@musictechsolve: Vote for Creator and Startup Licensing Education at SXSW

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I have a class in the SXSW.edu track titled “TEACHING ARTIST ROYALTIES TO CREATORS AND STARTUPS.”  It follows my philosophy that we need smart artists and smart startups to work together if we all are to succeed.

The class has three purposes:

–A building block approach to teaching artists and songwriters about the principal royalty streams that sustain them.  This is targeted financial literacy which is as critical to artists and songwriters as balancing your checkbook.

–A licensing roadmap overlay for entrepreneurship studies.  It’s far too frequent that entrepreneurs spend more time developing their product roadmap and critical path than they do developing their licensing roadmap side by side with the product.  That way when a startup gets to launch there is less likelihood they will go into the terminal holding pattern or worse–launch without licenses.

–the importance of clean and stable metadata to both artists and startups (and mature companies) and how to accomplish this goal starting with the digital audio workstation.

The class description:

Royalty rates, royalty reporting and earnings are some of the least understood–yet most important–parts of a creator’s career or a startups nightmare. Understanding royalties is as important as understanding how to balance your checkbook. Starting with metadata and simple revenue streams, leading to complex calculations and government run compulsory licenses and sometimes impenetrable royalty statements, the workshop gives educators tools and building blocks to teach the subject.

I’d really appreciate your vote for the class in the SXSW Panel Picker here. To vote, you just need to sign in to PanelPicker or create a free SXSW account with your email only.

Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime from The Hill

[This is a July 30, 2013 summary from The Hill of my series that first appeared in the Huffington Post on July 26, 2013–let’s see how I did after the Music Modernization Act.]

1.  Create an Audit Right for Songwriters for Compulsory Licenses:  One of the oldest compulsory licenses in the Copyright Act is the “mechanical license”, the statutory mandate forcing songwriters to license songs that dates from 1909.  The government mandates the license and also mandates the rate that songwriters are paid—from 1909 until 1977 that rate was set at 2¢ per recording.  Although that rate was eventually indexed to inflation leading to the current 9.1¢ minimum, songwriters had to dig out of a deep hole.

Getting paid is another story.  This statutory license requires songwriters be sent “statements of account” for royalties—but songwriters are not allowed to conduct a “royalty compliance” examination (called an “audit”).  The law requires a company officer and a CPA to certify the company’s statements—a practice rarely complied with.  As recently demonstrated by Aimee Mann’s lawsuit against Medianet, if songwriters don’t get paid there’s not much they can do except sue—a costly process.

The government tells the songwriter “trust—but don’t verify.”  This is an easy fix.  Congress could give songwriters an audit right as they did for stakeholders in the contemporary digital performance compulsory license for satellite radio and Internet radio.

2.  Allow Artists and Songwriters to Opt Out of the Compulsory License:  The recent blow-up regarding the so-called “Internet Radio Fairness Act” and the related ASCAP and BMI rate court proceedings should let the Congress know that there are many artists and songwriters who want to be able to decide who gets to license their songs.  Again, the digital performance compulsory license allows copyright owners to control “interactive” uses of their works—why not at least do the same for the mechanical license as well?

3. Require Digital Royalties for pre-72 Sound Recordings:  Sound recordings did not receive federal copyright protection until 1972.  When the Congress established the digital performance royalty, it seemed to clearly apply to all recordings and did not arbitrarily exclude recordings prior to 1972.  However, this “gotcha” is used by SiriusXM and others to avoid paying great American artists whose records were released before 1972—jazz, R&B and rock legends get nothing.  Congress could fix this “gotcha” and secure a fair share of digital performance royalties to these authors of our musical heritage.

4.  Require All Unpaid Statutory Mechanical Royalties Be Paid to the State Unclaimed Property Offices:  As Aimee Mann’s alleged in her lawsuit against the white label provider Medianet, witnesses stated that 23 percent of the songs used by Medianet are unlicensed—which could easily be millions of songs if true.  And there are likely a number of digital music services that are arbitrarily holding unpaid royalties in an unauthorized “escrow.”

It seems that there could be substantial royalties controlled by the very retailers who must pay songwriters under the law, a potentially significant moral hazard.  Congress could require that any “escrowed” royalties be paid over under State unclaimed property laws—a lawful “escrow.”

5.  Require that Online and Offline Videos Follow the Same Rules:  As online video platforms become available through Internet enabled home televisions, attention should be paid to a frequently overlooked category of songwriter—the film and television music composers.  Current reporting by online video platforms makes it difficult for score composers to be paid for their work.  The Congress may well ask whether those who seek to replace television should be held to the same licensing standards as television.

These are but a few ideas the Congress could be addressing that might make a difference in the lives of artists and songwriters and would cost the taxpayer very little.  All leverage existing structures and bureaucracies, eliminate “gotchas,” and help to reduce the unintended consequences of government mandated compulsory licensing.

Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 4: Fixing Unmatched Songwriter Royalties

[In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do on predictions?  These posts were written from a 2013 perspective.]

The US is alone in the world in maintaining a compulsory license for songs. The government forces songwriters to license their songs at a rate approved by the government and then has rather flimsy rules about how songwriters actually get paid. These flimsy rules, I suggest, have resulted in unknown amounts of royalties not finding their way to songwriters, particularly under compulsory licenses used by on-demand digital music services.

There’s an easy fix for this — the same rule that was applied against record companies and music publishers for unclaimed royalties in the past: Pay the money to state unclaimed property offices. If songwriters are getting ripped off by brand sponsored piracy on the unlicensed sites, then let’s at least make sure they get paid on the licensed services.

The Compulsory License for Songs

When the Congress established the compulsory license in 1909, the legislative body was concerned that granting exclusive rights in “mechanical royalties” for songs in piano rolls might create a monopoly if a single publisher could buy up the market in songs. However real that concern might have been at the time, the most common complaint from digital music services about songs is that the music publishing market is too fragmented, so it seems that argument is no longer relevant.

One of the big users of compulsory licenses is, of course, Google Play. Concern about the antitrust lusting of songwriters is particularly difficult to comprehend in a world in which the same government allows Google to buy and subsidize YouTube with monopoly rents, buy Double Click to achieve a dominant position in online advertising, and is given a pass by the FTC for antitrust violations. But those songwriters…boy, we have to keep a close eye on them.

Unsupervised Digital Music Services

So what appears to be happening is this: Digital music services use the compulsory license and its labyrinthine regulations — often with notices that are too late, accountings that are noncompliant and data that is just incorrect. To give you a sense of scope, digital music services often offer 20 million or so recordings, all of which contain the co-equal copyright in the song being recorded. Songs and recordings of songs have to be separately licensed for on-demand streaming services (especially the popular “cover recordings”). Songs are frequently co-owned — so the service using the compulsory license must notify a minimum of 20 million songwriters of their use of the song and often two or more writers per song. So let’s just call it tens of millions of licenses.

The digital music services must then track the use of these songs and recordings and match the usage to licenses obtained. There inevitably will be songs for which the writers cannot be found. So even if you assume that these companies can get to the matching stage without making any mistakes at all, what happens when there is usage — and therefore payable royalties — for songs that the service is unable to match — even for the most honest of reasons.

How Digital Music Services Pay Themselves Free Money

Add to this problem another problem — digital music services frequently try to dupe songwriters — the ones they have found — into agreeing that the service need only account to them if the songwriter has over a certain amount in payable royalties — somewhere between $50 and $250 depending on the service. (Google Play, for example, has a $100 minimum threshold — unilaterally imposed — on all international and “friction free” electronic payments.)

To put some math on this, realize that there are about 20 million songs typically available in a broad based retail offering such as Google Play or Spotify. Assume that on average 50 percent achieve $25 in earnings in a given calendar quarter accounting period. (This is consistent with both the “long tail” power law type sales distribution and the miniscule royalties paid to songwriters by these services.)

If a service holds royalty payments from songwriters until payable royalties exceed $25 (such as Google Play’s $100 default threshold as stated in their “Publisher Statement of Account Preference”), this means that the service could then be sitting on up to $250,000,000 in interest-free money. Free money that they theoretically may never have to pay out and only have to pay out when the service determines that the songwriter’s account is payable. Free money that is not permitted under the compulsory license rules for songs.

And that’s one service.

This policy of withholding royalties is fraught with moral hazard and practical problems: The heirs of one songwriter recently tried to sort out these payments and were told they needed to hire a lawyer to deal with the highly litigious digital music service. They couldn’t afford a lawyer so guess what happens to the unclaimed monies? And then there’s the statute of limitations.

Unmatched and Unclaimed Royalties

But there’s another problem with the digital music services — if they service cannot match usage (and earnings) to a royalty recipient in their systems, what happens then? Particularly with monies based on a share of advertising revenue that is distributed proportionately based on usage?

In this example, if in one month all songs were played 100 times and your song was played 10 times, then you would get 10/100 (or 10 percentt) of the advertising pie for that period. But — if there were actually 120 songs played during that period but only 100 could be matched, what happens to the other 20 that were unmatched? There is a growing belief that what happens is that the services don’t count the 20 unmatched songs, and divide the pie up based on the 100 they are able to match.

That means — there are 20 songs that were exploited but that are never paid and are not on the books. Even though there should be no songs on the service that were unlicensed because the compulsory license applies. If this seems high, remember that MediaNet’s lawyers acknowledged in a declaration cited in the current case by Aimee Mann against MediaNet that 23 percent of the millions of songs on the service are unlicensed.

By not counting the unmatched (and probably also unlicensed) songs, a service could argue — albeit fallaciously — that it had no “unallocated” royalties as it allocated all payable royalties to songs it could match and did not accrue any unpaid royalties. If I’m right about this, services are overpaying the matched songs with a share of revenue from the unmatched songs (in our example, 10/120 or 8-1/3 percent instead of the overpayment of 10/100 or 10 percent).

Because the Congress does not allow songwriters to audit the digital music services, there is no real way to know whether this is happening or the degree to which it is happening. If 23 percent of the MediaNet songs are unlicensed, royalties payable on any activity on these songs seems like it should at least be accrued until the songwriters can be found.

This is, of course, why states have unclaimed property statutes. In 2004, then Attorney General Eliot Spitzer chased record companies and music publishers for unpaid royalties for artists who could not be found for a variety of reasons, some plausible, some not so plausible. Spitzer forced the royalties to be paid—like utility deposits, dividends, abandoned bank accounts, the works—to the state unclaimed property office where the monies are held forever and where somebody eventually tries to track down the rightful owner.

Of course — there is a chance that if the digital music services did this voluntarily they might be admitting that they were using unlicensed songs and they want to keep a good eye on those kinds of admissions. So they will come up with many excuses for why they should not be subject to the same laws as everyone else. It is, after all, the Internet, and you know how that can be.

An Easy Fix for Congress: Pay unclaimed money to people who deal with unclaimed money

Even if the Congress does not establish an audit right for songwriters for mechanical royalties as they have for rights holders under the more contemporary webcasting compulsory license and the Audio Home Recording Act, it would be quite simple for the Congress to clarify once and for all that unpaid royalties — whether for the unmet minimum thresholds unilaterally imposed by digital music services, unknown addresses for songwriters, or any other reason — should be paid to the state unclaimed property offices in the state of the songwriter’s last known address or at least the state where the company does business.

Companies that want to take advantage of the compulsory license rules for songs shouldn’t also get to make their own rules to take advantage of songwriters.

Postdicting the Present: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 3: Create an Audit Right for Songwriters

[In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do?  These posts were written from a 2013 perspective.]

Once a song is distributed to the public with the permission of the owner of the copyright in the song, the U.S. Copyright Act requires songwriters to license songs for reproduction and distribution under a “compulsory license.” This license is typically called a “mechanical license” because it only covers the “mechanical reproduction” of the song and does not, for example, include the right to use the song in a YouTube video or a motion picture, create a mashup or reprint the lyrics of the song.

When the Congress first developed the compulsory mechanical license in 1909, the concern was that “the right to make mechanical reproductions of musical works might become a monopoly controlled by a single company.” This monopoly never came to pass, and given the fragmentation in music licensing in the current environment, is unlikely to ever come about.

The user of the compulsory license (or “licensee”) has to comply with the rules for these licenses — including an obligation to account and pay royalties. If the licensee fails to comply, then the songwriter can in theory terminate the license, although making that termination stick usually requires an expensive copyright infringement lawsuit.

The bare compulsory license was not widely used before the advent of Internet music services — and then became something of a weapon of its own — music services bought into the “long tail” theory and tried to clear millions of songs overnight by massive mailings of notices of their intention to use the work. Given that songs are frequently co-written, this required sending huge numbers of notices. Behind each notice — supposedly — is a royalty account and statement of usage as required by law.

So if you’re following, songwriters suddenly were required to license to services they did not ask to be included in (unlike artists recording “cuts” the songwriter solicited), and only a limited paper trail to confirm the accuracy of royalty payments.

Trust, But Don’t Verify

Intuitively, you are probably thinking that songwriters would have the right to make the licensee provide evidence to demonstrate if this morass actually resulted in correct payments, right? Checking the evidence is called a “royalty compliance examination” or an “audit”. Since there is no “auditor general” of compulsory licenses appointed by the Congress, it would seem strange to believe that the intent of Congress was to codify the moral hazard of allowing the person doing the paying to examine their own books.

And yet, in the current practice, the fox is squarely among the chickens. This is because the government requires that the licensee merely “certifies” their own statements (i.e., promises the statements are true). This certification is done on a monthly basis by an officer of the licensee and annually by the licensee’s CPA. And songwriters are told “trust me.”

The Industry Standard

It’s safe to say that this certification process is drastically different than any industry-standard mechanical license. There is a long history of audits in the music business — the State of California even passed legislation in 2004 protecting the artist’s right to audit record companies. But when it comes to songwriters, the federal government forces songwriters to take the compulsory license, tells them the royalty rate they are to be paid, but does not permit songwriters to audit the licensee.

Instead, the government permits the licensee to “certify” their own statements (i.e., promises the statements are true). This certification is done on a monthly basis by an officer of the licensee and annually by the licensee’s CPA. And songwriters are told “trust me.”

The Blanche Dubois Approach to Royalty Accounting

As Blanche Dubois said in A Streetcar Named Desire, “I have always depended on the kindness of strangers” and until the Congress updates this certification business model, that’s exactly what songwriters are expected to do, too.

The compulsory license requires certification by the licensee on a monthly basis and by a CPA on an annual basis.

An officer of the licensee is to include this certification oath with the songwriter’s monthly statement:

“I certify that I have examined this Monthly Statement of Account and that all statements of fact contained herein are true, complete, and correct to the best of my knowledge, information, and belief, and are made in good faith.”

The Annual Statement of Account requires this certification by a Certified Public Accountant for the licensee:

“We have examined the attached “Annual Statement of Account Under Compulsory License For Making and Distributing Phonorecords” for the fiscal year ended (date) of (name of the compulsory licensee) applicable to phonorecords embodying (title or titles of nondramatic musical works embodied in phonorecords made under the compulsory license) made under the provisions of section 115 of title 17 of the United States Code, as amended by Pub. L. 94-553, and applicable regulations of the United States Copyright Office. Our examination was made in accordance with generally accepted auditing standards and accordingly, included tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.”

Do you think that the CPA has in fact examined millions of annual statements? Does the CPA’s risk manager or insurance carrier know that the CPA is certifying to a multitude of songwriters that the CPA has actually “examined the attached “Annual Statement of Account…” when it is highly unlikely that the CPA has done any such thing?

Congress crafted this language in a much simpler time. Remember — there are now millions of these statements every month. Do you think that the certification oath could possibly be true every time? Some of the time? How would you find out?

Certification is a One-Way Street

This certification runs only one way — the government only offers licensees and CPAs the opportunity to certify that the books are correct, not that they are incorrect. Under current practice, if a company or CPA is squishy about how accurate their books and records are, songwriters typically get no certifications at all and just an uncertified royalty statement if they are lucky.

What conclusion should be drawn from a failure to certify? Why not provide an alternative certification — that the licensee’s books and records cannot be certified. While it may be unrealistic to think that companies would ever disqualify their own books, it is not unrealistic to think that a CPA might choose this option on the annual statement of account given the CPA’s licensing responsibilities.

And it is definitely not unrealistic to think that the company’s books would be more likely to be accurate if the company knew that this disqualification option were available to the CPA. But the simplest thing Congress could do is to create an audit right for the compulsory license.

Let’s Keep it Simple

Chairman Goodlatte has said he intends to update the Copyright Act to bring it into line with the digital age. The Congress already allowed audits for the compulsory license for sound recordings and the webcasting royalty established under Section 114. This mechanism that Congress created in the recent past is working quite well.

Chairman Goodlatte could borrow heavily from the audit rights for the Section 114 compulsory license for sound recordings, and allow songwriters to conduct group audits under Section 115 to avoid a multiplicity of audits.

These changes would bring help bring song licensing into the 21st century and allow songwriters to enjoy greater confidence that they are being paid properly. Creating an audit right under Section 115 compulsory licenses would allow market forces to work to align the incentives toward better payments for songwriters.

Postdicting the Present: Five Things Congress Could Do For Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 1: Pre-72 Sound Recordings

In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do?

Artist Rights Watch

[This series first appeared in the Huffington Post on July 26, 2013–lets see how I did now that music is all modern and chrome.]

In this and future posts, I will be addressing five things the Congress could do for music creators that are easy to do and that would help develop an online market for music. First up is a slightly esoteric, but important area: royalties paid by companies like SiriusXM for sound recordings made before 1972.

Many of us in the music business know that songwriters and recording artists are financially worse off under the “new boss” than they were under the “old boss.” We have watched older artists “die on the bandstand” because the royalty or residual income they had counted on to support them in their retirement began evaporating with the arrival of the Internet in their lives. We have watched younger artists and songwriters essentially…

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More Evidence of DPO Conflicts: Is Spotify’s Stock Buyback Plan Taking it to the Shorts?

Spotify is experiencing the joys of being a public company–or at least a quasi public company if you count public companies as ones whose shares are actually held by the public as in Mrs. & Mr. America.  But both analysts and investors have to always remember that Spotify did not conduct an IPO in the traditional sense where an underwriting syndicate of bankers bought a block of shares from the company that the syndicate then resold to the public.  This is why Spotify’s recently announced $1 billion stock buy-back program bears closer scrutiny.

Instead they conducted a DPO, a direct public offering which is unusual and radically different than an IPO.  The DPO has an essential conflict–the sellers of shares are insiders in the issuer and have an incentive to keep the stock price high and to manipulate that stock price however they can.  Like through a stock buy back after less than a year of trading, for example.

From a financial markets point of view, that DPO makes almost everything about Spotify’s stock a different analysis than a market traded IPO–including Spotify’s recently announced stock buy back.  Stock buy backs happen all the time, particularly in declining markets.  But what is unusual is for a company that’s still in its first year of operating as a public company whose shares are largely traded by insiders and is a money losing company to take the odd step of using $1 billion of the shareholders money to buy back stock.

Or maybe not so unusual if the shareholders whose money it is are both the sellers of those shares and the beneficiaries of the stock buy back–as they try to find a bigger fool to sell the shares to in the retail market.  Another core problem with DPOs is that you don’t have an independent body setting the opening price as you would with an underwriting syndicate.  DPOs have to get an opening price from somewhere–so Spotify’s pricing problem started with the SEC and NYSE allowing Spotify to price at its last privately traded price (as some shares of Spotify traded in what used to be called a “Rule 4(a)(1)1/2” exemption for resale of restricted stock, now codified in Section 4(a)(7) of the Securities Act by the FAST [Breakfast at Buck’s] Act–a bit of a gloss but OK for our purposes here).

So by letting Spotify use the private market for restricted stock as a proxy for a market price, at a minimum the SEC and the NYSE assume that the rights, preferences and privileges of an unregistered share of Spotify stock are the same as a share of registered SPOT.  They’re not.  They also assume there are no price distortions from the relatively low number of unlegended restricted shares available in the private market.  They also assume that there’s nothing odd about a company like Spotify–staring down relatively slam dunk infringement lawsuits of significant value and in a money-losing business run from 10 floors of the World Trade Center like it was Apple or something–pricing way above the opening prices of Amazon, Facebook, Google and so on.

If that sounds cynical, it really isn’t once you understand the dynamics of a DPO compared to an IPO.  The DPO produces a market effect that is similar to the business model of Larry Ellison’s famous 1999 “HeyIdiot.com” parody of an Internet company:

HEYIDIOT.COM is tightly focused on selling just one product. Elegantly enough, that product is the stock of HEYIDIOT.COM, which will be offered to you for sale on-line at our web site of the same name. Buying the stock is simple, you can buy as much stock as you want with the only rule being that each new purchase must be executed at a successively higher price.  We call it a cash portal.

We’re seeing the result of the DPO come home to roost in Spotifyland which looks something like this:

 

Spotify 11-16-18 Basic
SPOT 11-6-18

After a run up in the stock price–on low volume and with no meaningful news–the stock retraces its steps and suggests its testing lower lows.  It’s hard to say what “price support” there is for a stock that’s had less then a year of trading, but let’s just say that if it broke through $100 to the downside, there would be rending of garments and closer examination of executive compensation unless Spotify executives could continue to blame artists for “high” royalties.

Also note that three out of four of Spotify’s biggest volume days were to the downside, and that the stock has been trading down, essentially, since August.Spotify 11-16-18 Volume

 

We can also assume that at these low trading volumes, the shares have gradually been accumulating in the trading accounts of Mrs. & Mr. America which also means that there are potentially more and more shares available to short sellers–the buy high sell low crowd that I discussed back in March.

short_sell_example

In fact, there are a few November 30 puts in the $115 range already.  Daniel Ek has announced he’ll be selling Spotify shares with a value of about $20 million on a monthly basis for a while.  You have to notice that those board-approved sales are overlapping with the board-approved Spotify stock buy back that will help to support the higher price point while insiders dump their shares.  This is another inherent conflict problem with the whoe DPO concept–but when you have the 1:10 voting power over your board as does Mr. Ek, many things are possible.

It’s nice work for a “cash portal.”