Big Tech’s Latest Infringement Loophole: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 2)

co-nois-1
“1 NOI” Means “1 Excel file for the NOIs Filed That Day, each Excel file contains tens of thousands of songs

As noted in Part 1 of this post, Google, Amazon and others are filing what are reportedly “millions” of “address unknown” NOIs with the U.S. Copyright Office.  I fully expect that Pandora will eventually do the same for its on-demand service and Spotify is likely to do the same.  Note–this type of carpet bombing of NOIs would not have helped Spotify in the David Lowery litigation because David Lowery registered his copyrights that are the subject of that litigation.

If you click here, you will find the most recent iteration of these massive NOIs, which apparently are being posted on a regular basis.  The screenshot above is the first page of these filings on the Copyright Office site, most of which came this month (September 2016).

Each Excel file can be downloaded–a word of warning, even the zipped files are large and may take a while to open on an average home computer.

Remember what you are looking at in these files–this is the list that results from comparing the list of sound recordings that the services are using to the data dump that the service purchases from the Library of Congress.  Take a tip–you’ll never find the page on the LOC website unless you know where to look, which is right here.

loc-prices-databases

Willful Blindness on Song Titles

This is an overwhelming amount of data, so in order to have any idea what is really going on, spot checking will be required.  And since it’s Google, you know there’s a scam afoot, your challenge is just to figure out which scam it is this time.  (Of course the entire exercise is a scam, but leave that to one side for now.)

Scam # 1 appears to be treating any song title that has any text in it other than the actual song title as a song for which the owner cannot be identified.  Here’s two examples from Sting in the Google 9/16/16 NOI file:

sting-fragile-google-noi

Of course, the song “Fragile” is registered, but Google’s filing claims that there is a different song “Fragile (Live)” that is not registered by that title.  Google has, no doubt, sent another NOI for the song “Fragile” (or has a direct license) and if so has actual knowledge of the song copyright owner.

And here’s the loophole–by claiming that “Fragile (Live)” is an “unknown” song, Google can try to get out of paying for the live version.  (Because how would you know that “Fragile” performed by Sting for which you know the copyright owner is the same as “Fragile (Live)” performed by Sting for which you now claim to be shocked that is the same song–unless, oh, maybe if you listened to the two?)  The government’s compulsory license says this:

sec-115-noi-unknown

If you search for live recordings in Google’s NOI filings, you will find many, many live recordings by artists such as Bob Dylan, Heart, Quincy Jones, Lynyrd Skynyrd and Chicago.  And then there’s the medleys like “Hotel California Dreaming” which lists the Eagles writers with John and Michelle Phillips of the Mamas and the Papas.

Not to mention a ton of foreign songwriters who are under no obligation to register their songs with the U.S. Copyright Office.

Let’s also set aside for the moment whether the recordings that Google has listed on their certified filing are all lawfully distributed–some certainly look like bootlegs to me.  Of course “bootlegs” these days have to include illegal live recordings posted on YouTube and then stream ripped into mp3 files to be distributed through Tunecore, CD Baby or someone else who doesn’t pay much attention to where the recordings come from and then subsequently distributed through Google–who invented the game.

So what appears to be happening is that Google and Amazon (which has hired MRI, I believe) are playing the willful blindness game.  What can be done about it?

That will be the subject of the next and final part of this post.

 

Big Tech’s Latest Infringement Loophole: Mass Filings of NOIs to Avoid Paying Statutory Royalties (Part 1)

If the music-tech industry has one major failing from which all of their messaging and legal problems flow, it is their fascination with loopholes that predictably harm creators.  Whether it’s YouTube’s nefarious reliance on a tortured interpretation of the DMCA safe harbors that bears no relation to the law, Pandora and SiriusXM’s bone headed refusal to pay statutory royalties on pre-72 sound recordings (not to mention Pandora’s purchase of a radio station in a failed attempt to pay songwriters lower royalties), Spotify’s absurdly unnecessary collision with Taylor Swift over windowing, the MIC Coalition’s ridiculous manipulation of the Department of Justice on 100% licensing, or Amazon’s bizarre fascination with compulsory licenses for which songwriters have no audit right, these companies rival each other in the undignified pursuit of loopholes.

And in particular, loopholes that hurt songwriters who can’t afford the litigation and lobbying machine that is always the not-so-veiled threat brought by all these companies.  The latest debacle is no different–mass filings of NOIs to avoid paying mechanical royalties because of a loophole that is detritus left over from the 1909 Copyright Act that is being manipulated to benefit the rich Silicon Valley companies at the expense of songwriters.

Yes, that’s right.  They’d rather pay enormous sums in filing fees that vastly exceed any royalties payable just to get out of paying royalties at all.  You have a better chance of recovering an old utility deposit from a state unclaimed property office than you have of getting mechanicals once you fall victim to this latest move.

I have been reliably informed that Google, Amazon and Music Reports among others are filing “millions” of “address unknown” NOIs with the Copyright Office based on a database that these companies are purchasing for tens of thousands of dollars from the Library of Congress (remember that the Copyright Office is under the jurisdiction of the Library of Congress).  And by the way–once they file this NOI, they don’t pay royalties until the copyright owner can be identified in the records of the Copyright Office.  Regardless of how easily the copyright owner could be found in other readily accessible databases.

Mystified?  I will explain.  Rest assured, you’re not the only one who is surprised.  And remember that bit about the utility deposit, we’ll come back to that one.

As you read this post, remember one thing–it didn’t have to be this way.  This is all happening for the same reason.  Google, Amazon, Spotify, and likely soon Pandora (for its yet-to-be-launched on demand service) are all far more likely to take the legalistic and aggressive route rather than reach out to the songwriting community to work cooperatively to find a solution.

One music tech executive told me, we decide what’s fair and then we jam it down your throat.

That doesn’t work.

Mechanical Licensing and the Compulsory License

For one reason or another, the U.S. Government has a tradition of being very interested in regulating songwriters.  The Copyright Act of 1909 established the baseline rules that compel songwriters to license their songs and sets the terms on which those songs are licensed including the royalty rate.

Even if you are not troubled by this degree of attention that is probably the original wage and price control, it would be nice if the USG is going to pay enough attention to songwriters that they set the price at which they can license their work, that the same USG not forget to raise that rate for 60-odd years.

That’s right–the government set the mechanical rate in 1909 at 2 cents and refused to raise it until 1978 (as part of the 1976 Copyright Act revision).  Adjusted for inflation, that 2 cent rate would now be about 80 cents.  Instead, it’s been 9.1 cents for the last 10 years.

The current compulsory license law was crafted in 1909 and slightly amended in 1976, and amended again a couple times to include the concept of “digital phonorecord deliveries” which essentially makes that compulsory applicable to streaming.

The 1976 Act also got rid of the copyright registrations that formed the basis of copyright under the 1909 Act with the exception of requiring a registration to sue for statutory damages and attorneys fees in a copyright infringement lawsuit.  (Not quite that straight a line, but that’s where we ended up.)

But here’s the twist–the compulsory license rules are a notice based system.  A music user who intends to use a song that is subject to the compulsory license must send a notice to the copyright owner.  These notices are called a “notice of intention” or “NOI”.  If you’re going to require an NOI, then how do you deal with copyright owners who cannot be found?

There was an easy answer to this that derives from the registration requirements–look them up in the Copyright Office.  If the copyright owner can’t be identified in the records of the Copyright Office, then the music user can send a notice to the Copyright Office which the Copyright Office then publishes.  Just like when your state publishes a list of unclaimed utility deposits, closed bank account balances, etc.

Now we all know that nobody uses the records of the Copyright Office to find a copyright owner, or if they use those records they don’t use them exclusively.  Most people will look first at the PRO databases, cue sheets, publisher websites, other materials like that.  When all else fails, then they look at the Copyright Office.  This is partly due to the lag time between filing a copyright registration and receiving a conformed copy of that registration (which is when it is “official”).

There is also another public record maintained by the Copyright Office called the “recordation section”.  This is where people file documents relating to works of copyright, such as a notice of assignment or a mortgage of copyright (which is kind of like a UCC-1 financing statement).  The recordation section requires paper filings and typically only ingests a handful of titles from a large acquisition.  That results in a filing of “‘Yesterday’ and 10,000 other songs” or something along those lines.

In other words, the recordation section is not all that reliable either–and neither is dispositive because there hasn’t been a registration requirement for decades.  Is it a good practice to register?  Yes.  Is it required to have valid copyright?  No.

And it’s particularly not required for non-US songwriters.  In fact, there’s a good argument that a registration requirement in order to enjoy your rights (such as the statutory mechanical royalty, however poorly handled by the government) is actually barred by the Berne Convention’s prohibition on formalities.

Yet, the U.S. Copyright Act allows a valid compulsory license to issue for a copyright owner who may be listed in the PRO databases, may be a foreign copyright owner, or be under license (even direct license) for other songs with the same music user–if that copyright owner of a particular song cannot be identified from the public records of the Copyright Office–as determined by the music user.

Now why is this a moral hazard that should not be resolved by the music user?

Because the Copyright Act also provides that the music user filing that “address unknown” NOI is not required to pay royalties until that copyright owner is identifiable in the public records of the Copyright Office.

And who decides if the NOI is properly filed for the right song title?  That’s right–the music user.  Who is incented to play games with the song metadata?  That’s right–the music user.

So what comes next should be of no surprise given the bad advice that these giant companies receive about their artist and writer relations.

Continued in Part 2.

 

 

Bad Medicine, No Spoonful of Sugar: How Useful is Blockchain for Music?

A Guest Post By Alan Graham of OCL.  Let’s get real. There’s a lot of talk about data and transparency and blockchain these days when it comes to the music industry. This will solve everything! However, there are issues no one seems to want to discuss that also need immediate attention. So let’s open up and take a very bitter […]

via Guest Post: Bad Medicine, No Spoonful of Sugar — MUSIC • TECHNOLOGY • POLICY

In this guest post, UK technologist Alan Graham offers some penetrating insights into what the much ballyhooed blockchain will and won’t do, and some technologies that are not so far over the horizon that we should all be thinking about how to bring into a safe and sane environment.

Are Legacy Revenue Share Deals More Trouble Than They Are Worth?

By Chris Castle

As an important publisher panel observed at MIDEM this year, revenue share deals make it virtually impossible for publishers to tell songwriters what their royalty rate is.  That’s especially true of streaming royalties payable under direct licenses for either sound recordings or songs or the compulsory licenses available for songs.

There are some good reasons why streaming rates developed without a penny rate–or at least some reasons that are the product of sequential thought–but there are also good reasons for creators to be distrustful of the revenue share calculation.  This is particularly true of compulsory licenses for songs where songwriters and publishers don’t even have the right to examine the services books to check if the service complied with the terms of the compulsory license (known as an “audit” or “royalty compliance examination”).

If you thought record deals were complicated, you will probably have to find a new vocabulary to describe streaming royalties.  (Calling Dr. Freud.)  But even under direct licenses for songs or sound recording licenses where there usually is an audit right, the information that needs to be audited is so closely held, so over-consolidated and the calculations so complex that there may as well be no audit right.

The result is that smart people with resources at big publishing houses cannot determine the penny rate coming out of Spotify and others with the information that is on their accounting statements.  That is hard to explain to songwriters (or artists for that matter, as they have similar problems).

Why is the calculation so complex?  The artist revenue share calculation looks something like this in its generic configuration:

[Monthly Service Advertising Revenue or Monthly Subscription Revenue] x [Your Total Monthly Streams on the Service/All Monthly Streams on the Service] x [Revenue Share] = Royalty per stream

Both monthly revenue and monthly usage change each month–because they are monthly.  In order to get a nominal royalty rate, you have many calculations on both sides of the equation.  Because these calculations are made monthly, it is not possible to state in pennies the royalty rate for any one song or recording at any one time.  There’s actually an additional eye-crossing wrinkle on subscription deals of setting a negotiated minimum per subscriber which can vary by country, but we will leave that complexity aside for this post–YouTube’s “Exhibit D” lists 3 pages of one line entries for per subscriber minima around the world.

In a simple example, if both advertising revenue and subscription revenue were $100, your one recording was played 10 times in a month, all recordings were played 100 times in a month and the revenue share was 50% for the sound recording then you would get:

$100 x [10/100] x .50 = $0.50 for that month.  How you get to the multiplicand in the revenue pot is not so simple and has gotten more complex over the years.  In fact, the contract language for these calculations make the Single Bullet Theory seem more plausible.

Revenue share formulas produce a different product when the factors change–which for the most part changes every month.  The formula we’re using is for the sound recording side, but publishers have a version of this calculation for their songwriter’s royalties, too.  The statutory rates are a version of this formula (see the nearly unintelligible 37 CFR §385.12).

Most of this information is under the exclusive control of the service, and largely stays that way, even if you are one of the lucky few who has an audit right.  Bear in mind that the “Monthly Service Advertising Revenue” in our formula is a function of advertising rates charged by the service, and “Monthly Subscription Revenue” is a function of net subscription rates charged by the service.  These calculations take into account day passes, free trial periods, and other exceptions to the royalty obligation.  There is essentially no way to confirm the revenue pot when the royalty rates appear on the publisher or label statements.

The problem is that the entire concept of revenue share deals is out of step with how artists and songwriters are used to getting paid, even for other statutory mechanical rates such as that for downloads.  If a publisher or label can’t come up with a nice crisp answer for what the songwriter or artist royalty is based on, the assumption often is that the creator is being lied to.  And who’s to say that’s an unreasonable conclusion to jump to?  The question is–who is lying?  Here’s a tip–it’s probably not the publisher or label because they’re essentially in the same boat as the artist.

How Did We Ever Get Here?

Let me take you back to 1999.  Fish were jumpin’, the cotton was high, and limited partners showed up for capital calls.  Startups were starting up their engines–some to drive into a brick wall at scale, others to an IPO (and then into a brick wall at even greater scale).

On the Internet, you didn’t just do business with a company, they were your “partner.”  You didn’t just negotiate a commercial relationship with a behemoth Fortune 50 company that could crush you like a bug–in the utopian value system your little company “partnered” with AOL for example.  Or Intel.  Or later, Google.

What that meant for music licensing was that startups wanted rights owners to take the ride with them so if they made money, the rights owner made money.  Rights owners shared their revenue, you know, like a partner.  Except you only shared some of their revenue.  You weren’t really a partner and had no control over how they ran their business even if the only business they’d had previously run was a lemonade stand.

The revenue share deal was born.  To some people, it seemed like a good idea at the time.  And it might have been if there were relatively few participants in that revenue share.  But revenue share deals don’t scale very well.

Enter Professor Coase and His Pesky Theorem 

Here’s the basic flaw with revenue share deals:  Calculating the share of revenue for the entire catalog of licensed music on a global basis requires a large number of calculations.  For companies like Spotify, Apple or YouTube, calculating the share of revenue for millions of songs and recordings requires billions of calculations.

Free services like Spotify or YouTube involve billions of essentially unauditable calculations, all of which are based on a share of advertising revenue.  Advertising revenue which is itself essentially unauditable due to the nearly pathological level of secrecy that prevents any royalty participant from ever knowing what’s in the pie they are sharing.

That secrecy runs both upstream, downstream and across streams.  And as we all know, keeping secrets from your partner is the first step on the road to ruining a relationship.

But before you get too deep into nuances, let’s start with a basic problem with the entire revenue share approach.  In order to get to a per unit royalty, you have to multiply one dynamic number (the revenue) by another dynamic number (the usage).  Meaning that the thing being multiplied and the thing by which it is multiplied change from month to month.  The only constant in the formula is the actual percentage of the pie payable to the rights owner (50% in our example).

Remember–this all started with the digital service proposing that artists, songwriters, labels and publishers should take a share of what the service makes.  If you have a significant catalog, however, you do what you do with everyone who wants to license your catalog–you require the payment of a minimum guarantee as a prepayment of anticipated royalties (also called an “advance”).

So in our simple example, if the service is pitching that they will invest heavily in growth and make the catalog owner $50 over a two year contract, the catalog owner is justified in responding that however much confidence they have in the service, they’d like that $50 today and not a burger on Tuesday.  The service can apply the $50 minimum guarantee against the catalog’s earnings during the term of the contract, but if the minimum guarantee doesn’t earn out, the catalog owner keeps the change.  This shifts the credit or default risk from the catalog owner partner to the digital service partner (who actually controls the fate of the business).

But–given the complexity of the revenue share calculations, at least three questions arise:

Question: How will creators ever know if they are getting straight count from the service due to the complexity of the calculations?

Answer: The vast majority will never know.

Question:  How will anyone know if the advance ever recoups with any degree of certainty if they cannot verify the revenue pot they are to share?

Answer: The royalty receiver has to rely on statements based on effectively unverifiable information.

Question:  And most importantly, if streaming really is our future as industry leaders keep telling us, then which publisher wants to sign up for a lifetime of explaining the inexplicable to songwriters and artists who question their royalty statements?

Let’s Get Rid of Revenue Share Deals

There’s really no reason to keep this charade going any longer.  If the revenue share deal was converted to a penny rate, life would get so much easier and calculations would get so much simpler.  There would be arguments as always about what that penny rate ought to be.  Hostility levels might not go away entirely, but would probably lessen.

Transaction costs should go down substantially as there would be far fewer moving parts.  Realize that it’s entirely possible that the transaction costs of reporting royalties in revenue share deals (including  productivity loss and the cost of servicing songwriters and artists) likely exceeds the royalties paid.  My bet is that the costs vastly exceed the benefits.

And the people who really count the most in this business–the songwriters and artists–should have a lot more transparency.  Transparency that is essentially impossible with compulsory licenses.

Because when you take into account the total transaction costs, including all the correcting and noticing and calculating and explaining on the publisher and label side, and all the correcting and processing and calculating and messaging that has to be done on the service side, surely–surely–there has to be a simpler way.

 

Sony Sues Rdio Executives for Fraud, A Cautionary Tale for Entrepreneurs

I’m on the alert for signals and other signs and portends that the Bubble Riders are about to bring down the U.S. economy yet again.  My theory is that Dot Bomb II: All Dogs Go to BK is casting right now, and will go into principal photography later this year.  Three signs are Spotify’s bonds (where a year maturity can be a “century bond“), Deezer’s busted IPO and of course the Rdio bankruptcy.

When bubbles burst, the harsh reality of the rules of bankruptcy suddenly become part of the vocabulary instead of aggregating bricks-and-clicks niches or facilitating user-centric content. And before you think that Rdio’s disaster is Pandora’s blessing, realize we also may be seeing a bubble bursting signal with the lawsuit that Sony Music filed against Rdio executives Anthony Bay, Elliot Peters and Jim Rondinelli.

The cautionary tale begins right there–note that this lawsuit is against these men individually.  If the case withstands the various means of dismissing it before it gets started which time will tell, this is about personal conduct, not the corporate actions of Rdio which has filed for bankruptcy.  Another reason that Sony may be suing these men individually is to pursue their action outside of the bankruptcy court that has jurisdiction over Rdio, a legitimate, but potentially intricate maneuver.

Of course you should realize that we haven’t heard the other side of the story yet, so keep that in mind.  There will be defenses and another side to the facts.  But what you should also keep in mind is that given the current state of the business, if a streaming service owes you money, you will have virtually no way to find that out.  Streaming services are very snide about affording artists and especially songwriters the right to conduct a royalty compliance examination (or “audit” for short, although it has nothing to do with CPAs, GAAP or financial audits).  Often the only time an artist or songwriter knows they are owed money is when the service goes bankrupt and the creator finds their name on the unsecured creditors list.

According to the Sony lawsuit (read it here) the defendants seem to have been some or all of the negotiating team for Rdio that came to Sony and asked for help.  Pay close attention to the timeline and remember that if your company is insolvent and either shuts down or actually files for bankruptcy, what you did in the run up to your bankruptcy will get scrutinized in bankruptcy.  Or as I prefer to call bankruptcy, volunteering to have a federal judge oversee every breath you take and ever have taken (key concepts are highlighted):

Unbeknownst to SME [Sony Music Entertainment], however, at the same time that Rdio was negotiating the amendment to its Content Agreement with SME, it was simultaneously negotiating its deal with Pandora—under which Rdio would file for bankruptcy [also known as a “prepack” or “prepackaged bankruptcy” usually requiring the advance approval of the creditors, including SME in this case]; Pandora would  buy Rdio’s assets out of bankruptcy; defendant Bay (as part-owner, executive officer, and  director of Rdio’s secured creditor) [potentially conflicting duties in a bankruptcy setting] would expect to be first in line to receive proceeds of the Pandora  deal; and SME (as an unsecured creditor) would receive pennies on the dollar for the amounts owed to it under the amended Content Agreement.

To summarize Sony’s allegations:  You guys came crying to us about renegotiating your deal, we were nice and gave you a break.  Even while you were crying to us, you were conspiring with Pandora to screw us because you knew that we would be in a weak position compared to the secured creditors like you.

That highlights another part of the cautionary tale–while officers and directors of a company have a fiduciary duty to stockholders under “normal” circumstances, when the company is essentially or actually insolvent, that fiduciary duty shifts to the creditors including the unsecured creditors.  Why?  (For a trip down memory lane on this subject, see the New York Times coverage of a judge’s ruling that denied Bertelsmann the ability to bid on Napster assets due to the “divided loyalty” of Napster’s CEO, a former Bertelsmann executive.)

Because the law puts the onus on the officers and directors to protect the creditors when it is likely that the officers and directors are the only ones who know that the company is going under.  Is this surprising?  On the schoolyard, you are supposed to protect the weaker kid before they get beat up, especially before they get beat up by your crazy brother.

The difference in these streaming service bankruptcies is going to be numerosity–the number of unsecured creditors will include every songwriter, artist, publisher and record company who is owed money.  Another reason why experienced digital service royalty auditors like Keith Bernstein of Royalty Review Council advises creators lucky enough to have an audit right to audit annually.  Don’t wait around for the service to go bust.

And here it comes in the next paragraph of Sony’s complaint:

Defendants knew that, had SME learned about Rdio’s negotiations with  Pandora at any time during the negotiations to amend the Content Agreement, SME would have  demanded immediate payment of the $5.5 million that Rdio owed to SME, and would have refused to grant Rdio further access to the recordings owned by SME. That in turn would have  diminished Rdio’s business and jeopardized the secret proposed sale to Pandora….Unbeknownst to SME at the time, Rdio had one day earlier signed a Letter of Intent with Pandora concerning the intended bankruptcy filing, which would prevent Rdio’s performance of its obligations to SME under the Renewal Amendment. Rdio never intended to fulfill the commitments it made in the Renewal Amendment.

I would point out that it takes two to tango (or maybe four or five in this case) and I’m surprised that Pandora isn’t in this lawsuit as well.  It would have made sense for Pandora to ask for some evidence that Rdio had the approval of all of its creditors (or at least all of the major creditors) before committing to buy Rdio’s assets.  Gutting the company of its ability to earn revenues (like buying its major assets and hiring its relevant employees) has its own set of problems.  Time will tell.

The timeline in this case is crucial:

On July 8, 2015, Pandora presented Rdio with a preliminary Letter of Intent to proceed with a sale of Rdio’s assets in bankruptcy. This was followed by further negotiations that culminated in a signed Letter of Intent between Rdio and Pandora on September 29, 2015, one day prior to Anthony Bay’s signing of the Renewal Amendment with SME. In other words, Rdio and Pandora had agreed in writing to proceed with a bankruptcy sale before Bay executed the Renewal Amendment [with SME]….

A material provision of the Renewal Amendment was Rdio’s obligation to pay SME $2 million on October 1, 2015—the day after the Renewal Amendment was executed.  This presented a dilemma for Rdio: the Pandora deal would be jeopardized either upon Rdio’s taking $2 million in cash out of its business, or upon Rdio failing to make the payment to  SME and putting its ongoing access to SME’s content at risk. To escape this bind, Defendants made false statements designed to induce SME to extend the due date for the payment rather than terminate the Renewal Amendment. Defendants Bay and Rondinelli fraudulently misrepresented to SME that Rdio was raising capital that would enable it to make this payment, when in fact Rdio was finalizing its deal with Pandora, under which Rdio would pay SME neither the $2 million, nor the monthly fees it owed for the rights to SME’s content that Rdio continued to exploit, nor the millions of dollars in other payments required under the Renewal Amendment.

And here is the Old Testament ending you knew was coming, sure as Cain and Abel:

As detailed below, Rdio ultimately succeeded in hiding the Pandora deal from SME until November 16, 2015, the date on which Rdio and Pandora signed an Asset Purchase Agreement and Rdio filed for Chapter 11 relief. As a result of this fraud, SME lost millions of dollars owed to it by Rdio.  Each of the Defendants was an officer or director of Rdio, and each of them knew of and participated in the fraud on SME. Defendants Bay and Peters were both personally involved in Rdio’s simultaneous negotiations with Pandora and SME, and knew that Rdio’s representations to SME were false. In addition, Defendants Bay and Rondinelli personally made fraudulent misrepresentations to SME in furtherance of the fraudulent scheme.  Defendants’ fraudulent actions substantially harmed SME, and enriched the individual Defendants by making the Pandora deal possible.

These are very serious charges, and Sony has a lot to prove.  But the cautionary tale is this: When you get into these situations, streamers have to be very careful about the sequence in which you do things and be very clear with all concerned about who benefits.  The timing of pre-bankruptcy events that affect the value of the bankruptcy estate will definitely get questioned.

On the licensor’s side, you have to always ask yourself, what happens if they go bankrupt tomorrow?  Is my minimum guarantee going to get caught up in the bankruptcy, either as a preference or am I never going to see the money?  There are ways to get comfortable with this, but it requires some extra precautions.

Investors Deserve a Standard for Measuring Music Service Subscribers

“Today, Spotify CEO Daniel Ek officially announced that the streaming service has hit the 30 million paying subscribers.”

Digital Music News.

Spotify “officially” announced today that it has 30 million paying subscribers.  What does “officially” mean?

I wonder if that’s like its announcement that it pays 70% of its revenue to rights holders–except when it doesn’t as David Lowery’s class action and other challenges to Spotify’s arithmetic credibility have revealed.

How do we know that Spotify has 30 million subscribers?  Because Spotify’s CEO says so.  Moral hazard much?  Isn’t that the same guy who claims to be the savior of the music industry but is underpaying songwriters to the tune of millions of dollars?

The ability of advertising supported media to deliver a reliable audience is hardly news, so it is hardly news that someone figured out that these numbers need to have some independent third party auditing those statements.

The Alliance for Audited Media is just such an independent third party.  AAM describes itself:

The Alliance for Audited Media connects North America’s top advertisers, ad agencies, media companies and platform providers. Our clients stand for trusted media analysis across all brand platforms—print, web, mobile, email and more—to make smart decisions. AAM delivers insightful, audited cross-media metrics that matter. We are one of the world’s most experienced providers of technology certification audits to industry standards established by the Interactive Advertising Bureau, Media Rating Council and Mobile Marketing Association. As a third-party auditor, we deliver media assurance via our verification and information services and provide solutions that empower media professionals to transact with greater trust and confidence.

It would be helpful for investors to know exactly what a “subscriber” means to Spotify (and other DSPs for that matter).  If the user is “subscribing” to an ad supported service, such as Spotify’s dearly beloved “freemium” service with Ads by Google, what does that mean?  Does it mean that a user has paid their bill for 90 consecutive days, or does it mean that the user is on their fourth 90 day free trial?

Given complaints by experts like WPP’s CEO Sir Martin Sorrell that click fraud and false billing is rampant on YouTube, shouldn’t investors expect to have subscribers audited by an impartial source?  (Harvard Business School Professor Ben Edelman called it back in 2009 with his prescient “Toward a Bill of Rights for Online Advertisers“.)

In this particular context, “investor” takes on a broader meaning.  Spotify and its defenders routinely ask that artists and songwriters “trust” but “don’t verify” to help Spotify grow–that is, to “invest” in Spotify’s future by taking a low royalty today for a burger on Thursday.  Now that class action lawsuits from songwriters are motivating the company to cover its tracks, it’s starting to look like Spotify is asking for a burger today for a dollar on Thursday.

It’s time that all investors in music services got independent verification of exactly what these subscriber numbers actually mean.

YouTube Revenues Explainer

I had the good fortune to participate in a SXSW panel about the mechanics of YouTube revenues.  If I say so myself, it was a wonderful panel with some deep expertise (“Stop Complaining and Start Monetizing“).  There was a real interest in the audience about the mechanics of the rights involved and the revenues paid.

If you have that same interest and you weren’t able to go to SXSW, here’s a basic chart of revenue splits that may help you:

YouTube Chart

Source: Billboard

YTP, YTPC= “YouTube Partner“, “YouTube Partner Channel”
SR= Sound Recording
WW= “Wild West” meaning no particular rule.

Notice that the basic categories are song, sound recording and video which track the main three copyright categories of musical work, sound recording and audiovisual work.

The percentages refer to shares of “Net Ad Revenue” often defined as:

“Net Ad Revenues” means all gross revenues recognized by YouTube attributable to any sponsorship of or advertising displayed on, incorporated in, streamed from and/or otherwise presented in or in conjunction with any User Video displayed on a Covered Service including, without limitation, banner advertisements, synchronized banner advertisements, co-ads, in-stream advertising, pre-roll advertising, post-roll advertising, video player branding, and companion ads, less ten percent (10%) of such gross revenues for operating costs, including bandwidth and third-party (affiliated or unaffiliated) advertising fees. Net Ad Revenues excludes any e-commerce referral fees received by YouTube from “buy buttons” or “buy links” on the Covered Services that facilitate recorded music “upsells” when a Publisher separately receives payment from a third party in connection with such an upsell (e.g., royalties for a CD or sheet music sale); provided, however, for the avoidance of doubt, that such exclusion does not extend to (a) advertising of the type described in the first sentence of this Section for recorded music products, the revenues from which shall be included in Net Ad Revenues; and (b) all other types of e-commerce referral fees and revenues, which shall be included in Net Ad Revenues.

One key component of your YouTube earnings is the “CPM” paid by advertisers to Google.  Even if you have the right to audit YouTube (which few do), it is highly unlikely that you will ever be able to determine what the CPM is that Google uses to pay you on YouTube.  Multichannel networks (“MCNs”) like Machinima have reportedly tied creators to CPMs that were well below market, particularly considering that the highest CPMs on YouTube are often associated with exactly the kind of talent most frequently signed to an MCN.

“Official” or “Premium” Videos

When a label uploads an “official” music video on YouTube or Vevo, the video has higher production values than UGC and is usually supported by a sustained marketing effort outside of YouTube that drives traffic to the site.  If the premium video appears on Vevo, then 100% of the royalty is paid to the label, which in turn has licenses from the publishers for the song.  If the video is on YouTube proper, then the label’s share is reduced by the publisher royalty, often around 15% of net ad revenue.

Claiming and YouTube’s Content Management System (“CMS”)

Because of a combination of YouTube’s monopoly position in the market, Google’s controversial reliance on the notice and takedown provisions of the Copyright Act and its sheer litigation muscle, YouTube will let anyone upload anything also known as “user generated content” or “UGC”.  If you have access to YouTube’s “Content Management System” or “CMS” you have the chance to block UGC through YouTube’s “Content ID” fingerprinting tool.

Compared to the massive volume of videos uploaded to YouTube, a very, very small percentage of copyright owners have direct access to Content ID.  According to YouTube:

YouTube only grants Content ID to copyright owners who meet specific criteria. To be approved, they must own exclusive rights to a substantial body of original material that is frequently uploaded by the YouTube user community.

Participating in Content ID allows you to help YouTube create a vast and valuable library of reference versions of  your works.  (YouTube does not compensate you for participating in Content ID.)  Rightsholders usually participate in Content ID for two reasons which are not mutually exclusive:  Blocking or “monetizing”.  Monetizing means that you give YouTube permission to sell advertising against your works.  Naturally, YouTube hopes you will choose to monetize because over 90% of Google’s revenue comes from selling advertising online.

YouTube creates a reference version of your work in the form of a “fingerprint” (a psychoacoustic technique that has long been in use by the U.S. Navy among others to distinguish sound patterns–see Jonesy in The Hunt for Red October). A fingerprint is a mathematical rendering of the waveform of an audio file that essentially reduces a sound recording to a kind of hash that makes comparing fingerprints quicker and more accurate.

YouTube maps the reference fingerprint to other identifiers such as the International Standard Recording Code for sound recordings, song title, artist name and copyright owners for all of the above including song splits in many cases.  When a work is in the Content ID system, YouTube will compare an uploaded video to the Content ID database reference fingerprint and most of the time will follow the rules established by the copyright owner to block or monetize (often called “match policies“).  If the match is done before the UGC video is uploaded, then it won’t go live, and if the match is done after it is live, then the users will see one of YouTube’s controversial messages saying the file is blocked due to a claim by copyright owner X.

What this boils down to is that if you don’t have a label or publisher, you will need to go to a claiming service like Adshare, The Collective or Onramp in order to get access to CMS and Content ID in order to monetize your works outside of a YouTube Partner Channel (which is done through an Adsense account associated with your YouTube Partner account).  If you have a label, publisher or claiming service, then all of these entities should have access to CMS and Content ID and will be able to claim your songs, sound recordings or videos and monetize them if you wish.

Deciding if Monetization is Right For You

If you’re familiar with term recording artist agreements or publishing agreements (or what is normally called a “record deal” or “publishing deal”), you’ll probably remember negotiating “marketing restrictions” involving the use of your recording or song in advertising.  Those clauses usually restrict the use of your works in political ads, certain kinds of products (firearms, tobacco for example), or more artist-specific restrictions.  There are also restrictions on the kinds of movies or television programs (even videogames) in which your works can be used.

If you allow your work to be used in UGC and you elect to monetize, you can just forget all that on YouTube.  “UGC” includes just about anything you can imagine short of explicit pornography, but would include, for example, sex tourist home movies, jihadi recruiting videos (although “songs” are unlikely to appear there), hate speech and the like.  All of those are on YouTube and frequently are not behind any kind of age restriction wall.

The ads that get served as preroll for these videos are themselves often unsavory.  For example, Google serves ads for “dating” sites that are in categories frequently identified as thinly disguised human trafficking operations.  There are ways to block these particular uses if you have access to CMS but due to YouTube’s “catch me if you can” business practices, you may have to spend the time to track down each use which otherwise can stay on YouTube for months or years.

Winning the Lottery

We often hear about “YouTube stars” with elite channels (1 million plus subscribers) who are very well compensated.  The source of this high level of compensation is rarely limited to advertising revenue.  Most of the time, their ad revenue is salted with a high number of payments for what are essentially sponsorships, endorsements or product placements, often called “brand integrations“.

In the music and movie businesses, the term “star” is usually reserved for a relatively small group of performers who have demonstrated ability over time to reach a large audience, often a global audience.  YouTube “stars” may have large YouTube communities and may be able to introduce products to fans on YouTube, but whether that will hold up on YouTube over time or translate to other platforms remains to be seen in most cases.

It is also important to realize that advertising is a highly regulated business, particularly when it comes to false or deceptive advertising that is regulated by the Federal Trade Commission.  Machinima has just entered a 20 year consent decree with the FTC to settle claims that it misled consumers by passing off paid endorsers as independent reviewers.  Given that Machinima and other MCNs are supposed to protect their talent from such missteps suggests that YouTube stars may well have more to watch out for on YouTube than do recording artists or songwriters on record labels or music publishers.

Online Advertising in Decline

Whether it is ubiquitous ad blocking software, “do not track” settings on browsers, or distrust of advertisers, online advertising is in decline.  Like a ship that is sinking very slowly, it is sometimes difficult to tell if you’re really lower in the water, or if that was just a wave.  And remember, over 90% of Google’s revenues come from online advertising, moonshots notwithstanding.

If the online advertising ship really does sink, all the driverless cars, military robots and Google Glass will not save Google or YouTube.  That’s something to keep in mind when you agree to participate in the YouTube monetization game.