Spotify’s “Fake Artist” Issue and Other Problems at Scale

Spotify just can’t seem to catch a break in the artist community.  A story broke on Vulture evidently based on a Music Business Worldwide post alleging (and I’m paraphrasing) that (1) Spotify commissions artists to cover hits of the day and (2) there’s a lot of sketchy material on Spotify that trades on confusing misspellings, “tributes” and other ways of tricking users into listening to at least 30 seconds of a recording.  Which means that Spotify isn’t that different than the rest of the Internet.  (Thank you DARPA, the people who gave you the Internet.  And Agent Orange.  The real one.)

Spotify of course has issued a denial that I find to be Nixonian in its parsing.  Let’s not go crazy on this, but here’s the first part, according to Billboard:

“We do not and have never created ‘fake’ artists and put them on Spotify playlists. Categorically untrue, full stop,” a Spotify spokesperson wrote in an email.

Nobody said Spotify “creates” “‘fake artists,'” and the accusation was that the fake artists were on the service AND on some playlists, not just playlists.  The allegation is that Spotify commissions recordings.

“We pay royalties — sound and publishing — for all tracks on Spotify, and for everything we playlist. [If Spotify commissioned the fake tracks, they would also “pay royalties”.]  We do not own rights, we’re not a label, all our music is licensed from rightsholders and we pay them — we don’t pay ourselves.”

Notice the switch to “rights holders” which would include either publishing or sound recordings.  If Spotify commissioned fake artists they would not need to “own rights” and they could easily have “licensed” the fake artists recordings.  Cover songs would require an…ahem…NOI for the compulsory license.  And the commission payment could go to the artist as a buyout so Spotify would “pay them”.  If the object was to increase traffic for their ad supported service, commissioning recordings would both increase traffic AND reduce the prorata share of advertising revenue by making the denominator larger for everyone with a  revenue share during that accounting period.  I don’t want to go too far down that rabbit hole, but there are some odd loose ends.

Leave the holes in Spotify’s denial to the side.  The core problem identified by the Vulture post is the same for Spotify as it is for Google, YouTube, Facebook, all the other Internet companies that require “scale” to succeed, and which are, one way or another, hell bent on being monopolists.  The second part of Spotify’s denial in Billboard could apply to this lack of monitoring:

“As we grow there will always be people who try to game the system. We have a team in place to constantly monitor the service to flag any activity that could be seen as fraudulent or misleading to our users.”

Maybe that “team” could have a role in “monitoring the service” for tracks before the recordings get on the service rather than after.  Noah built the Ark before the rain.

It must be said that it sounds a bit implausible that Spotify would commission this type of recording to avoid paying artist royalties on the fake tracks.  Such an affirmative act would require a commercially tortured logic because the royalty offset on those specific tracks would be so tiny that the cost of the commissioned recordings would have to be very, very low.  One guy with Garageband in Mom’s basement kind of low.  How much the prorata revenue share would be reduced is hard to know from the outside.

But even if Spotify doesn’t hire studio musicians to perform “fake hits”, it appears that they are allowing a lot of sketchy recordings onto the service.  One might ask how those recordings get there in the first place.  I would bet that the explanation is pretty much that nobody bothers to check before the recordings are posted (or “ingested” in the vernacular, if you can stand that word).

So while there is a major difference in degree of harm, there isn’t a great deal of difference between what seems to be happening on Spotify with sketchy recordings and the links to illegal materials that the Canadian Supreme Court just blocked on Google Search, promoting the sale of illegal drugs for which Google paid a $500,000,000 fine and narrowly avoided prison, ISIS recruiting for which Google lost a chunk of market cap (at least for a while), human trafficking on Craig’s List and fake news on Facebook.  Each of these services operate at scale and they seem to have the same problem:  No one is minding the store and there are no or poorly enforced standards and practices that are only enforced after the harm has occurred.

The other trait that all these companies have in common to one degree or another is that they are all at least dominant if not monopolies in their markets.

Remember–on May 12, 2014, Spotify’s director of economics Will Page gave a presentation at the Music Biz Conference in Nashville.  As reported by Billboard, Will Page gave the audience a good deal of evidence of Spotify’s domination of the online music market:

Spotify claims to have represented one out of every ten dollars record labels earned in the first quarter….Page’s claim shows the speed at which subscription services are gaining share of the U.S. market. According to IFPI data, all subscription services accounted for 10.2 percent of U.S. recorded music revenue in 2014. If Spotify had a 10-percent share in the first quarter, it’s safe to say the overall subscription share is well above the 10.2 percent registered last year.

These numbers suggest that while Spotify may have a significant share of overall U.S. recorded music revenue, Spotify is clearly dominant if not a monopoly in the global subscription market with its now 100 million plus users and probably is at least dominant if not a monopoly in the U.S. music subscription market.

So how does Apple address these problems?  If you consult the iTunes Style Guide, you’ll see that iTunes expressly prohibits the use of search terms or keywords in track title metadata (like “Rock Pop Indie Rock”) or an artist name (like “Aerosmith Draw the Line).  Audio files have to match track titles on each album delivered.  “All track titles performed by the same artist on an album must be unique, except for different versions of the same track that are differentiated by Parental Advisory tags.“  And most importantly, perhaps, “the name of the original artist must not be displayed in any artist field on the track level or the album level.”  Why these rules?  One reason might be that Tunecore has encouraged their users for years to use covers as a way of getting noticed in searches on music services (with suitable admonishments to not “trick” fans).

Let’s face it–there’s only one way to keep your service clean.  Don’t let the bad stuff on in the first place.  You may think that it should be self evident that allowing sketchy recordings, ISIS videos or human trafficking on your service is a bad thing.  You may think that it should be self evident that allowing someone to change a letter in an artist’s name to trade on their reputation is a bad thing–not that different from typo squatting.  You may think that it is self evident that promoting the sale of illegal drugs is a bad thing.  And you may think that anyone who wants to engage in commerce with the legitimate commercial community, much less the artist community, wouldn’t allow these travesties into their business.

But you would be wrong.  Probably because you don’t worship at the alter of the great god Scale.

 

 

 

Save the Date! July 26 in Austin: Chris Castle on Address Unknown NOIs Sponsored by Texas Accountants & Lawyers for the Arts

Big thanks to Texas Accountants & Lawyers for the Arts and Norton Rose Fulbright for hosting my presentation on the “address unknown” loophole and what to do about it.  As MTS and MTP readers will recall, this is a vital issue for songwriters that is a festering sore that no one has addressed.  We appreciate the support from I Respect Music Austin!

All are welcome. One hour of Texas CLE credit pending.

6:15-7:15pm Presentation “Address Unknown: Are You Missing Money from Your Songs”

7:15-8:00pm Mixer with attorneys, artists, managers, and other participants

If you are able to attend, please RSVP for details on Eventbrite.

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How Deep is Pandora’s Financial Hole?

Pandora 6-14-17

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

Billboard WW P
Remember World War P?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

The Core Flaw of Blockchain

The truth about blockchain is that at its core, it requires its regime to be enforced on rights owners in order to scale–and that is its essential flaw.

Call me a blockchain skeptic.  I agree with many of the conclusions reached by Alan Graham in his MusicTechPolicy interview, but I also think that at its core, blockchain as currently contemplated fails as an industry-wide rights registry.  Since I understand that its essential purpose is to be a reliable rights registry, it seems obvious to me that blockchain has limited application at best.

I spent a good deal of time helping some very smart people build an independent rights registry around 2005 and have thought about these issues for a long time.  (All the major labels and many indies participated in that registry.)

Based on that experience, I believe that the core value proposition of a rights registry is that it be easy to use; that the information in it be objectively verified and only changed with a proper showing of authority; that it be capable of making or directing the making of royalty payments (which means holding necessary tax information); and that it can be easily and timely updated with information for new releases.  I believe all these elements are essential and that blockchain accomplishes none of them well and some of them not at all.

A quote from Benji Rogers in MusicAlly lays out the core problem very effectively.  (Benji Rogers is a promoter of the blockchain technology and his own company Dot Blockchain–I think I have all the capitalizations in the right place, but forgive me if it’s actually dOt bLK.ch..n or something like that.)  Here’s his quotation (which I doubt that he viewed as a criticism of his product):

“Blockchains force action… If I were to make a statement about a work that I own in a blockchain, and I were to send it to you…you have three choices: yes it’s correct and I agree, no it’s not correct, or ignore it, which means it’s correct.”

What blockchain may bring to the table is something you cannot ignore, because ignoring it is the same as accepting what’s there in the table is truth… A blockchain-based system at scale could force people to work with it, in a way that exposes them to decentralisation and transparency, arguably whether they like it or not.” (emphasis in original)

In other words, organizing the world’s information whether the world likes it or not.  Sound familiar?

It is one thing if blockchain is a voluntary regime that artists and users can decide to participate in–and submit themselves to forced “decentralization and transparency” as Mr. Rogers articulates so well.  But it is entirely another thing altogether if blockchain is enforced by law.

I would not rule out that it is ultimately the goal of the blockchain investors to force songwriters and artists to submit to the blockchain as a matter of law.  This is certainly a familiar refrain if you have followed the various meltdowns over the desire of online retailers and search companies to force songwriters and artists to submit to their exploitation.  We have heard these ideas frequently over the years whether it is even safer harbors, orphan works or massive numbers of unauditable address unknown NOIs under the US compulsory mechanical license.

If you doubt that could happen, realize that two unmovable government agencies are currently allowing millions of songs to be exploited with unverified and dubious authority–the U.S. Copyright Office with mass NOIs and the Department of Justice with 100% licensing.  What’s to stop them taking the next step?

One person’s forced “decentralization and transparency” is another’s eminent domain.  So when you hear about blockchain, imagine if the blockchain bubble had the awesome power of the sovereign forcing someone else’s interpretation of truth on creators.

Especially when the time it takes to correct someone else’s interpretation of the truth as Mr. Rogers suggests their job would become will be even more uncompensated time for another free ride that will probably end the same way that DMCA notices do for the vast majority of independent artists.

They just give up because resistance really is futile.

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

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

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

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

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

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

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

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

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

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

 

Senate Introduces Register of Copyrights Selection and Accountability Act (S. 1010)

As the House of Representatives version of the Register of Copyrights Selection and Accountability Act of 2017 passed the House on April 26, a version of that House bill was duly introduced in the Senate on May 2 as Senate Bill 1010.

The Senate bill is identical to the House bill and is sponsored by Senate luminaries Senate Judiciary Committee Chairman Chuck Grassley (R-Iowa), ranking member Dianne Feinstein (D-Calif.), former chairmen Patrick Leahy (D-Vt.) and Orrin Hatch (R-Utah).

Remember that the House bill  passed with an extraordinarily lopsided bipartisan vote of 378-48 demonstrating broad support for the purpose of the bill:   to elevate the position of the head of the Copyright Office to a Presidential appointment (confirmed by the Senate), thus making the office comparable to the U.S. Patent & Trademark Office and certain other legislative branch positions.  The “Register of Copyrights” is currently (and historically) appointed by the Librarian of Congress as would a more junior job, but the Congress decided to upgrade the position after recent controversy illuminated the benefit of that most justified disruption.

The Senate bill was read twice and referred to the Senate Rules Committee (which has direct jurisdiction over the Library of Congress).  If no amendments are offered in the Senate, S 1010 can proceed straight to the President for signature.

Elevating the Register of Copyrights to a Presidential appointment is a long overdue first step toward modernizing the Copyright Office and allowing it to innovate separately from the extraordinary management weaknesses at the Library of Congress identified by the Government Accountability Office in its 2015 report (“Library of Congress Needs to Implement Recommendations to Address Management Weaknesses“).

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