like what should be happening here is that underperforming tracks get dropped, but that doesn’t support the narrative that all the world’s music is on offer. Just not paid for.
Is it a lot of money to any one person? Not really, but it’s obviously enough money to make the exercise worthwhile to Spotify. And notice that they haven’t really told you how much money is involved. It may be that Spotify isn’t holding back any small payments from distributors if all payments are aggregated. But either way it does seem like this new new thing should start with a clean slate–and all accrued royalties should be paid.
This idea that you should be forced to give up any income at all for the greater good of someone else is kind of an odd way of thinking. Or as they say back in the home country, from each according to their ability and to each according to their needs. And you don’t really need the money, do you?
By the way, can you break a $20?
The NO AI Fraud Act
Thanks to U.S. Representatives Salazar and Dean, there’s an effort underway to limit Big Tech’s AI rampage just in time for Davos. (Remember, the AI bubble got started at last year’s World Economic Forum Winter Games in Davos, Switzerland).
Chairman Issa Questions MLC’s Secretive Investment Policyfor Hundreds of Millions in Black Box
As we’ve noted a few times, the MLC has a nontransparent–some might say “secretive”–investment policy that has the effect of a government rule. This has caught the attention of Chairman Darrell Issa and Rep. Ben Cline at a recent House oversight hearing. Chairman Issa asked for more information about the investment policy in follow-up “questions for the record” directed to MLC CEO Kris Ahrend. It’s worth getting smart about what the MLC is up to in advance of the upcoming “redesignation” proceeding at the Copyright Office. We all know the decision is cooked and scammed already as part of the Harry Fox Preservation Act (AKA Title I of the MMA), but it will be interesting to see if anyone actually cares and the investment policy is a perfect example. It will also be interesting to see which Copyright Office examiner goes to work for one of the DiMA companies after the redesignation as is their tradition.
Congress is considering whether to renew The MLC, Inc.‘s designation as the mechanical licensing collective. If that sentence seems contradictory, remember those are two different things: the mechanical licensing collective is the statutory body that administers the compulsory license under Section 115. The MLC, Inc. is the private company that was “designated” by Congress through its Copyright Office to do the work of the mechanical licensing collective. This is like the form of a body that performs a function (the mechanical licensing collective) and having to animate that form with actual humans (The MLC, Inc.), kind of like Plato’s allegory of the cave, shadows on the wall being what they are.
Congress reviews the work product of The MLC, Inc. every five years (17 USC §115(d)(3)(B)(ii)) to decide if The MLC, Inc. should be allowed to continue another five years. In its recent guidance to The MLC, Inc. about artificial intelligence, the Copyright Office correctly took pains to make that distinction in a footnote (footnote 2 to be precise. Remember–always read the footnotes, it’s often where the action is.). This is why it is important that we be clear that The MLC, Inc. does not “own” the data it collects (and that HFA as its vendor doesn’t own it either, a point I raised to Spotify’s lobbyist several years ago). Although it may be a blessing if Congress fired The MLC, Inc. and the new collective had to start from scratch.
But Congress likely would only re-up The MLC, Inc. if it had already decided to extend the statutory license and all its cumbersome and byzantine procedures, proceedings and prohibitions on the freedom of songwriters to collectively bargain. Not to mention an extraordinarily huge thumbs down on the scales in favor of the music user and against the interest of the songwriters. The compulsory license is so labyrinthine and Kafka-esque it is actually an insult to Byzantium, but that’s another story.
Rather than just deciding about who is going to get the job of administering the revenues for every songwriter in the world, maybe there should be a vote. Particularly because songwriters cannot be members of the mechanical licensing collective as currently operated. Congress did not ask songwriters what they thought when the whole mechanical licensing scheme was established, so how about now?
Before the Congress decides to continue The MLC, Inc. many believe strongly that the body should reconsider the compulsory license itself. It is the compulsory license that is the real issue that plagues songwriters and blocks a free market. The compulsory license really has passed its sell by date and it’s pretty easy to understand why its gone so sour. Eliminating the Section 115 license will have many implications and we should tread carefully, but purposefully.
Party Like it’s 1909
First of all, consider the actual history of the compulsory license. It’s over 100 years old, and it was established at a time, believe it or not, when the goal of Congress was to even the playing field between, music users and copyright owners. They were worried about music users being hard done by because of the anticompetitive efforts of songwriters and copyright owners. As the late Register Marybeth Peters told Congress, when Congress created the exclusive right to control reproduction and distribution in 1909, “…due to concerns about potential monopolistic behavior [by the copyright owners], Congress also created a compulsory license to allow anyone to make and distribute a mechanical reproduction of a nondramatic musical work without the consent of the copyright owner provided that the person adhered to the provisions of the license, most notably paying a statutorily established royalty to the copyright owner.”
Well, that ship has sailed, don’t you think?
This is kind of incredible when you think about it today because the biggest users of the compulsory license are those who torture the bejesus out of songwriters by conducting lawfare at the Copyright Royalty Board–the richest corporations in commercial history that dominate practically every moment of American life. In fact, the statutory license was hardly used at all before these fictional persons arrived on the scene and have been on a decades-long crusade to hack the Copyright Act through lawfare ever since. This is particularly true since about 2007 when Big Tech discovered Section 115. (And they’re about to do it again with AI–first they send the missionaries.)
If the purpose of the statutory scheme was to create a win-win situation that floats all boats, you would have expected to see songwriters profiting like never before, right? If the compulsory was so great, what we really needed was for everyone to use Section 115, right? Actually, the opposite has happened, even with decades of price fixing at 2¢ by the federal government. When hardly anyone used the compulsory license, songwriters prospered. When its use became widespread, songwriters suffered, and suffered badly.
Songwriters have been relegated to the bottom of the pile in compensation, a sure sign of no leverage because whatever leverage songwriters may have is taken–there’s that word again–by the compulsory license. I don’t think Google, a revanchist Microsoft, Apple, Amazon or Spotify need any protection from the anticompetitive efforts of songwriters. Google, Amazon, Apple, Microsoft, Spotify are only worried about “monopolistic behavior” when one of them does it to one of the others. The Five Families would tell you its nothing personal, it’s just business.
Yet these corporate neo-colonialists would have you believe that the first thing that happens when the writing room door closes is that songwriters collude against them. (Sounding very much like the Radio Music Licensing Committee–so similar it makes you wonder, speaking of collusion.)
The Five Year Plan
Merck Mercuriadis makes the good point that there is no time like the present to evolve: “In the United States, we have a position of stability for the next five years – at the highest rates paid to songwriters to date – in the evolution of the streaming economy. We are now working towards improving the songwriters’ share of the streaming revenue ‘pie’ yet further and, eventually, getting to a free market.” The clock is ticking on the next five years, a reference to the rate period set by the Copyright Royalty Board in the Phonorecords IV proceeding. (And that five years is a different clock than the five years clock on the MLC which is itself an example of the unnecessary confusion in the compulsory license.)
What would happen if the compulsory license vanished? Very likely the industry would continue its easily documented history of voluntary catalog licenses. The evidence is readily apparent for how the industry and music users handled services that did not qualify for a compulsory license like YouTube or TikTok. However stupid the deals were doesn’t change the fact that they happened in the absence of a compulsory license. That Invisible Hand thing, dunno could be good. Seems to work out fine for other people.
Let’s also understand that there is a cottage industry complete with very nice offices, pensions and rich salaries that has grown up around the compulsory license (or consent decrees for that matter). A cottage industry where collecting the songwriters’ money results in dozens of jobs paying more in a year than probably 95% of songwriters will make, maybe ever. (The Trichordist published an excerpt from a recent MLC tax return showing the highest compensated MLC employees.) Generations of lawyers and lobbyists have put generations of children through college and law school from legal fees charged in the pursuit of something that has never existed in the contemporary music business–a willing buyer and a willing seller. Those people will not want to abandon the very government policy that puts food on their tables, but both sides are very, very good at manufacturing excuses why the compulsory license really must be continued to further humanity.
The even sadder reality is that as much as we would like to simply terminate the compulsory license, there is a certain legitimacy to being clear-eyed about a transition. (An example is the proposals for transitioning from PRO consent decrees–ASCAP’s consent decree has been around a long time, too.) There would likely need to be a certain grandfathering in of services that were pre or post the elimination of the compulsory, but that’s easily done, albeit not without a last hurrah of legal fees and lobbyist invoices. Register Pallante noted in the well-received 2015 Copyright Office study (Copyright and the Music Marketplace at 5) “The Office thus believes that, rather than eliminating section 115 altogether, section 115 should instead become the basis of a more flexible collective licensing system that will presumptively cover all mechanical uses except to the extent individual music publishers choose to opt out.” An opt out is another acceptable stop along the way to liberation, or even perhaps a destination itself. David Lowery had a very well thought-out idea along these lines in the pre-MLC era that should be revisited.
X Day
However, while there is a certain attractiveness to having a plan that the dreaded “stakeholders” and their legions of lobbyists and lawyers agree with, it is crucially important for Congress to fix a date certain by which the compulsory license will expire. Rain or shine, plan or no plan, it goes away on the X Day, say five years from now as Merck suggests. So wakey, wakey.
That transparency drives a wedge into the process because otherwise millions will be spent in fees for profiting from moral hazard and surely the praetorians protecting the cottage industry wouldn’t want that. If you doubt that asking for a plan before establishing X Day would fail as a plan, just look at the Copyright Royalty Board and in particular the Phonorecords III remand. Years and years, multiple court rulings, and the rates still are not in effect. Perseveration is not perseverance, it’s compulsive repetition when you know the same unacceptable result will occur.
But don’t let people tell you that the sky will fall if Congress liberates songwriters from the government mandate. The sky will not fall and songwriters will have a generational opportunity to organize a collective bargaining unit with the right to say no to a deal.
The closest that Congress has come to a meaningful “vote” in the songwriting world is inviting public comments through interventions, rule makings, roundtables and the like–information gathering that is not controlled by the lobbyists. Indeed, it was this very process at the Copyright Royalty Board that resulted in many articulate comments by songwriters and publishers themselves that were clearly quite at odds with what the CRB was being fed by the lobbyists and lawyers. So much so that the Copyright Royalty Judges rejected not only the “Subpart B” settlement reached by the insiders but the very premise of that settlement. Imagine what might happen if the issue of the compulsory license itself was placed upon the table?
Now that songwriters have had a taste of how The MLC, Inc. has been handling their money, maybe this would be a good time to ask them what they think about how things are going. And whether they want to be liberated from the entire sinking ship that is designed to help Big Tech. And you can start by asking how they feel about the $500 million in black box money that is still sitting in the bank account of The MLC, Inc. and has not been paid–with an infuriating lack of transparency. Yet is being “invested” by The MLC, Inc. with less transparency than many banks with smaller net assets.
This “investment” is another result of the compulsory license which has no transparency requirements for such “investments” of other peoples’ money, perhaps “invested” in the very Big Tech companies that fund the The MLC, Inc. That wasn’t a question that was on the minds of Congress in 1909 but it should be today.
Attention Must Be Paid
Let’s face facts. The compulsory license has coexisted in the decimation of songwriting as a profession. That destruction has increased at an increasing rate roughly coincident with the time the Big Tech discovered Section 115 and sent their legions of lawyers to the Copyright Royalty Board to grind down publishers, and very successfully. That success is in large part due to the very mismatch that the compulsory license was designed to prevent back in 1909 except stood on its head waiting for loophole seekers to notice the potential arbitrage opportunity.
The Phonorecords III and IV proceedings at the Copyright Royalty Board tell Congress all they need to know about how the game is played today and how it has changed since 1909, or the 1976 revision of the Copyright Act for that matter. The compulsory license is no longer fit for purpose and songwriters should have a say in whether it is to be continued or abandoned.
We see the Writers Guild striking and SAG-AFTRA taking a strike authorization vote. When was the last time any songwriters voted on their compensation? Maybe never? Voting, hmm. There’s a concept. Now where have I heard that before?
The “risk free rate” is often thought of as the rate of interest paid on US government bonds. That interest rate is thought of as risk free because it is backed by the full faith and credit of the United States. Want to know where you can find that full faith and credit? Look in the mirror.
When you ask around about what collective management organizations do with their “black box” monies while they are waiting to match money with songwriters or at least copyright owners, you often hear that the money is invested in very safe instruments, like U.S. treasury bonds. This might be particularly true of CMOs that are required to pay interest on black box because that interest has to come from somewhere.
But–and here it is–but, as we have learned from the Silicon Valley Bank collapse and the number of federal government officials in the mumble tank about why these banks are failing and why they are getting bailed out by, you know, the full faith and credit of the United States, “risk free” seems to be a relative concept. When you buy US government bonds, there are a number of different maturity dates available to you, kind of like buying a certificate of deposit. A common maturity date is the 10-year bond and the two-year bond, both of which were recently down sharply.
But–there is a connection between the interest rate that the bond pays, the price of the bond, and the maturity date of that bond. When bond interest rates increase, the face price tends to decrease. So if you paid $100 for a bond with a interest rate of say .08% and that rate then increased to say 4.5%, the face price of that bond will no longer be $100, it will be less. If that increase happens fairly quickly, you can have difficulty finding a buyer. The good news is that when the Federal Reserve raises the interest rate, there is about as much news coverage of the event as it is theoretically possible to have, both before during and after the rate increase, not to mention the Federal Reserve chair testifying to Congress. It’s very public. Closely watched doesn’t really capture that level of attention.
When bond prices decline, holders only “realize” the loss or gain if they sell the bond unless the bond is marked to market so the firm has to disclose the amount of what the loss would be if they sold the bond. Hence the concept of “unrealized losses,” “maturity risk,” or “interest rate risk.” Some think that US banks currently have $620 billion in unrealized losses due to interest rate risk. And don’t forget, these are your betters. These are the smart people. These are the city fellers.
This interest rate risk issue is not limited to banks, however. It is also present anytime that an entity tasked with caring for other people’s money invests that money in treasury bonds, crypto, or whatever. You don’t have to be Wall Street Bets to end up losing your shirt or something in this environment.
So the point is that the same problem of interest rate risk and unrealized losses could apply to CMOs, such as The MLC, Inc. because of their undisclosed “investment policy” of investing the $424 million of black box they were paid by the services. They don’t disclose what the investment policy is and they don’t disclose their holdings so we don’t really know what has happened, if anything. The money could be perfectly safe.
MusicTechPolicy readers will have seen my post about the interest rate paid by the MLC on the rather sizable black box of “unmatched” funds sitting at a bank account (rumored to be City National Bank in Nashville).
That rate was modernized in the Music Modernization Act to be a floating rate: The Federal short term interest rate essentially set by the Federal Reserve. In fact, that particular federal rate is one of the lowest interest rates set by the Federal government and is the kind of interest rate you would want to be obligated pay–very low–if you knew you’d be in the business of holding large sums of money that you wanted to earn interest on yourself and make money on the spread, often called “the float.” (The black box is usually free money, so it’s actually an improvement.). For example, the bank prime loan rate is currently 5.5% that may be a good indicator of what you could get in the way of relatively risk free interest for a big lump sum–if not better for a really big lump sum, say $500,000,000.
The MLC is not, after all, the government, however much that fact might be lost on them. Why should the lowball government rate apply to the MLC instead of a competitive bank rate? Particularly when it comes to the substantial unmatched funds that songwriters and publishers are forced by the government to allow the MLC to hold and for which they control distribution–a bit of the old moral hazard there.
Indeed, you could also express that rate of involuntary saving as “prime plus x” where “x” is an additional money factor like 1%, so the rate floats upward to the songwriters’ advantage. Get some inspiration for this by looking at your credit card interest rate.
You probably have heard that the Federal Reserve is increasing the federal funds rate, and therefore all interest rates that are a function of the federal funds rate including the short term rate that the MLC is required by law to pay on the black box. The Federal Reserve is expecting to keep making significant increases in the federal interest rates in an effort to get inflation under control, which means that the MLC’s black box interest rate will also continue to increase significantly.
A quick recap: The MLC’s short term interest rate was 0.44% in January in keeping with then-prevailing Zero Interest Rate Policy (or the “lower bound”) of the Fed for the easy money years since the crash of 2008. But in August 2022 (that is, now) the MLC’s rate has increased to 2.84% monthly. The modern black box holding period in the Music Modernization Act is pretty clear:
Also recall that the black box is to be held for an arbitrarily modern period of time while the MLC attempts to locate the rightful recipients as is their statutory burden under the MMA. Different numbers are thrown around for this holding period, but a three year holding period seems to be popular and has the benefit of having been modernized in the Music Modernization Act itself (see above). Bear in mind that the first tranche of “historical” black box (“historical” means “late” in this context) was $424,384,787 and was paid in February of 2021–nearly 18 months ago.
Also recall that we were not given any information that I am aware of as to when the services paying this rather large sum of other people’s money first accrued the black box. People who line up on the shorter holding period side of the argument generally favor rapid market share distributions which tends to help the majors; people on the longer holding period of time generally favor redoubled efforts to find the people who are actually owed the money.
The third group is that the MLC should simply find who is owed the money, have the money being held earn the highest rate of risk-free interest possible, and pay all of the interest money to the correct people when found and not have this cutesy limitation on the money factor paid out for holding OPM. Their argument goes something like your government takes away my right to negotiate my own rates, tells me how much I can charge, then makes it difficult to find me but easy to use my song and now you also want to take away the money you say I’m owed and give it to rich people I don’t know before I’ve had a change to claim it and pay yourselves to not do your jobs?
So we are at the midpoint of the three year statutory holding period. Although remember that this is a two pronged holding period of the earlier of 3 years after the MLC got the cash or 3 years after the date the service started holding the money that it subsequently transferred–a different holding period which would likely end sooner than the date the money was transferred to the MLC.
Although we know the date that the money was transferred in the aggregate to the MLC we may not know exactly when the money was accrued without auditing (although you would think that the MLC would release those dates since the timing of the accrual is relevant to the MMA calculation).
According to my reading of the statute, the modernized interest rate would likely attach from the time the money was accrued by the service, so should have been transferred to the MLC with accrued interest, if any. This may be in lieu of or in addition to a late fee. Very modern.
This leaves us with a couple questions. Remember that after the holding period, the black box is to be transferred on a market share basis to all the copyright owners who could be identified based on usage, which includes usage under voluntary licenses that are not administered by the MLC.
So this raises some questions:
Why should the black box be divided up amongst copyright owners who have voluntary licenses and who are not administered by the MLC? They presumably have the most accurate books and statements and may have already had a chance to recover.
What happens to the accrued interest at the time of distribution? Why should the market share distribution include interest on money that didn’t belong to the recipients?
The statute takes the position that the MLC must pay the interest rate but is silent on how much interest the MLC can earn from the bank holding the substantial deposit of the unmatched monies. There’s nothing that requires the MLC to pay over all earned interest.
Here’s a rough justice calculation of 3 years compound interest at current rates with steadily increasing black box. While the holding period started at the .44% rate, I ran the numbers at the 2.84% rate because it was easier–but also left out an estimate of the increase in rates that is surely to come. Since we are at the midpoint of the holding period already, this gives you an idea:
Hypothetical chart of growth rate of unmatched funds (historical and current) over a three year period at 2.84% compounded monthly interest rate
It’s becoming more obvious that the Mechanical Licensing Collective is not succeeding in its Congressional mandate to build the definitive music rights database so that all songwriters get paid. We often hear about MLC match rates being consistent with the “industry standard,” but this is pre-MMA thinking and is no longer relevant in a post-MMA world. (Not to mention the fact that it was these very “industry standards” that produced gigantic levels of unmatched payments that the MLC is mandated to fix.) As we will see, any match rate less than 100% is inconsistent with the MLC’s Congressional mandate which will be relevant when those in control of the MLC’s operations are reviewed by Congress in the not too distant future. Remember, The MLC, Inc. may be a private company in the traditional sense, but the MLC (different than The MLC, Inc.) is a statutory creation whose functionality is awarded to the current operators if they do a good job giving effect to the Congressional mandate. Congress can take that deal away and essentially “fire” The MLC, Inc.
It’s also becoming increasingly apparent that the Copyright Office has no stomach for its Congressionally mandated oversight role as they have been silent as the tomb so far no matter how absurd the results coming from MLC. The difference in post-MMA planning is that every royalty audit of MLC should be accompanied by a FOIA request to the Copyright Office regarding what they knew and when they knew it. Neither of those remedies were available in combination to songwriters in a pre-MMA environment. (If you took the king’s shilling and signed up for HFA you got a piece of an audit recovery of unknown providence for the most part often based on projections.)
Thankfully, due to the services paying for MLC operations as well as cost-shifting combinations of direct licensing, modified compulsory and service-supported blanket (and significant non-blanket) licensing, cost will never be a factor for The MLC, so the only consideration should be the benefit to all songwriters from getting it right.
Not everyone sees it that way. I raised this point on a Copyright Office roundtable about the MLC and was immediately jumped on by both the Head of Government Relations for Spotify and the head of the Digital Media Association (neither of whom have rendered a royalty statement in their lives in all likelihood). They rejected my position that the MMA requires that there should be no cost benefit analysis in matching–remember, the services are supposed to pay for that matching functionality as part of their deal for the MMA safe harbor giveaway.
Now I’m sure that these DIMA companies are perfectly capable of getting a match rate that’s in the limit. Just because they’ve never done it before doesn’t mean they can’t ever do it. They just need a little guidance.
Fortunately we have Congressional guidance on this issue in the legislative history of Title I of the Music Modernization Act which states:
Testimony provided by Jim Griffin at the June 10, 2014 Committee hearing highlighted the need for more robust metadata to accompany the payment and distribution of music royalties….In an era in which Americans can buy millions of products via an app on their phone based upon the UPC code on the product, the failure of the music industry to develop and maintain a master database has led to significant litigation and underpaid royalties for decades. The Committee believes that this must end so that all artists are paid for their creations and that so-called ‘‘black box’’ revenue is not a drain on the success of the entire industry.
H. Rep. 115-651 (115th Cong. 2nd Sess. April 25, 2018) at 8. (my emphasis)
I realize that the Head of Government Relations for Spotify would want to protect her employer as would the head of DIMA and immediately try to kill the idea that the MLC had to set new industry standards and that the services would pay for it. And that’s a reasonable deal in exchange for the safe harbor giveaway.
But that wasn’t the deal they made. Now you can well say that the services are not required to give a blank check, that the costs should be reasonable, and that the services have something to say about how the money is spent particularly given their expertise with supporting the world’s intelligence agencies in finding things and people, or so says Mr. Snowden. But we already see that the services got a rube deal for their tens of millions in MLC costs if the match rate is simply as bad as it was before MMA (or worse). That wasn’t their deal, either.
The deal they made was to see to it that “all artists are paid for their creations”. No qualifiers.
Please take a few minutes (4 or so) to help us understand how the Mechanical Licensing Collective and the Copyright Office is doing getting the word out about signing up with the MLC and getting paid royalties (including your share of the $424 million black box/unmatched payment that has been sitting at MLC for months).
Your response are anonymous and we’ll post the results when we get a threshold number of responses. We’d really appreciate your help!
One of the first world problems with the Copyright Office unmatched report (and frankly the legislative history) is that the Office seems to confound matching transitory royalty payments with building a permanent asset. There is an inherent tension in utilizing a cost benefit analysis to decide which songs are “worth” identifying and paying compared to which songs are “worth” identifying to build the Congressionally mandated core asset of the Mechanical Licensing Collective–the public’s musical works database.
These are two entirely different projects. The unmatched report misses the opportunity to properly distinguish them and emphasize the priority that must be given to building the gold standard musical works database–for which the services pay and in consideration for which the services received a Congressionally mandated retroactive safe harbor for the legion of past infringements. It now becomes apparent that the services were not really serious about doing the hard work and wanted to do just enough to be able to get their safe harbor.
But what about the $424 million in black box, you say? Didn’t they pay beaucoup bucks to settle up with songwriters? Yes, it’s true–the services paid songwriters with what services said was the amount of the songwriters own money that the services owed them due to extraordinarily sloppy licensing practices. Hopefully when the accounting data is made public, we will have a better idea of whether this $424 million makes sense as the semi-accurate number. If, however, it turns out that the vast bulk of the retroactive payment of $424 million accrued over the last few years, that is, since the passing of the MMA Title I safe harbor to benefit those who need it least, it will become apparent that the “historic” retroactive payment was neither historic nor particularly retroactive. Watch the Eight Mile Style case in Tennessee for some answers on this where both Spotify and the Harry Fox Agency are being sued by Eminem’s publishers.
Yet this confusion over the difference between complying with the Congressional mandate to build an authoritative musical works database and some line in the legislative history that the lobbyists inserted about “play your part” is another reason why using a cost benefit analysis for identifying long tail royalty payments makes no sense.
The MLC is charged by Congress with creating the public musical works database–an asset. The MLC is also charged with accounting for royalties–a payment. The report says “The MLC should take reasonable steps to ensure that its data is of the highest possible quality, meaning, among other things, that it is as complete, accurate, up-to-date, and de-conflicted as possible, and is obtained from authoritative sources.” But not if the cost of quality data exceeds the royalties payable in a particular month?
Payments change, assets do not. The MLC are either building a “highest possible quality asset” or they are doing the usual 80/20 “industry standard” slop that is already becoming the MLC’s go-to excuse for failure. Because rest assured–it will always be someone else’s fault. Who do you think caused that “industry standard” to exist? One of the MLC’s principal vendors, mebbbie?
The services like the Title I safe harbor just fine, but obviously no one is interested in actually building an asset of the “highest quality” which is a different enterprise than royalty accounting.
Which is it going to be? I think we all know the answer. If we let it, it will be a lot of sound and fury signifying nothing.
Music Tech Solutions 