The Great Artist Revolt: Are Apple Music and Spotify a Solution to a Post-YouTube Reality?

As I noted in a recent Huffington Post blog, major labels are in the middle of renegotiations with YouTube, Google’s subsidiary and the world’s dominant video search engine.  These deals are relatively short term and are renegotiated every few years.

What’s different this time is that a growing number of artists and songwriters at the grassroots and established levels are asking a simple question:  How can the labels conclude any negotiation with YouTube that doesn’t address the problems with YouTube’s legacy “DMCA license” business?  Would this not trigger an artist revolt if their demands are not met?

You may say you’ve never heard the term “DMCA license”.  It’s a term that has come to describe a bargaining position that plays a desire to push an extreme interpretation by a music user of the “notice and takedown” rules that twists the statute into an unrecognizable shape–so the users have neither a DMCA compliant service nor a license.  The DMCA license is predicated on  the user having an essentially unlimited litigation budget that allows the user to strong arm an entire industry.  There is only one company in this category at the moment–Google–but others like Vimeo and Facebook are not far behind.

Will Negotiations Fail?

There are at least three key points to be addressed in any new deal with YouTube: updating YouTube’s legacy revenue share based royalty, marketing restrictions (such as on selling artist names as keywords and the use of recordings in UGC not approved by artists), but most importantly Google’s aggressive DMCA practices in both search and on YouTube.

For the first time, artists are crossing Google’s DMCA position in search with YouTube’s desire to have the cover of licenses on YouTube.

As of this writing, Google is rumored to be holding the line in their renegotiations regardless of what the artists want.  When you consider the issues we covered in YouTube’s Messaging Problem, it’s not surprising that the brittle true believers in Google’s policy shop make compromise on Google’s legacy business an impossibility (like long-time true believer Fred Von Lohmann, chief architect of the Electronic Frontier Foundation’s legal strategy to destroy artists livelihood).

This leads me to believe that when confronted with these choices, the negotiations with YouTube will fail.  This is unfortunate, because what really should be happening is that YouTube should agree to take the DMCA safe harbor off the table if they are getting a license.  It seems not only logically inconsistent to have both a real license and a faux DMCA license, trying to combine the two comes up with an unworkable and frustrating structure.

If YouTube wants the benefits of a license with copyright owners, they should not be surprised that artists expect them to abandon the safe harbor for those licensed recordings, adopt a private arbitration process to resolve disputes, and respect the marketing restrictions that artists reasonably expect.

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Where Do We Go if Negotiations Fail?

There’s no reason that official videos could no longer be available on Vevo that is partly owned by YouTube–although expect YouTube to violate their fiduciary duties as a stockholder if major label partners withdraw from YouTube.

The most likely outcome of getting out of the YouTube deals will be a renewed emphasis on alternative video sites like Apple and Spotify.  There’s actually no reason not to start working more closely with those two services right away which will address the artist displeasure with Google.

Plus, as I spun out a bit more on the Huffington Post, YouTube has the great benefit of label marketing budgets spent to drive traffic to YouTube (as well as marketing resources from companies in all other copyright categories).  If those budgets are redeployed to drive traffic away from litigious companies that insult artists with aggressive and unreasonable DMCA positions, the industry will be better prepared for the inevitable “step away” from YouTube.

I think that labels need to be coming to grips with a succession plan as it seems increasingly unlikely that Google will stop acting on the advice of the “policy people” who have never sold a record in their lives.

If the labels fail to satisfy their artists, there will no doubt be an artist revolt.

 

@linamkhan: How to reboot the FTC — Artist Rights Watch

Since the FTC closed its investigation of Google’s business practices, researchers have found that Google ties its content to its search results in ways that harm the public—one of the very practices that FTC had scrutinized and decided posed no problems.

via @linamkhan: How to reboot the FTC — Artist Rights Watch

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.

@copyright4u: Is There Any Value in Marking an Image with the Copyright Symbol? — Artist Rights Watch

Copyright Alliance has a useful FAQ that collects a number of questions and answers about copyright. Works created after March 1, 1989 do not require a copyright notice in order to be protected under U.S. copyright law. However, there are a number of benefits to including a copyright notice, such as: It puts potential users […]

via @copyright4u: Is There Any Value in Marking an Image with the Copyright Symbol? — Artist Rights Watch

@nyismusic: Empire State Music Production Tax Credit Goes to @NYGovCuomo for Signature — Artist Rights Watch

New York is Music coalition announced the passage of the Empire State Music Production Tax Credit (A10083A/S7485A) in the NY Legislature and urged Governor Cuomo to sign the bill into law.

via @nyismusic: Empire State Music Production Tax Credit Goes to @NYGovCuomo for Signature — Artist Rights Watch

@russmusicwatch: Sound Quality Matters — Artist Rights Watch

A study from long-time consumer researcher Russ Crupnick suggests tens of millions of consumers want better sound quality from streaming and will pay more for it.

via @russmusicwatch: Sound Quality Matters — Artist Rights Watch

@thetrichordist: Thoughts on the Open Music Initiative by Alan Graham — Artist Rights Watch

For many the belief is that simply solving an issue of data or creating a central and transparent repository of rights in the music industry will solve most of the issues when it comes to money and the speed at which it finds its way back to the creators. But if the answer is “data”, what is the question?

via @thetrichordist: Thoughts on the Open Music Initiative by Alan Graham — Artist Rights Watch

The MTP Interview: @Rebecca_Cusey on the Copyright Office Notice and Takedown Roundtables — MUSIC • TECHNOLOGY • POLICY — Artist Rights Watch

[The Copyright Office is preparing a new study on the effects of the “notice and takedown” clauses of the Copyright Act (often called the “DMCA takedown”. The DMCA takedown law has been criticized by artists for creating a legacy system that puts 100% of the burden of policing unauthorized copies of the artist’s work on […] […]

via The MTP Interview: @Rebecca_Cusey on the Copyright Office Notice and Takedown Roundtables — MUSIC • TECHNOLOGY • POLICY — Artist Rights Watch

Pandora Sees the Light On Audit Rights

Music industry licenses that require a music service to pay a royalty to a copyright owner have traditionally included what’s come to be called an “audit clause”.  Because so much information required to actually confirm that royalties are paid properly is under the control of the person doing the paying, the control of that information by the party in whose interest  lies the underpayment creates significant moral hazard.

Under Pandora’s new version of the direct publishing license for their on-demand streaming service currently being circulated by MRI, we get some good news.  Here’s why….

In the MRI license Pandora has dropped many of the restrictions on royalty compliance examinations (commonly called “audits”) that it tried to get the Copyright Royalty Judges to impose on artists and record companies through the sound recording statutory license.  SoundExchange conducts these audits under the compulsory license on behalf of featured artists, nonfeatured artists and sound recording owners.

This will, no doubt, come up on one of the appeals of the CRJs, so hopefully the ruling of the Copyright Royalty Judges (called “Web IV”) on this issue will now be moderated by reality in the form of this new Pandora commercial benchmark.  And we all know how important Pandora’s contracting practices are for benchmarking the law the rest of us must live under.

Digital services are new to royalty audits and have perpetuated the charade started with the very record companies these services are quick to criticize–this time that somehow only certified public accountants have the qualifications to conduct royalty audits of the services.

There is a great tradition in record deals of trying to load up as many restrictions as possible on the artist’s auditor to suppress the number of “inbound” audits coming at the record company.  Almost all record companies will drop the CPA requirement, because in reality everyone knows that royalty compliance has nothing to do with GAAP, financial statements or any of the other tools of the CPA’s trade.  More on this below from a Warner Music Group executive.

Royalty compliance examinations are a science of knowing where to look, knowing when you’re being lied to, and having the means to hold feet to the fire.  And due to the complexity of streaming and its billions of lines of royalties, an auditor also needs to have the technical expertise, staff and systems to manage enormous volumes of data.

This is not a knock on CPAs, but that expertise has nothing to do with GAAP or the skill set tested by the CPA licensing examinations.  The reason that a digital service traditionally wants a CPA requirement is that (1) it is usually more expensive (unnecessarily so), and most importantly (2) very few CPAs do royalty compliance examinations of digital services so the service is likely to be audited by someone who doesn’t know where–or how–to look.  (All due respect to CPAs, but royalty compliance–especially the specific skill set required for digital service audits–is simply not part of their training.)

The National Association of Broadcasters went even further in the recent Web IV proceeding with the full-throated support of Pandora’s CFO Michael Herring–under the CRJ’s new rules not only must a compulsory license audit be conducted by a certified public accountant, that CPA must also be licensed in the jurisdiction where the audit is conducted.  This is another one of the real howlers enunciated with a straight face by the Copyright Royalty Judges in their Web IV determination recently published.  (See the final determination paragraph G6.)

Not even the evil record companies ever tried to get away with this licensing requirement under the audit clauses of record deals, probably because they would have been laughed out of the room.  Unfortunately, that’s not possible with the government’s boot on your throat in the form of the Copyright Royalty Judges.

Warner Music Group executive Ron Wilcox gave an excellent summary of this issue in his Web IV testimony (at p. 15):

WMG’s agreements generally do not require that a certified public accountant (“CPA”) perform royalty audits with its digital partners. Auditors who conduct royalty audits of digital services generally do not draw on the set of skills required to pass the CPA exam.

Rather, royalty auditors must be able to understand the technical systems that WMG’s partners use, to interpret data those systems maintain and generate, and the like. For example, a royalty auditor may have to examine a streaming service’s server logs and content databases to determine the accuracy of the service’s statement of performances and royalty payments.

This could require understanding how the service’s systems record digital performances, how those records are retained, and how those records are used to generate royalty statements. In addition, royalty auditors must be familiar with some of the unique conventions and jargon in the music industry as well as the royalty terms applicable to each service provider.

For instance, auditors need to understand how to calculate a pro-rata share from a label pool, how performances are defined in the relevant contracts, and how to account for non-royalty-bearing plays.

Because royalty audits require extensive technical and industry-specific expertise, in WMG’s experience a CPA certification is not generally a requirement for conducting such audits. To my knowledge, some of the most experienced and knowledgeable royalty auditors in the music industry are not CPAs.

For some unknown reason, the Copyright Royalty Judges chose to disregard this testimony from one of the most experienced and knowledgeable executives in the music business.  Who happened to get the issue exactly right, by the way.

So the CRJ’s disconnected ruling on this issue was unfortunate.  Especially so because this ruling affects all SoundExchange audits–conducted on behalf of artists, musicians, vocalists and record companies.  The CRJ’s ruling makes an already difficult practice Jesuitical in the extreme and adds untold expense and inefficiency to an already cumbersome process.

But good news has come to light–actually great news.  Pandora has seen the error of their ways on this issue and has dropped both the CPA requirement and the licensing requirement in its most recent push for direct licensing conducted by MRI.  This is truly great news and indicates a welcome change of heart at Pandora.

Here’s the new language in Pandora’s announced streaming service:

Audit: In order to enable PUBLISHER to be satisfied that it is being accounted to on an accurate and timely basis in connection with the Pandora Services (including by verifying that the calculation of all financial information is correct), PUBLISHER may appoint an independent third-party auditor (“Auditor”) to examine and make copies and extracts of Pandora’s books, records and server logs related to the use of PUBLISHER Compositions and fulfillment of Pandora’s obligations under this Agreement (collectively, the “Accounting Materials”), such audit to occur at Pandora’s offices and at PUBLISHER’s expense.

This is a triumph of reason over the absurdly out of touch positions taken during Web IV by Pandora, NAB and others, and should immediately be brought to the attention of the appeals court to conform the audit regulations in line with the Pandora commercial benchmark.

 

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.