Songwriter Catalog Sales and Unrealized Capital Gains

If you’e been reading along at home, you may be aware that there is an extensive tax proposal from the Biden Administration on the table. The President previewed his tax proposal in the 2024 State of the Nation and documented it in the form of .the President’s 2025 budget and concomitant tax plan. It’s hard to know with certainty as of this writing, but it appears that Vice President Harris supports the President’s tax plan at least according to sources like Morningstar and may have adopted it in her campaign. I guess we’ll find out eventually.

Among other things, part of the proposal is to institute a new wealth tax by means of a new tax on something called “unrealized capital gains.” This means you pay tax on a paper gain from an asset like your home, artwork, or shares of stock regardless of whether you sold the taxed asset and had (or “realized”) gains from the sale. Those taxed assets may include the sale of a song or sound recording catalog.

Of course, if unrealized capital gains are taxed by the federal government, we have to imagine that the 41 states which tax capital gains at the state level will join in, starting with California and New York. Federal and state capital gains tax will be very complex. Commentators believe this idea is likely to have a host of unintended consequences.

Liquidity and Valuation Problems

The two biggest problems with this concept of taxing unrealized gains are liquidity of the taxpayer to actually pay the tax and how to determine the value to be attributed to the taxable asset in order to calculate that tax in the first place. If the proposal becomes law, we can see that there will be cottage industries in tax loans and valuation experts.

If you’re not familiar with the vernacular, “realized gains” means you made money on the sale of an asset and thus have the money to pay the tax at the time the taxed asset is sold (or gains are “realized”). You may also be able to take that cost into account when determine a selling price. Alternatively, “unrealized gains” means you have to pay the tax without selling the asset. That tax payment must come from somewhere; likely other liquid cash (or you may in the end have to sell the taxed asset in order to pay the tax on unrealized gains that were levied before you sold–and would have to pay tax on the sale and so on and so on). This is the liquidity problem with the idea of taxing unrealized gains.

So if you have a song catalog and the new tax covers intangible assets like songs (or patents for that matter), you have to pay taxes as you go if you are a taxpayer subject to the unrealized capital gains tax. It’s unclear whether it is Constitutional to tax an unrealized gain. (For “realized” interpretation see Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955) which holds that income is realized whenever there are “instances of [1] undeniable accessions to wealth, [2] clearly realized, and [3] over which the taxpayers have complete dominion.”).

Remember, the sale of song catalogs is generally given capital gains treatment under Section 1221(b)(3) of the Internal Revenue Code. This provision permits songwriters to treat revenue from the sale of their self-created musical works as capital gains rather than ordinary income. This means that the profits from catalog sales are taxed at the lower capital gains tax rate, instead of the much higher ordinary income tax rates. If the unrealized gains proposal is applied to song catalogs, it goes even further than taxing at ordinary income rates on the realized gains from a sale–there doesn’t even need to be a sale.

Origins of the Billionaires Minimum Income Tax

I flagged a version of this new tax that was floated by Artist Enemy Number 1 Senator Ron Wyden back in 2019, but his “Billionaire’s Income Tax” bill has now been refined into an explicit budget proposal by the Biden Administration. Like most unpopular tax proposals (one study showed 3-1 opposition), Senator Wyden’s proposal was originally to apply to “millionaires and billionaires”, or in the immortal words of Senator Russell B. Long, don’t tax you, don’t tax me, tax that fellow behind the tree. Of course, if you count home values into net worth as one does, there’s way more than a handful of taxpayers with a net worth over $1 million. When Senator Wyden says “millionaires and billionaires” he doesn’t really mean just any millionaire because that would mean a lot of homeowners–eight million homes in the US are valued over $1 million. He probably means “rich people” especially rich people who inherited wealth. Like Ron Wyden.

But there’s rich and then there’s rich. Washington being what it is, when they’ve spent and leveraged new taxes from “millionaires and billionaires” what starts out being a tax that only effects a relatively small percentage of the universe of taxpayers, somehow has a way of seeking lower levels–you know, trickle down. That’s already happened–what started out with Senator Wyden going after “millionaires and billionaires” or what in March 2024 the Treasury Department called a “Billionaires Tax” has now settled into people with $100 million net worth (assets minus liabilities). That’s about 14,000 taxpayers in the US. And stay with me here–even though the threshold is $100 million the tax is called the Billionaires Minimum Income Tax, or “BMIT.” That acronym makes you focus on the billionaires (boo!) and ignore that billionaires are only about half the people who will be subject to the tax. And when Washington comes up with an acronym that hides an important detail like who is taxed, you know they’re serious. The plan may be shovel ready, but it’s definitely trickle down–and it’s only August.

$100 million is not a billion. $100 million could include Bruce Springsteen, Bob Dylan, Stevie Nicks, Neil Young and probably Paul Simon, estate of David Bowie and Bon Jovi, maybe all or substantially all major songwriters who sold their catalogs in the last few years. If they weren’t in the category before they sold their catalogs, they probably were after the sale which was likely taxed at the lower capital gains rate and not at the higher ordinary income rates. If you were, say, Taylor Swift or Beyoncé who have yet to sell their catalogs, your net worth is over $100 million and unrealized gains in that song catalog might be a juicy target for the IRS and their unrealized capital gains tax.

The Valuation Problem

So who decides how much unrealized gain is taxable? That question lays bare the valuation problem with this proposal. Remember, unrealized capital gain refers to the increase in value of an investment or an asset that you hold but have not yet sold. Remember, these gains are “unrealized” because they exist only on paper. Gains (or losses) only become “realized” once the asset is sold. The amount of unrealized gain or loss is the difference between the initial purchase price and the current market price. And therein lies the rub.

If the asset has not been sold, then in order to be taxed in must be valued. Coming up with a value is pretty easy if the asset is a publicly traded stock. But–if that particular asset class does not have a liquid market, then someone has to “mark to market” being an estimate of the fair market value of the asset on the day the asset is valued, or “marked.” In other words, “they” guess. The taxpayer hopes they guess low, and the IRS hopes they guess high. The problem is, the IRS’s guess is the only one that counts.

If that seems unconstitutional, have a peek at a recent U.S. Supreme Court case, Moore v. United States. Writing for a 7-2 majority, Justice Kavanaugh said that a similar (but not identical in my view) set of facts allowed Congress to tax U.S. residents on “realized but undistributed” income from a closely held foreign corporation. Justice Kavanaugh for the majority held that tax “does not exceed Congress’s constitutional authority” that “applies when Congress treats the entity [receiving the money] as a pass-through.” Importantly, Justices Thomas and Gorsuch dissented asserting that because the taxpayers “never actually received any of their investment gains, those unrealized gains could not be taxed as ‘income.” It also should be noted that the majority took great pains to make clear that the Moore case presented a “precise and narrow question” which should be construed narrowly. Dissents have a way of becoming the opinion of the Court, so I wouldn’t make too much of the Moore case in the context of taxing unrealized capital gains for your house although many commenters think it’s a step toward finding that the “billionaire’s tax” is Constitutional. I think Moore can be distinguished.

The Invitation to Shenanigans

Compare mark to market to historical cost accounting, which maintains an asset’s value at the original purchase cost. This can get hinky in volatile markets. If you remember the end of The Big Short, Dr. Michael Burry was trying to get the smart people on Wall Street to mark his credit default swaps which would have required them to take an even bigger bath than the smug bankers actually took.

This was an invitation to shenanigans. Goldman came up with excuses for why they hadn’t marked the swaps (“Goldman had a systems failure…” an excuse Dr. Burry receives skeptically. That’s mark to market. Somebody like Goldman Sachs or the IRS who is conflicted invents a value today that benefits them without regard to what you paid or what would be paid. You know, like when the willing buyer and the willing seller are the same person.

Crucially, the liquidity and valuation problems with taxing unrealized gains are a practical ones–you’ll be taxing people on paper profits when they have not realized the cash to pay the tax. That means the tax payment has to come from somewhere else unless the holder is forced to sell the taxable asset in order to pay the tax. And is able to sell.

In the case of illiquid assets, like say song catalogs, that may not be so easy to do. One of the reasons that the U.S. has never taxed unrealized capital gains is that the practical problems can become political problems.

Will Song Catalogs Be Subject to the New Wealth Tax?

But, yes, I did say song catalogs. Hold that thought for a moment and let’s look at what assets will be included in this new tax category. And think about this thought experiment: Songwriter A manages to get to the point that they can sell their catalog for a price that puts their net worth over $100 million but does not sell futures. Those as yet unwritten songs will accumulate in a new catalog. The songwriter then continues to write valuable songs and creates a new publishing catalog and holds off selling that catalog for a while–under the proposal that new catalog would potentially be subject to the unrealized capital gains wealth tax. Here are the asset classes we know about:

1. Publicly Traded Securities

Publicly traded securities, such as stocks, bonds and mutual fund shares, are a big target. If there is a liquid market for these assets, valuation is relatively easy based on their market price. Remember, if you hold shares in a publicly traded company and the value of those shares increases before you sell the shares, that unrealized gain would be subject to the proposed tax, even if you don’t sell your shares. I haven’t seen a discussion about unrealized losses. Gee, I wonder why.

2. Private Equity and Venture Capital Investments

If you hold shares in a private company or a startup, i.e., not publicly traded, unrealized gain in those shares is also taxed. This will surely raise valuation issues.

3. Real Estate Holdings

Residential or commercial real estate gains are also taxed. For example, if a paying taxpayer owns a home that has appreciated in value, the unrealized gain could be subject to the proposed tax.

4. Collectibles and Art

Collectibles and art are also included in the proposed tax base including fine art, rare coins, vintage cars, and other valuable collectibles These assets can appreciate over time, and the proposed laws aim to capture the unrealized gains on such items. Again, there’s a valuation issue.

5. Cryptocurrencies

Cryptocurrencies like Bitcoin or Ethereum would need to report and pay taxes on the unrealized gains of these digital assets. Given the volatility of many cryptocurrencies, valuation is going to be a challenge, particularly if Bitcoin was valued at 10x in year 1 but fell to -10x in year 2.

6. Other Securities

Securities like derivatives and options, are also included. These instruments can have complex valuations, but the proposed laws require taxpayers to report unrealized gains on these assets.

Will Valuation Experts be Worth More than Songwriters?

There are many consequences of establishing a new tax regime like taxing unrealized gains. It may seem far off if the only people affected (for now) are $100 millionaires. But having crossed that red line, both more asset classes and more taxpayers could be drawn in. If the government dropped the limit to taxpayers with a net worth of $50 million, they now have 97,000 taxpayers to hit with an unrealized gains tax bill. At a $25 million net worth, there are over 250,000. Is $25 million still rich? Not in Silicon Valley, maybe, but anywhere else…. So how long do you think it will take for “them” to get down to that level or even lower with their billionaires tax on millionaires? Get thee behind me, Satan.

Obviously, the business to be in if this regime becomes law is the valuation business.

Study: The CCP’s Digital Charm Offensive: How TikTok’s Search Algorithm and Pro-China Influence Networks Indoctrinate GenZ Users in the United States

I’ve been concerned for a a good four years and with advancing velocity that TikTok’s is leveraging unsuspecting artists and fans to advance a murky agenda. And frankly duping most of the executives in our business into believing that TikTok was just another addictive social media site. There are many clinical issues with TikTok and the short video format, but behind all that is the algorithm.

CNN reports:

Allowing TikTok to continue to be operated by its current parent company could allow the Chinese government to covertly influence US elections, the Justice Department said in a court filing late Friday.

In a federal appeals court filing, prosecutors raised concerns that TikTok’s algorithm could be used in a “secret manipulation” campaign to “influence the views of Americans for its own purposes.”

“Among other things, it would allow a foreign government to illicitly interfere with our political system and political discourse, including our elections,” prosecutors wrote. The filing added, “if, for example, the Chinese government were to determine that the outcome of a particular American election as sufficiently important to Chinese interests.”

“Allowing the Chinese government to remain poised to use TikTok to maximum effectiveness at a moment of extreme importance presents an unacceptable threat to national security,” prosecutors wrote.

It should come as no surprise that the CCP government treats the TikTok algorithm as something of a state secret and has put export restrictions on the technology in an attempt to block any sale that includes the algorithm (which of course is TikTok’s primary asset).

A recent study from the Network Contagion Research Institute at Rutgers University may shed light on why this is all such a big deal to both state and federal governments in the US. That study finds:

Amplification of Pro-China and Irrelevant Content: TikTok amplifies frontier influencers (travel and lifestyle content accounts) and irrelevant or clickbait material, to crowd out discussion of CCP-driven ethnic genocide and human rights abuses on its platform.

Suppression of Anti-China Content: TikTok’s moderation algorithms significantly augment this suppression. The views-to-likes ratio for anti-China content on TikTok was 87% lower than pro-China content even though the content was liked nearly twice as much.

Cross-Platform Influence Operations: The CCP also uses frontier influencers and stateaffiliated
media to disseminate pro-China narratives to crowd out discussion of human rights abuses on Instagram and YouTube with tourism and culture content.

Psychological Indoctrination: A psychological survey of Americans (n=1214) shows that, among the platforms studied, TikTok screentime positively and uniquely predicted favorability towards China’s human rights record. Notably, heavy users of TikTok (i.e., those with >3 hours of daily screentime) demonstrated a roughly 50% increase in pro-China attitudes compared to non-users. This suggests that TikTok’s content may contribute to psychological manipulation of users, aligning with the CCP’s strategic
objective of shaping favorable perceptions among young audiences.

Strategic Assessment: NCRI assesses that the CCP is deploying algorithmic manipulation in combination with prolific information operations to impact user beliefs and behaviors on a massive scale and that these efforts prove highly successful on TikTok in particular. These findings underscore the urgent need for transparent regulation of social media algorithms, or even the creation of a public trust funded by the platforms themselves to safeguard democratic values and free will.

So there’s that.

The Intention of Justice:  In Which The MLC Loses its Way on a Copyright Adventure

ARTHUR

Let’s get back to justice…what is justice?  What is the intention of justice?  The intention of justice is to see that the guilty people are proven guilty and that the innocent are freed.  Simple, isn’t it?  Only it’s not that simple.

From And Justice for All, screenplay written by Valerie Curtin and Barry Levinson

Something very important happened at the MLC on July 9:  The Copyright Office overruled the MLC on the position the MLC (and, in fairness, the NMPA) took on who was entitled to post-termination mechanical royalties under the statutory blanket license.  What’s important about the ruling is not just that the Copyright Office ruled that the MLC’s announced position was “incorrect”—it is that it corrected the MLC’s position that was in direct contravention of prior Copyright Office guidance.  (If this is all news to you, you can get up to speed with this helpful post about the episode on the Copyright Office website or read John Barker’s excellent comment in the rulemaking.)

“Guidance” is a kind way to put it, because the Copyright Office has statutory oversight for the MLC.  That means that on subjects yet to be well defined in a post-Loper world (the Supreme Court decision that reversed “Chevron deference”), I think it’s worth asking whether the Copyright Office is going to need to get more involved with the operations of the MLC.  Alternatively, Congress may have to amend Title I of the Music Modernization Act to fill in the blanks.  Either way, the Copyright Office’s termination ruling is yet another example of why I keep saying that the MLC is a quasi-governmental organization that is, in a way, neither fish nor fowl.  It is both a private organization and a government agency somewhat like the Tennessee Valley Authority.  Whatever it is ultimately ruled to be, it is not like the Harry Fox Agency which in my view has labored for decades under the misapprehension that its decisions carry the effect of law.  Shocking, I know.  But whether it’s the MLC or HFA, when they decide not to pay your money unless you sue them, it may as well be the law.

The MLC’s failure to follow the Copyright Office guidance is not a minor thing.  This obstreperousness has led to significant overpayments to pre-termination copyright owners (who may not even realize they were getting screwed).  This behavior by the MLC is what the British call “bolshy”, a wonderful word describing one who is uncooperative, recalcitrant, or truculent according to the Oxford Dictionary of Modern Slang.  The word is a pejorative adjective derived from Bolshevik.  “Bolshy” invokes lawlessness.

In a strange coincidence, the two most prominent public commenters supporting the MLC’s bolshy position on post-termination payments were the MLC itself and the NMPA, which holds a nonvoting board seat on the MLC’s board of directors.  This stick-togetherness is very reminiscent of what it was like dealing with HFA when the NMPA owned it.  It was hard to tell where one started and the other stopped just like it is now.  (I have often said that a nonvoting board seat is very much like a “board observer” appointed by investors in a startup to essentially spy on the company’s board of directors.  I question why the MLC even needs nonvoting board seats at all given the largely interlocking boards, aside from the obvious answer that the nonvoters have those seats because the lobbyists wrote themselves into Title I of the MMA—you know, the famous “spirit of the MMA”.)

Having said that, the height of bolshiness is captured in this quotation (89 FR 58586 (July 9, 2024)) from the Copyright Office ruling about public comments which the Office had requested (at 56588):

The only commenter to question the Office’s authority was NMPA, which offered various arguments for why the Office lacks authority to issue this [post-termination] rule. None are persuasive. [Ouch.]

NMPA first argued that the Office has no authority under section 702 of the Copyright Act or the MMA to promulgate rules that involve substantive questions of copyright law. This is clearly incorrect. [Double ouch.]

The Office ‘‘has statutory authority to issue regulations necessary to administer the Copyright Act’’ and ‘‘to interpret the Copyright Act.’’  As the [Copyright Office notice of proposed rulemaking] detailed, ‘‘[t]he Office’s authority to interpret [the Copyright Act]  in the context of statutory licenses in particular has long been recognized.’’

Well, no kidding.

What concerns me today is that wherever it originated, the net effect of the MLC’s clearly erroneous and misguided position on termination payments is like so many other “policies” of the MLC:  The gloomy result always seems to be they don’t pay the right person or don’t pay anyone at all in a self-created dispute that so far has proven virtually impossible to undo without action by the Copyright Office (which has other and perhaps better things to do, frankly).  The Copyright Office, publishers and songwriters then have to burn cycles correcting the mistake.  

In the case of the termination issue, the MLC managed to do both: They either paid the wrong person or they held the money.  That’s a pretty neat trick, a feat of financial gymnastics for which there should be an Olympic category.  Or at least a flavor of self-licking ice cream.

The reason the net effect is of concern is that this adventure in copyright has led to a massive screwup in payments illustrating what we call the legal maxim of fubar fugazi snafu.  And no one will be fired.  In fact, we don’t even know which person is responsible for taking the position in the first place.  Somebody did, somebody screwed up, and somebody should be held accountable.

Mr. Barker crystalized this issue in his comment on the Copyright Office termination rulemaking, which I call to your attention (emphasis added):

I do have a concern related to the current matter at hand, which translates to a long-term uneasiness which I believe is appropriate to bring up as part of these comments. That concern is, how did the MLC’s proposed policies [on statutory termination payments] come in to being in the first place? 

The Copyright Office makes clear in its statements in the Proposed Rules publication that “…the MLC adopted a dispute policy concerning termination that does not follow the Office’s rulemaking guidance.”, and that the policy “…decline(d) to heed the Office’s warning…”. Given that the Office observed that “[t]he accurate distribution of royalties under the blanket license to copyright owners is a core objective of the MLC”, it is a bit alarming that the MLC’s proposed policies got published in the first place. 

I am personally only able to come up with two reasons why this occurred. Either the MLC board did not fully understand the impact on termination owners and the future administration of those royalties, or the MLC board DID realize the importance, and were intentional with their guidelines, despite the Copyright Office’s warnings. 

Both conclusions are disturbing, and I believe need to be addressed.

Mr. Barker is more gentlemanly about it than I am, and I freely admit that I have no doubt failed the MLC in courtesy.  I do have a tendency to greet only my brothers, the gospel of Matthew notwithstanding.  Yet it irks me to no end that no one has been held accountable for this debacle and the tremendous productivity cost (and loss) of having to fix it.  Was the MLC’s failed quest to impose its will on society covered by the Administrative Assessment?  If so, why?  If not, who paid for it?  And we should call the episode by its name—it is a debacle, albeit a highly illustrative one. 

But we must address this issue soon and address it unambiguously.  The tendency of bureaucracy is always to grow and the tendency of non-profit organizations is always to seek power as a metric in the absence of for-profit revenue.  Often there are too many people in the organization who are involved in decision-making so that responsibility is too scattered.  

When something goes wrong as it inevitably does, no one ever gets blamed, no one ever gets fired, and it’s very hard to hold any one person accountable because everything is too diffused.  Instead of accepting that inevitable result and trying to narrow accountability down to one person so that an organization is manageable and functioning, the reflex response is often to throw more resources at the problem when more resources, aka money, is obviously not the solution.  The MLC already has more money than they know what to do with thanks to the cornucopia of cash from the Administrative Assessment.  That deep pocket has certainly not led to peace in the valley.

Someone needs to get their arms around this issue and introduce accountability into the process.  That is either the Copyright Office acting in its oversight role, the blanket license users acting in their paymaster role through the DLC, or a future litigant who just gets so fed up with the whole thing that they start suing everyone in sight.   

Saint Thomas Aquinas wrote in Summa Theologica that a just war requires a just cause, a rightful intention and the authority of the sovereign (Summa, Second Part of the Second Part, Question 40).  So it is with litigation.  We have a tendency to dismiss litigation as wasteful or unnecessary with a jerk of the knee, yet that is overbroad and actually wrong.  In some cases the right of the people to sue to enforce their rights is productive, necessary, inevitable and—hopefully—in furtherance of a just cause like its historical antecedents in trial by combat.  

It is also entirely in keeping with our Constitution.  The just lawsuit allows the judiciary to right a wrong when other branches of government fail to act, or as James Madison wrote in Federalist 10, so the government by “…its several constituent parts may…be the means of keeping each other in their proper places.”  

That’s a lesson the MLC, Inc. had to learn the hard way.  Let’s not do that again, shall we not?

Let’s not do this again, shall we? Did Daniel Ek become a billionaire because of Spotify’s revenue or profit or because of his stock?

Digital Music News reports “Spotify CEO Daniel Ek Is Richer Than Any Musician—Yes, Even Taylor Swift.” Did that just sneak up or is it really Groundhog Day? Maybe it’s groundhog day in Sweden.

Let’s try this again. Remember that artists and labels get paid a revenue share from Spotify. (So do songwriters, but that’s a whole other conversation.) Before you go any farther, getting a share of revenue is for chumps. But what does that mean, this “revenue”. Consider the definition of “gross revenue” that is common in the negotiated version of these deals:

“Gross Revenues” means, with respect to audio and video streams, all gross revenues directly related to the Services, including but not restricted to (i) all revenues attributable to text and/or graphic display, rich media and “in-stream” advertising revenues (i.e., audio, visual or audiovisual advertisements exhibited before, during or after a stream containing any Label Materials) generated from software client interfaces, widgets or properties through which the Services are made available; (ii) all revenues attributable to CPC-, CPM- and CPA-based advertising, e-commerce and “referral fees”/bounties (including non-refundable advances and guarantees, however characterized) generated via the Services, whether structured as a one-time payment or as a recurring revenue share, but specifically excluding e-commerce, “referral fees”/bounties and like revenue generated from sales of permanent audio and video downloads; (iii) all sponsorships sold by Company or its agents; (iv) solely with respect to the Subscription Services, all subscription income; and (v) any share of traffic or tariff charges for delivery of the Services that Company may be able to secure from telecommunications partners, and (vi) all revenues derived from the sale of data related to End Users and their use of the Services [then less a bunch of deductions]”

Now you can just tell that some smart lawyers somewhere sat down to try to think of all the ways that Spotify could earn revenue so they could include those sources in their deal. What did they miss out?

The stock.

In fairness, they didn’t miss out the stock entirely, they just missed it out from the deal that all the artists got paid on. The stock was dealt with in another contract not connected to the main sound recording license and never the twain shall meet.

But what this approach misses entirely is that once you have sold the stock in a stock grant, you’re done being a shareholder. Unless you get another stock grant, which we will assume hasn’t happened.

Leave aside the issue of trading stock for lower royalties, because it’s actually worse that that–it’s trading a one-time stock bump for a lower long term royalty rates set at a price point you have to keep digging out of.

I’m just a country lawyer from Texas and I’m not as smart as the city fellers, but it seems to me that if you knew going in that the big money was in the stock, why wouldn’t you get some measurement of the increase in the net worth of Daniel Ek or some comparable metric as a money factor in the revenue calculation? Getting a one time stock grant isn’t really the same thing. And I say using Ek’s net worth as a bogey only slightly facetiously. That is a little specific, but let’s be honest. It’s Ek’s net worth that really pisses people off, right? And if our Spotify earnings increased in some relationship to his increase in wealth, we’d all probably feel at least less screwed if not actually better about the whole thing.

But even if you didn’t use that metric but knew and acknowledged that the real value was in the stock and the increase in market capitalization due to artists and songwriters, why would you ever allow yourself to get snowed by Spotify’s poor mouthing about they can’t make a profit when it should have been obvious for the last 10-plus years that Spotify didn’t care about making a profit?

The saving grace is, of course, that it’s a damn good thing we’re never going to let another MTV build a business on our backs.

Chronology: The Week in Review: The Consensus for Conditional Approval of The MLC, Inc. by the @CopyrightOffice

I am pleased to see that there is a consensus against more happy talk among commenters in The MLC, Inc.’s five year review of its operations at the Copyright Office. The consensus is an effort to actually fix the MLC’s data defects, rogue lawmaking and failure to pay “hundreds of millions of dollars” in black box royalties.

The Two Arguments for Conditional Approval

There is a significant group, and sometimes from unexpected corners, who fall into two broad camps: One camp is approve The MLC, Inc. with post-approval conditions that may lead to being disapproved if not accomplished until the next five year review rolls around.

The other camp, which is the one I’m in if you’re interested, is to spend some time now getting very specific about crucial improvements The MLC, Inc. needs to put into effect and payments they need to make. This would be accomplished by bringing in advisory groups of publishing experts, especially from the independent community, roundtables, other customary tools for public consultations, but the redesignation approval would occur only after The MLC, Inc. accomplished these goals.

Either way, the consensus is for conditions if not the timing. I’m not going to argue for one or the other today, but I have some thoughts about why delayed approval is more likely to accomplish the goals to make things better in the least disruptive way.

Remember, once The MLC, Inc. is approved, or “redsignated,” then all leverage to force change is lost. Putting operations-based obligations on The MLC, Inc. to be responsive to their members before they get the valuable approval preserves leverage and will force change one way or another, The reward for successfully accomplishing these goals is getting approved for another term (or the balance of their five year review). Noah built the Ark before the rain.

What if we fired them?

I’m actually pleased to see the consensus for conditional approval. Simply firing The MLC, Inc. would be disruptive (and they know it), mostly because the Copyright Office hasn’t gotten around to requiring that a succession plan be in place so that firing the MLC would not be disruptive.

The simple solution to this pickle is for the Copyright Office to make any redesignation conditioned upon certain fixes being accomplished on an aggressive time frame. I say aggressive because they’ve had five years to think about this; it shoudln’t take long to at least implement some fixes. But if we don’t make it conditional the MLC will lack the incentive to actually fix the problems.

Conditional Approval

I have to say I was encouraged by the number of commenters who said that The MLC, Inc. needs some very definite performance goals. Many commenters said that those goals needed to be met in order for The MLC, Inc. to get approved for another five years until the next quinquennial review. I’m not quite sure how you approve them for another five years with performance goals unless you are really saying what some commenters came right out and said: Any approval should be conditional.

I think that means that the Copyright Office needs a plan with two broad elements: One, the plan identifies specific performance goals, and then two, establishes a performance timeline that The MLC, Inc. must meet in order for this current “redesignation” to become final.

That “conditional redesignation” would incentivize The MLC, Inc. to actually accomplish specific tasks. The timeline will likely vary based on the particular task concerned, but impliedly would be less than five years. There’s a very good reason to make the approval conditional; there’s just too much money involved. Other people’s money.

The Black Box

Every comment I read brings up the black box. Commenters raised different complaints about how The MLC, Inc. is managing or not managing the matching that is required for the black box distribution contemplated by Congress, but they all were pretty freaked out about how big it is, how little we know about it, and the fact that the board of The MLC, Inc. is deeply conflicted because the lobbyists drafted an eventual market share distribution. Strangely enough, there’s every possibility that the market share distribution will happen, or could happen, right after the redesignation. Also known as losing on purpose in a fixed fight.

There’s an easy fix for that one–don’t do the market share distribution, maybe ever.

The harsh but near certain fact is if there is a market share distribution of the black box, the MLC (and everyone involved) will be sued. It almost doesn’t matter how clean it is. So why do it at all? The MLC is supposed to set an example to the world, right? (And we know how much the world loves it when Americans say that kind of thing.) What if we said that the market share distribution was just bloodlust by the lobbyists salivating over a really big poker pot? On reflection, it should be put aside particularly because Congress may not have been told how big the black box really was if anyone knew at the time. Ahem.

The Interest Penalty

This actually goes hand in hand with another interpretation of the black box provisions of Title I which requires the payment of compound interest for black box money to be paid by The MLC, Inc. to the true copyright owner. That compound interest accrues at the “federal short term rate” in effect from time to time (that rate is adjusted monthly and is currently 5.01%). MLC’s interest obligation accrues in an account set up for the true copyright owner’s benefit, not for the recipients of the market share distribution.

Interest runs from the time the unmatched money is received by the MLC until it is matched and paid. There could easily be several different interest rates in effect if the unmatched royalties stay in the black box for months or particularly years. This concept is elaborated in a comment by the Artist Rights Institute.

Title I requires this “penalty” the same way that it requires the statutory late fee which itself has been the subject of much negotiation. It is important to note that the word “penalty” does not appear in Section 115, but both the interest rate and the late fee are obviously “penalties” in plain English. You don’t have to call it a thing a penalty in order for it to be a penalty. It doesn’t stop being a penalty just because the statute doesn’t define it as one, just like a large furry animal with big teeth, big claws, a loud roar and really bad breath who wants to eat you stops being a bear just because it doesn’t have a sign around its neck saying “BEAR”. Particularly when the furry animal has you by throat.

Align the Incentives

I have to imagine that a penalty of compound interest would incentivize both the MLC and the licensees who pay its bills to clear that black box right quick. If a third party is paying the statutory interest penalty which is how it is now according to MLC CEO Kris Ahrend’s testimony to Congress (under oath), then there’s really no incentive for the MLC to pick up the pace on matching and there’s even less incentive for the licensees to make them do it.

It makes sense that the MLC is to maintain an account for each copyright owner (or maybe for each unmatched song since the copyright owner is not matched), so it only makes sense that these accounts and compound interest would be maintained on the ledger of the MLC. It would be pretty dumb to just lump all the money into one account and run compound interest on the whole thing that would have to be disaggregated every time a song is matched. Assuming matching was the object of the exercise.

Plus, there’s nothing in Title I that says that black box money has to be put in a bank account that accrues interest so that the MLC doesn’t have to pay this penalty for being slow. Again, the word “bank” does not appear in Section 115. It definitely doesn’t say a federally insured bank account, a bank in the Federal Reserve system, or the like–because the statute does not require a bank.

Even so, I have to believe that if you want to an insurance company and said I will bring you the “hundreds of millions of dollars” Mr. Ahrend refers to if you write me a policy that will cover my interest expense and insure the corpus, somebody would take that business. If they can write derivatives contracts for fluctuations in natural gas futures, I bet they could write that policy or my name’s not Jeffrey Skilling.

William of Ockham Gets Into the Act

What makes a lot more sense and is a whole lot simpler is that Congress wanted to incentivize the MLC to match and pay black box royalties quickly. Congress established the compound interest penalty to add jet fuel to that call and response cycle.

That penalty is part of the normal costs of operating the MLC therefore should be paid as part of the administrative assessment, i.e., by the services themselves. If the MLC sits on the money too long, the services can refuse to cover the interest costs beyond that point and the MLC can then pass the hat to the board members who allowed that to happen.

So everyone has a good incentive to clean out the black box. Brilliant lawmaking. I don’t think that’s such a bad deal for the services since they are the ones who sat on the money in the first place that produced the initial hundreds of millions of dollars for the black box. They got everything else they wanted in the MMA, why object to this little detail? Let’s try to hold down the hypocrisy, shall we?

There may be some arguments about that interpretation, but here’s what Congress definitely did not do and about which there should definitely not be an argument. Congress did not authorize the MLC to use the black box money as an investment portfolio. Nowhere in Title I is the MLC authorized to start an investment policy and become a “control person” of mutual funds. Which they have done.

That investment policy also raises the question of who gets the upside and who bears the downside risk. If there’s a downturn, who makes the corpus whole? And, of course, when the ultimate market share distribution occurs, who gets the trading profits? Who gets the compound interest? Surely the smart people thought of this as part of their investment policy.

The Key Takeaway

You may disagree with the Institute’s analysis about what is and isn’t a penalty, and you may disagree about the thing of the conditions on approval, but I think that there is broad agreement that there needs to be a discussion about forcing The MLC, Inc. to do a better job. I bet if you asked, the Congress clearly did not see the Copyright Office’s role as handing out participation trophies or pats on the head. And that should not be the community’s goal, either. This whole thing was cooked up by the lobbyists and they were not interested in any help. That obviously crashed and burned and now we need to help each other to save songwriters today and in future generations. If not us, then who; if not now, then when; if not here, then where?

Who Will Get to the Bottom of The Hundreds of Millions of Black Box Money at MLC?

One of the most common questions we get from songwriters about the MLC concerns the gigantic level of “unmatched funds” that have been sitting in the MLC’s accounts since February 2021.  Are they really just waiting until The MLC, Inc. gets redesignated and then distributes hundreds of millions on a market share basis like the lobbyists drafted into the MMA?  

Not My Monkey

Nobody can believe that the MLC can’t manage to pay out several hundred million dollars of streaming mechanical royalties for over three years so far.  (Resulting in the MLC holding $804,555,579 in stocks as of the end of 2022 on its tax return, Part X, line 11.) The proverbial monkey with a dart board could have paid more songwriters in three years.  Face it—doesn’t it just sound illegal?  In my experience, when something sounds or feels illegal, it probably is.

What’s lacking here is a champion to extract the songwriters’ money.  Clearly the largely unelected smart people in charge could have done something about it by now if they wanted to, but they haven’t.  It’s looking more and more like nobody cares or at least nobody wants to do anything about it.  There is profit in delay.

Or maybe nobody is taking responsibility because there’s nobody to complain to.  Or is there? What if such a champion exists?  What if there were no more waiting?  What if there were someone who could bring the real heat to the situation?

Let’s explore one potentially overlooked angle—a federal agency called the Office of the Inspector General.  Who can bring in the OIG?  Who has jurisdiction?  I think someone does and this is the primary reason why the MLC is different from HFA.

Does The Inspector General Have MLC Jurisdiction?

Who has jurisdiction over the MLC (aside from its severely conflicted board of directors which is not setting the world on fire to pump the hundreds of millions of black box money back into the songwriter economy).  The Music Modernization Act says that the mechanical licensing collective operates at the pleasure of the Congress under the oversight of the U.S. Copyright Office and the OIG has oversight of the Copyright Office through its oversight of the Library of Congress.

But, hold on, you say.  The MLC, Inc. is a private company and the government typically does not have direct oversight over the operations of a private company.

The key concept there is “operates” and that’s the difference between the statutory concept of a mechanical licensing collective and the actual operational collective which is a real company with real employees and real board members.  Kind of like shadows on the wall of a cave for you Plato fans.  Or the magic 8 ball.

The MLC, Inc. is all caught up with the government.  It exists because the government allows it to, it collects money under the government’s blanket mechanical license, its operating costs are set by the government, and its board members are “inferior officers” of the United States.   Even though The MLC, Inc. is technically a private organization, it is at best a quasi-governmental organization, almost like the Tennessee Valley Authority or the Corporation for Public Broadcasting.  So it seems to me that The MLC, Inc. is a stand-in for the federal government.

But The MLC, Inc. is not the federal government.  When Congress passed the MMA and it charged the Copyright Office with oversight of the MLC.  Unfortunately, Congress does not appear to have appropriated funds for the additional oversight work it imposed on the Office.  

Neither did Congress empower the Office to charge the customary reasonable fees to cover the oversight work Congress mandated.  The Copyright Office has an entire fee schedule for its many services, but not MLC oversight.  

Even though the MLC’s operating costs are controlled by the Copyright Royalty Board and paid by the users of the blanket license through an assessment, this assessment money does not cover the transaction cost of having the Copyright Office fulfill an oversight role.

An oversight role may be ill suited to the historical role of the Copyright Office, a pre-New Deal agency with no direct enforcement powers—and no culture of cracking heads about wasteful spending like sending a contingent to Grammy Week.

In fact, there’s an argument that The MLC, Inc. should write a check to the taxpayer to offset the additional costs of MLC oversight.  If that hasn’t happened in five years, it’s probably not going to happen.  

Where Does the Inspector General Fit In?

Fortunately, the Copyright Office has a deep bench to draw on at the Office of the Inspector General for the Library of Congress, currently Dr. Glenda B. Arrington.  That kind of necessary detailed oversight is provided through the OIG’s subpoena power, mutual aid relationships with law enforcement partners as well as its own law enforcement powers as an independent agency of the Department of Homeland Security.  Obviously, all of these functions are desirable but none of them are a cultural fit in the Copyright Office or are a realistic resource allocation.

The OIG is better suited to overseeing waste, fraud and abuse at the MLC given that the traditional role of the Copyright Office does not involve confronting the executives of quasi-governmental organizations like the MLC about their operations, nor does it involve parsing through voluminous accounting statements, tracing financial transactions, demanding answers that the MLC does not want to give, and perhaps even making referrals to the Department of Justice to open investigations into potential malfeasance.  

Or demanding that the MLC set a payment schedule to pry loose the damn black box money.

One of the key roles of the OIG is to conduct audits.  A baseline audit of the MLC, its closely held investment policy and open market trading in hundreds of millions in black box funds might be a good place to start.  

It must be said that the first task of the OIG might be to determine whether Congress ever authorized MLC to “invest” the black box funds in the first place.  Congress is usually very specific about authorizing an agency to “invest” other people’s money, particularly when the people doing the investing are also tasked with finding the proper owners and returning that money to them, with interest. 

None of that customary specificity is present with the MLC.

For example, MLC CEO Kris Ahrens told Congress that the simple requirement that the MLC pay interest on “unmatched” funds in its possession (commonly called “black box”) was the basis on which the MLC was investing hundreds of millions in the open market.  This because he assumed the MLC would have to earn enough from trading securities or other investment income to cover their payment obligations.  That obligation is mostly to cover the federal short term interest rate that the MLC is required to pay on black box.

The Ghost of Grammy Week

The MLC has taken the requirement that the MLC pay interest on black box and bootstrapped that mandate to justify investment of the black box in the open market.  That is quite a bootstrap.

An equally plausible explanation would be that the requirement to pay interest on black box is that the interest is a reasonable cost of the collective to be covered by the administrative assessment.  The plain meaning of the statute reflects the intent of the drafters—the interest payment is a penalty to be paid by the MLC for failing to find the owners of the money in the first place, not an excuse to create a relatively secret $800 million hedge fund for the MLC.  

I say relatively secret because The MLC, Inc. has been given the opportunity to inform Congress of how much money they made or lost in the black box quasi-hedge fund, who bears the risk of loss and who profits from trading.  They have not answered these questions.  Perhaps they could answer them to the OIG getting to the bottom of the coverup.

We do not really know the extent of the MLC’s black box holdings, but it presumably would include the hundreds of millions invested under its stewardship in the $1.9 billion Payton Limited Maturity Fund SI (PYLSX). Based on public SEC filings brought to my attention, The MLC, Inc.’s investment in this fund is sufficient to require disclosure by PYLSX as a “Control Person” that owns 25% or more of PYLSX’s $1.9 billion net asset value. PYLSX is required to disclose the MLC as a Control Person in its fundraising materials to the Securities and Exchange Commission (Form N-1A Registration Statement filed February 28, 2023).  This might be a good place to start.

Otherwise, the MLC’s investment policy makes no sense.  The interest payment is a penalty, and the black box is not a profit center.

But you don’t even have to rely on The MLC, Inc.’s quasi governmental status in order for OIG to exert jurisdiction over the MLC.  It is also good to remember that the Presidential Signing Statement for the Music Modernization Act specifically addresses the role of the MLC’s board of directors as “inferior officers” of the United States:

Because the directors [likely both voting and nonvoting] are inferior officers under the Appointments Clause of the Constitution, the Librarian [of Congress] must approve each subsequent selection of a new director. I expect that the Register of Copyrights will work with the collective, once it has been designated, to ensure that the Librarian retains the ultimate authority, as required by the Constitution, to appoint and remove all directors.

The term “inferior officers” refers to those individuals who occupy positions that wield significant authority, but whose work is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate. Therefore, the OIG could likely review the actions of the MLC’s board (voting and nonvoting members) as they would any other inferior offices of the United States in the normal course of the OIG’s activities.

Next Steps for OIG Investigation

How would the OIG at the Library of Congress actually get involved?  In theory, no additional legislation is necessary and in fact the public might be able to use the OIG whistleblower hotline to persuade the IG to get involved without any other inputs.  The process goes something like this:

  1. Receipt of Allegations: The first step in the OIG investigation process is the receipt of allegations. Allegations of fraud, waste, abuse, and other irregularities concerning LOC  programs and operations like the MLC are received from hotline complaints or other communications. 
  2. Preliminary Review: Once an allegation is received, it undergoes a preliminary review to determine if OIG investigative attention is warranted. This involves determining whether the allegation is credible and reasonably detailed (such as providing a copy of the MLC Congressional testimony including Questions for the Record). If the Office is actually bringing the OIG into the matter, this step would likely be collapsed into investigative action.
  3. Investigative Activity: If the preliminary review warrants further investigation, the OIG conducts the investigation through a variety of activities. These include record reviews and document analysis, witness and subject interviews, IG and grand jury subpoenas, search warrants, special techniques such as consensual monitoring and undercover operations, and coordination with other law enforcement agencies, such as the FBI, as appropriate.  That monitoring might include detailed investigation into the $500,000,000 or more in black box funds, much of which is traded on open market transactions like PYLSX.
  4. Investigative Outputs: Upon completing an investigation, reports and other documents may be written for use by the public, senior decision makers and other stakeholders, including U.S. Attorneys and Copyright Office management. Results of OIG’s administrative investigations, such as employee and program integrity cases, are transmitted to officials for appropriate action. 
  5. Monitoring of Results: The OIG monitors the results of those investigations conducted based on OIG referrals to ensure allegations are sufficiently addressed.

So it seems that the Office of the Inspector General is well suited to assisting the Copyright Office by investigating how the MLC is complying with its statutory financial obligations.  In particular, the OIG is ideally positioned to investigate how the MLC is handling the black box and its open market investments that it so far has refused to disclose to Members of Congress at a Congressional hearing as well as in answers to Questions for the Record from Chairman Issa.

On the Internet, “Partners” Don’t Hear You Scream: Daniel Ek Makes a “Bundle” From the Value He Won’t Share

Here’s a quote for the ages:

MICHAEL BURRY

One of the hallmarks of mania is the rapid rise and complexity
of the rates of fraud. And did you know they’re going up?

The Big Short, screenplay by Charles Randolph and Adam McKay, based on the book by Michael Lewis

I have often said that if screwups were Easter eggs, Daniel Ek would be the Easter bunny, hop hop hopping from one to the next. I realize that is not consistent with his press agent’s pagan iconography, but it sure seems true to many.

The Bunny’s Bundle

This week was no different. Mr. Ek evidently has a “10b5-1 agreement” in place with Spotify, a common technique for insiders, especially founders, who hold at least 10% of the company’s shares to cash out and get the real money through selling their stock. The agreement establishes predetermined trading instructions for company stock (usually a sale and not a buy so not trading the shares) consistent with SEC rules under Section 10b5 of the Securities and Exchange Act of 1934 covering when the insider can sell. Why does this exist? The rule was established in 2000 to protect Silicon Valley insiders from insider trading lawsuits. Yep, you caught it–it’s yet another safe harbor for the special people.

As MusicBusinessWorldWide reported (thank you, Tim), Mr. Ek sold $118.8 million in shares of Spotify at roughly the same time that Spotify was planning to change the way the company paid songwriters on streaming mechanicals by claiming that its recent audiobook offering made it a “bundle” for purposes of the statutory mechanical rate. That would be the same rate that was heavily negotiated in 2021-22 at great expense to all concerned, not to mention torturing the Copyright Royalty Judges. The rates are in effect for five years, but the next negotiation for new rates is coming soon (called Phonorecords V or PR V for short). We’ll get to the royalty bundle but let’s talk about the cash bundle first.

As Tim notes in MBW, Mr. Ek has had a few recent sales under his 10b5-1 agreement: “Across these four transactions (today’s included), Ek has cashed out approximately $340.5 million in Spotify shares since last summer.” Rough justice, but I would place a small wager that Ek has cashed out in personal wealth all or close to all of the money that Spotify has paid to songwriters (through their publishers) for the same period. In this sense, he is no different that the usual disproportionately compensated CEOs at say Google or Raytheon.

Don’t get me wrong, I don’t begrudge Mr. Ek the opportunity to be a billionaire. I don’t at all. But I do begrudge him the opportunity to do it when the government is his “partner” as it is with statutory mechanical royalties, he benefits from various other safe harbors, has had his lobbyists rewrite Section 115 to avoid litigation in a potentially unconstitutional reach back safe harbor, and he hired the lawyer at the Copyright Office who largely wrote the rules that he’s currently bending. Yes, I do begrudge him that stuff.

And here’s the other thing. When Daniel Ek pulls down $340.5 million as a routine matter, I really don’t want to hear any poor mouthing about how Spotify cannot make a profit because of the royalty payments it makes to artists and songwriters. (Or these days, doesn’t make to some artists.) This is, again, why revenue share calculations are just the wrong way to look at the value conferred by featured and nonfeatured artists and songwriters on the Spotify juggernaut. That’s also the point we made in some detail in the paper I co-wrote with Professor Claudio Feijoo for WIPO that came up in Spain, Hungary, France, Uruguay and other countries.

The Malthusian Algebra Strikes Again

It’s not solely Mr. Ek who is the problem child here, it’s partly the fault of industry negotiators who bought into the idea that what was important was getting a share of revenue based on a model that was almost guaranteed to cause royalties to decline over time. This would be getting a share of revenue from someone who purposely suppressed (and effectively subsidized) their subscription pricing for years and years and years. (See Robert Spencer’s Get Big Fast.). If I were a betting man, I would bet that the reason they subsidized the subscription price was to boost the share price by telling a growth story to Wall Street bankers (looking at you, Goldman Sachs) and retail traders because the subsidized subscription price increased subscribers.

Just a guess.

Now about this bundled subscription issue. One of the fundamental points that I think gets missed in the statutory mechanical licensing scheme is the scheme itself. The fact that songwriters have a compulsory license forced on them for one of their primary sources of income is a HUGE concession that songwriters have been asked to agree to since 1909. That’s right–for over 100 years. A decision that seemed reasonable 100 years ago really doesn’t seem reasonable at all today in a networked world. So start there as opposed to streaming platforms are doing us a favor by paying us at all, Daniel Ek saved the music business, and all the other iconography.

Has anyone seen them in the same room at the same time?

The problem that I have with the Spotify move to bundled subscriptions is that it can happen in the middle of a rate period and at least on the surface has the look of a colorable argument to reduce royalty payments. I think if you asked songwriters what they thought the rule was, to the extent they had focused on it at all after being bombarded with self-congratulatory hoorah, they probably thought that the deal wasn’t change rates without renegotiating or at least coming back and asking.

And they wouldn’t be wrong about that, because it is reasonable to ask that any changes get run by your, you know, “partner.” Maybe that’s where it all goes wrong. Because let me suggest and suggest strongly that it is a big mistake to think of these people as your “partner” if by “partner” you mean someone who treats you ethically and politely, reasonably and in good faith like a true fiduciary.

They are not your partner. Stop using that word.

A Compulsory License is a Rent Seeker’s Presidential Suite

But let’s also point out that what is happening with the bundle pricing is a prime example of the brittleness of the compulsory licensing system which is itself like a motel in the desolate and frozen Cyber Pass with a light blinking “Vacancy: Rent Seekers Wanted” surrounded by the bones of empires lost. Unlike the physical mechanical rate which is a fixed penny rate per transaction, the streaming mechanical is a cross between a Rube Goldberg machine and a self-licking ice cream cone.

The Spotify debacle is just the kind of IED that was bound to explode eventually when you have this level of complexity camouflaging traps for the unwary written into law. And the “written into law” part is what makes the compulsory license process so insidious. When the roadside bomb goes off, it doesn’t just hit the uparmored people before the Copyright Royalty Board–it creams everyone.

Helienne Lindvall, David Lowery and Blake Morgan tried to make this point to the Copyright Royalty Judges in Phonorecords IV. They were not confused by the royalty calculations–they understood them all too well. They were worried about fraud hiding in the calculations the same way Michael Burry was worried about fraud in The Big Short. Except there’s no default swaps for songwriters.

Here’s how the Judges responded, you decide if it’s condescending or if the songwriters were prescient knowing what we know now:

While some songwriters or copyright owners may be confused by the royalties or statements of account, the price discriminatory structure and the associated levels of rates in settlement do not appear gratuitous, but rather designed, after negotiations, to establish a structure that may expand the revenues and royalties to the benefit of copyright owners and music services alike, while also protecting copyright owners from potential revenue diminution. This approach and the resulting rate setting formula is not unreasonable. Indeed, when the market itself is complex, it is unsurprising that the regulatory provisions would resemble the complex terms in a commercial agreement negotiated in such a setting.

PR IV Final Rule at 80452 https://app.crb.gov/document/download/27410

It must be said that there never has been a “commercial agreement negotiated in such a setting” that wasn’t constrained by the compulsory license so I’m not sure what that reference even means. But if what the Judges mean is that the compulsory license approximates what would happen in a free market where the songwriters ran free and good men didn’t die like dogs, the compulsory license is nothing like a free market deal. If they are going to allow services to change their business model in midstream but essentially keep their music offering the same while offloading the cost of their audiobook royalties onto songwriters (and probably labels, too, although maybe not) through a discount in the statutory rate, then there should be some downside protection or another bite at the apple.

Unfortunately, there are neither, which almost guarantees another acrimonious, scorched earth lawyer fest in PR V coming soon to a charnel house near you.

Eject, Eject!

This is really disappointing because it was so avoidable if for no other reason. It’s a great time for someone…ahem…to step forward and head off the foreseeable collision on the billable time highway. I actually think the Judges know that the rate calculation is a farce but are dealing with people who have made too much money negotiating it to ever give it up willingly. If they are looking for a way off the theme park ride run by the evil clown, grab my hand on the next pass and I’ll try to pull you out of the centrifugal force. It won’t be easy.

This inevitable dust up means other work will suffer at the CRB. It must be said in fairness that the Judges seem to find it hard enough to get to the work they’ve committed to according to a recent SoundExchange filing in a different case (SDARS III remand from 2020) brought to my attention by Mr. George Johnson.

That’s not uncharitable–I’m merely noting that when dozens of lawyers in Phonorecords proceedings engage in what many of us feel are absurd discovery excesses, you are–frankly–distracting the Judges from doing their job by making them focus on, well, bollocks. We’ll come back to this issue in future, but I think all members of the CRB bar–the dozens and hundreds of those putting children through college at the CRB bar–need to take a breath and realize that judicial resources at the CRB are a zero sum game. This behavior isn’t fair to the Judges and it’s definitely not fair to the real parties in interest–the songwriters.

Tell the Horse to Open Wider

The answer isn’t to get the judges more money, bigger courtroom, craft services and massages, like a financial printer. Some of that would be nice but it doesn’t solve what I think is the real problem. I’d say that the answer is that the participants remember that the main this is that the main thing has to be the main thing. Ultimately, it’s not about us in the phonorecords proceedings, it’s about the songwriters. How are they served?

A compulsory license in stagflationary times is an incredibly valuable gift, and when you not only look the gift horse in the mouth but ask that it open wide so you can check the molars, don’t be surprised if one day it kicks you.

Grifting Under Heaven: What happens if TikTok Shuts Itself Down?

It finally happened–Congress passed the  Protecting Americans from Foreign Adversary Controlled Applications Act that prohibits the distribution, maintenance, or provision of internet hosting services for applications that are directly or indirectly operated by foreign adversaries. This legislation would include applications owned by ByteDance, Ltd. (the company that owns TikTok) or social media companies controlled by foreign adversaries that pose a significant threat to national security.

According to a Reuters exclusive, the response from Bytedance is that they would rather shut down TikTok than sell it–if the sale included the TikTok algorithm:

“The algorithms TikTok relies on for its operations are deemed core to ByteDance’s overall operations, which would make a sale of the app with algorithms highly unlikely, said the sources close to the parent….

TikTok shares the same core algorithms with ByteDance domestic apps like short video platform Douyin, three of the sources said. Its algorithms are considered better than ByteDance rivals such as Tencent and Xiaohongshu, said one of them.

It would be impossible to divest TikTok with its algorithms as their intellectual property licence is registered under ByteDance in China and thus difficult to disentangle from the parent company, said the sources.”

Well then. Of course, one of the primary national security arguments supporting any First Amendment defense on a challenge by TikTok to the content neutral, time, place and manner regulation will involve both the data privacy and foreign actor mass media manipulation evidentiary hearings. I don’t know how you make that defense without access to the algorithm. So why so secretive?

One could therefore plausibly argue that refusing to put the algorithm on the table is as good as admitting that TikTok is manipulating US users through algorithmic emotional targeting and scraping their users private data to do so. That would directly undermine their First Amendment attack on the US government and be a big step toward proving the government’s case.

And, of course, that secret algorithm uses music as the honeypot to attract users from the very young to the not so young. Remember, if this issue ever comes up in a court as a defense for the government, it will likely be because TikTok brought the underlying lawsuit that gave rise to the defense, and then refused to comply with a subpoena for the key piece of evidence. We call that “bootstrapping” in the trade.

In the interest of full disclosure, I’ve been supporting a version of the foreign adversary divestment legislation since 2020 and did so publicly that year when I moderated a great panel at the Music Biz conference on this very subject. If that panel or this topic made you uncomfortable, it may be because you felt such a strong…let’s say attraction…to TikTok as either a marketer or user that you couldn’t imagine living without it. Or maybe you bought into the “exposure” benefits of TikTok. Or maybe you’d had no reason to think about the larger implications. More about that another time.

After the legislation passed–despite a US lobbying campaign against it worthy of The Internet Association…ahem–people are asking, now what? So let’s think about that.

The Universal Connection

TikTok’s future cannot be well understood without taking into account the withdrawal of Universal’s recordings and songs from the platform for commercial reasons. That withdrawal now looks even more prescient given the foreign adversary divestiture legislation. Is it materially different to make a deal with a company that is just another piggy Big Tech company that doesn’t value music and considers it a loss leader to get to the really big bundle of cash like Spotify stock, or to do a deal with that piggy company who has also been declared a tool of a strategic foreign adversary of the United States by none other than the President of the United States?

I think it rather is. So the two events are in some ways quite connected.

First of all, in the short run I would expect TikTok to immediately expand their direct licensing campaign which evidently has already snared Taylor Swift and do it quickly before anyone noticed that what was just a crappy licensing deal the day before President Biden signed the legislation into law, now is a crappy licensing deal from a declared foreign adversary of the United States. How that twist will affect the brand of Miss Americana remains to be seen.

One solution I would expect to get floated in coming days is the need for TikTok executives to register as foreign agents under the Foreign Agents Registration Act. According to the Congressional Research Service:

In 1938, the Foreign Agents Registration Act (22 U.S.C. §§611-621; FARA) was enacted to require individuals doing political or advocacy work on behalf of foreign entities in the United States to register with the Department of Justice and to disclose their relationship, activities, receipts, and disbursements in support of their activities. The FARA does not prohibit any specific activities; rather it seeks to require registration and disclosure of them….In 1966, FARA was amended to shift the focus from political propagandists to agents representing the economic interests of foreign principals. These amendments were partially the result of an investigation by the Senate Foreign Relations Committee into foreign sugar interests and other lobbying activities. The 1966 amendments changed several definitions in the law, prohibited contingent fee contracts, broadened exemptions to ensure legitimate commercial activities were not burdened, strengthened provisions for the disclosure and labeling of propaganda, and required the Department of Justice to issue regulations on the act (28 C.F.R. §5.1 et seq.).

FARA enforcement languished for a bit over the years. However, FARA enforcement against those who fail to register as a foreign agent has had a resurgence in popularity at the Department of Justice. I think it can fairly be said that requiring TikTok executives to register would be consistent with DOJ’s actions and is worth a discussion. The policy underlying FARA is for the public to be aware of who is whom–disclosure not imprisonment, or at least disclosure first.

Enter the Miasma of Angst

There is something of a miasma of angst around passing the foreign adversary divestment legislation as applied to TikTok which is partly due to an extraordinary amount of commercial activity between the US and China which may tend to mask the underlying kinetic tensions between our countries. It’s quite difficult for Americans to grasp this kinetic part due to the Great Firewall of China, the language and cultural barrier, and China’s own propaganda which is way, way more effective and long lasting than anything the Nazis dreamed up. TikTok is, after all, a danger close propaganda missile battery.

The legislation seems to assume that China is an “adversary” and not a “belligerent”. Is that actually true?

There are other rather inescapable events that suggests that the U.S. is already in a war with China, at least as far as the Chinese government are concerned. It helps to understand that when people say the Chinese Communist Party or “the CCP”, they mean the Chinese government and vice versa, a government ruled by Chairman for Life Xi Jinping. The Chinese constitution is, for example, the Constitution of the CCP.

Always remember that Usama Bin Laden declared war on the US but nobody took him seriously. Nuff said.

Why is that relevant to TikTok? Well, here’s another declaration of war on the US that nobody noticed. On May 14, 2019, the CCP government declared a “people’s war” against the United States as reported in the Pravda of China, the Global Times operated by Xinhua News Agency (the cabinet-level “news” agency run by the CCP):

“The most important thing is that in the China-US trade war, the US side fights for greed and arrogance … and morale will break at any point…The Chinese side is fighting back to protect its legitimate interests. The trade war in the US is the creation of one person and one administration, but it affects that country’s entire population…In China, the entire country and all its people are being threatened. For us, this is a real ‘people’s war.'”

What is the “people’s war”? It is an old Maoist phrase (remembering that Xi Jinping’s father fought with Mao during China’s Communist Revolution). It has a very specific meaning in the history of the Chinese Communist Party according to Wikipedia:

People’s war, also called protracted people’s war, is a Maoist military strategy. First developed by the Chinese communist revolutionary leader Mao Zedong (1893–1976), the basic concept behind people’s war is to maintain the support of the population and draw the enemy deep into the countryside (stretching their supply lines) where the population will bleed them dry through a mix of mobile warfare and guerrilla warfare. 

So in the dimension of “unrestricted warfare,” what end state would the CCP like to see? Bearing in mind that they will avoid a shooting war in favor of the various other dimensions of civil-military fusion and following Sun Tzu’s admonishment o subdue the enemy without fighting. One way would be to impose economic damage on the United States.

The Unrestricted Warfare Dimension

What is this “unrestricted warfare”? That is a much bigger topic and I cannot emphasize enough the importance for every American and really everyone to understand it. Literally “Unrestricted Warfare” is one of the most important books on military strategy and geopolitics that nobody has read.

We think the book was published in Mandarin In 1999; it could have been earlier. It was written by two colonels in the Peoples’ Liberation Army of the Peoples Republic of China and entitled Unrestricted Warfare. The title is variously translated as Unrestricted Warfare: Two Air Force Senior Colonels on Scenarios for War and the Operational Art in an Era of Globalization, or the more bellicose Unrestricted Warfare: China’s Master Plan to Destroy America. 

Why is this important? You must understand that when the colonels say “to destroy America” they actually mean that very thing. China’s military and civil goal is to replace the United States as the global hegemon under the “mandate of Heaven.” (See 2050 China: Understanding Xi Jinping Thought.)

No kidding.

The thesis of the book is that it is a mistake for a contemporary great power to think of war solely in military terms; war includes an economic, cyber, space, information war (especially social media like TikTok), and other dimensions–including kinetic–depending on the national interest at the time. I think of Unrestricted Warfare as an origin story for China’s civil and military fusion policy, later expressed in various statutes of the Chinese Communist Party that were on full display in the TikTok hearings before Congress.

Although the book was translated and certain of the cognoscenti read it in Mandarin (see Josh Rogan, Michal Pillsbury and Gen. Rob Spaulding), it was largely unnoticed until recently. Except in China–the CCP rewarded the authors handsomely: Colonel Qiao Liang retired as a major general in the PLA and Colonel Wang Xiangsui is a professor at Beihang University in Beijing following his retirement as a senior Colonel in the PLA (OF-5).

The point of both Bin Ladin’s 1998 fatwa and Unrestricted Warfare, and the 2019 people’s war declaration, is both that each of them declared war on America, and that no one paid attention. We know where that got us with bin Ladin, there are movies about it.

To War or Not?

So the first question is what is the argument that we are not at war currently with China under their definition? Particularly given that they declared war on us with just enough plausible deniability to make you feel bad about shutting down TikTok–see what I did there? (I think the CCP declared war started much, much longer ago, but let’s stick with their people’s war declaration as a recent tangible event to keep it manageable and ignore, oh, say island building, expanding to the largest navy in the world, and the rest of it. (Read The Hundred-Year Marathon and see what you think. It may be worth reviewing the history on the Anglo-German Naval Agreement indirectly referenced in a Noël Coward song.)

Don’t Let’s Be Beastly to the Germans by Noël Coward is reflective on “excessive humanitarians”

It is also worth remembering that should open hostilities with China actually break out, i.e., in the colonels’ words should the current level of unrestricted warfare go kinetic, CCP-owned companies operating in the US will fall under an entirely more intense level of scrutiny. This is permitted by international laws of armed conflict and doesn’t even require additional US national laws although there surely will be many.

In the first instance, is the ostensibly private company actually private? What if good old chummy Mr. Tok turned out to be a colonel in the People’s Liberation Army and just didn’t get around to telling anyone? (I don’t think anyone in Congressional hearings ever asked him.)

And what if TikTok complied with the CCP laws that apply to Bytedance for sure and may apply to TikTok that require there to be a CCP cadre in each company? (See Article 19 of China’s “Company Law.”) If a private company’s staff members are also members of the armed forces of a state or have combat functions for an organized armed group belonging to a party in the conflict, they are not considered civilians.  Further, if a private company is directly involved in military operations (e.g., cyber attacks or psy ops), it may lose its civilian status and become a legitimate military target under the Geneva Conventions. (Further reading, an excellent article from West Point on topic. I don’t think anyone ever asked Mr. Chew if he was a serving member of the PLA.)

So if China invades Taiwan and the US comes in on the side of Taiwan, but TikTok assists in even psychological warfare ops to support that war effort for China against Taiwan (and possibly the US), then what happens? What if it turns out that senior Tiks are reservists or active duty in the Peoples Liberation Army that they just kind of didn’t mention before? Good old Uncle Chew? This kind of thing can also get you sanctioned if you try hard enough. Remember this came up with Elon Musk when Starlink allegedly thwarted an attack by Ukraine (which he denied for other reasons).

So about those licenses….Do artists really want to be used as a honeypot? Especially if TikTok keeps its algorithm, ostensibly shuts down in the US, but parks outside the US and still assaults US users?

Chronology: The Week in Review: Search is Ripping Us Off Again, this time for AI; #FreeJimmyLai; the MLC loves the MLC almost as much as the NMPA

In case you think that infringement of copyrights in AI training happens only to rock stars, photographers, record companies or movie studios, let me give you a personal anecdote that might cause you to reconsider. I asked Bing’s Copilot AI tool to list the deal points in a record producer agreement, and this is what I got back:

Copilot

Certainly! When negotiating a producer agreement, several key points should be considered. Here are some common negotiation points from the artist’s perspective:

  1. Scope of Engagement:
    1. The producer is generally engaged for one album project at a time.
    1. Clarify the scope of work, including the number of songs or recordings to be produced.
  2. Budget and Compensation:
    1. Determine the budget for the project (e.g., $10,000 in your case).
    1. Agree on the producer’s compensation, which may include an upfront fee, points on sales, or a combination.
  3. Ownership and Rights:
    1. Address ownership of the master recordings:
      1. Will the artist own and control the masters?
      1. Does the producer retain any rights?
  4. Credits and Royalties:
    1. Specify how the producer will be credited on releases.
    1. Discuss any royalties or backend points for the producer.
  5. Recording Schedule:
    1. Set a timeline for recording sessions.
    1. Define the two-week period for your project.
  6. Logistics:
    1. Determine where the recordings will take place.
    1. Outline the artist’s approval process.
    1. Define the producer’s deliverables.
  7. Termination Clause:
    1. Include provisions for termination if either party breaches the agreement.
    1. Address payment for work completed up to that point.

Remember that each negotiation is unique, and it’s essential to tailor the agreement to your specific needs and circumstances. Legal advice is recommended to ensure compliance with local laws and industry standards1 3 4.

Source(s)

1. An Artist’s Guide to Negotiating Record Producer Agreements – Medium

2. Negotiating a Music Producer Agreement: 7 Key Issues

3. 5 Things to Look for in a Music Producer Agreement – Lawyer Drummer

4. How to Negotiate: Steps, Phrases & Tips to Win the Deal – Selling Signals

Notice that Copilot lists “Source(s)” and that source #1 is an article from Medium.

My article.

I’ve written a number of articles about negotiating producer agreements and I can categorically say I haven’t given permission or been asked to give permission for any of those articles to be scraped and used to train AI. So how did it come to be in Copilot’s training materials?

My guess is that Medium (and probably a lot of other sites) were crawled by Bing’s spider and that copies of Medium pages were stored in Bing’s (or Microsoft’s) data centers. When Microsoft launched its Copilot AI tool, one could imagine that the temptation would have been strong to use those copies as part of the training tools for Copilot. In fact, the Verge reports that “companies around the web are using your site and its data to build massive sets of training data, in order to build models and products that may not acknowledge your existence at all.”

Are you surprised then that two of the biggest operators in the AI space are the search engine operators Google and Microsoft? This is another example of how Big Tech helps itself to your data and work product without you even knowing it’s happening. So now what? Now I know I’m being ripped off, and I’m wondering if Medium is in on it.

The Verge tells us:

The ability to download, store, organize, and query the modern internet gives any company or developer something like the world’s accumulated knowledge to work with. In the last year or so, the rise of AI products like ChatGPT, and the large language models underlying them, have made high-quality training data one of the internet’s most valuable commodities. That has caused internet providers of all sorts to reconsider the value of the data on their servers, and rethink who gets access to what. 

Ya think?

#FreeJimmyLai

In case you were wondering if the Chinese Communist Party is serious about using TikTok to collect data as they please, Hong Kong publisher Jimmy Lai is a perfect example of what happens when a company refuses to cooperate. The CCP took over Jimmy’s Apple Daily newspaper and arrested him. Jimmy has been in prison for three years and has still not come to “trial” (whatever that means under the CCP).

Blake Morgan sounds off in Hypebot on how TikTok uses music as a honeypot to hook innocent users

The MLC Reup

The MLC gets a five year review of how they are doing. The Copyright Office conducts that review of both the MLC and the DLC. The public (that’s you) gets a chance to weigh in now because the MLC and the DLC filed their respective written statements about their respective awesomeness.

One of the most interesting exchanges happened between Graham Davies (who essentially is the public face of the DLC and is the head of the Digital Media Association) and the NMPA. Graham offered muted criticism of the MLC which irked the easily irked NMPA who offered a rather scathing response.

The most interesting thing about the exchange was that it was the NMPA–not the MLC–that responded to Graham. Tell you anything?

Taking Away the Punchbowl: Removing Open Market Investments from the MLC

Whenever someone is holding your money, you kind of want to a lot of about it, don’t you? You want to know how much, where they hold it, and when you get it back, right? Seems reasonable. But not only does the MLC hold what is likely to be hundreds of millions in black box money, they don’t really tell you these attributes, do they?

Plus they tell you that somehow the Music Modernization Act authorizes them to invest your money in the open market to obtain some theoretical government mandated rate of return, yet the Copyright Act says nothing of the kind.

They then refuse to disclose how they intend to invest OPM and who bears any losses and makes any profit from these open market transactions. They don’t just refuse to tell songwriters, because why tell them whose money it is, they don’t just refuse to tell the Copyright Office who is tasked by Congress with overseeing their operations, they also dodge answering questions from the very Congressional committee that oversees the MLC.

The other problem is that the longer the MLC delays in distributing the black box to the correct copyright owners, the more likely it is that the MLC will choose the nuclear option–market share distribution to the copyright owners who are overrepresented on the MLC’s board without regard to copyright ownership. And just to be clear what that means, it means the black box money is going to get shared with people who aren’t entitled to it thus leaving lots of hungry people.

Many people believe that this is exactly the intent and that the market share distribution will happen right after the MLC gets redesigned to operate for another five years at the punchbowl. Why? Because when the market share distribution happens it very likely will tip off an aggressive no-shit backlash against the MLC that would likely argue they can’t be trusted with much of anything at all.

It’s entirely possible that if the MLC has been this secretive about the amount of black box money in its grasp, the lobbyists never came clean with Congress about just how much the services were paying for their retroactive safe harbor in the form of undisclosed and unallocated monies. Remember the big scramble to deny a press report that the black box was over $1 billion? Maybe that press report wasn’t so far off after all.

Fortunately, there is a simple solution. Congress needs to take away any control or decision making about the unallocated black box money from the MLC. This could be as simple as a technical amendment forcing the MLC to act in a transparent manner and disclose the current investments of the black box money, any desposits and withdrawals, and to force distributions to occur when claimed by the correct owner.

The entire concept of a market share distribution should be eliminated from the Copyright Act because it creates a perverse incentive not to find the true owners by the people who benefit from the market share distribution. This moral hazard was obvious from the time the lobbyists drafted Title I of the Music Modernization Act and it should come as no surprise that it has failed miserably.

There’s no time like the present to fix it. Decisions about the black box should be taken away from the MLC and placed far, far outside if its orbit of the network of interlocking boards, consultants, accountants and companies surrounding the MLC and its confederates.