Archive for January, 2009

Getting to Yes in the Blogosphere: YouTube Launches the Dance of the Sock Puppets

January 27, 2009 Comments off

As someone who has been an observer of the state of the music business for a while, I can tell you that the attacks on Warner Music Group and their artists in the blogosphere are (A) silly and (B) laced with what is called “quibbling” in some circles. And if you’re a black helicopter guy like me, not an accident.

First of all, the new media folk at Warner Music Group are and have been at the leading edge of adopting new media in our business. They’ve had some company, but have always tried to get it right and often have. Sorry, everybody else, but that’s my view.

In the recent past, this includes really smart work on Michelle Branch, The Secret Machines, Linkin Park, and having a very important role to bringing new media to country music. (Attention those having breakfast at Bucks–Nashville is that place where the people come from whom you like to mock.)

I don’t have any special information about this, but here’s what I can tell you from following my nose. When a company gets a big advance on a deal, they don’t have to share that money with the artist until it earns out. If they get to the end of that deal with an unrecouped balance (called a “red balance”, no offence meant to the EFF), then the label pockets the unrecouped amount.

The label doesn’t have to account, i.e., share that advance, with artists until they get an accounting for actual usage of that artist’s work, or videos in the case of YouTube. So it is to the label’s advantage to have the accountings be terrible (which I keep hearing they are at YouTube) and to have the per unit royalty rate be low so that they get to keep as much of the advance as possible.

For example, let’s say that an online company paid Big Records a $25 million advance for a 3 year license. And let’s say that the per unit rate the Big Records agreed to was some version of a revenue split with a minimum of $0.01 per play. And let’s say the accountings were really poor quality on the revenue split so that the per unit minimum was all that got paid through to Big Records on 5,000,000 plays per quarter just to keep it simple.

So Big Records has to account to the artists for $50,000 a quarter, or $600,000 life of the deal. And at the end of three years, Big Records has an unrecouped balance of…wait for it…$24,400,000.

This is a bit of an extreme example, but you get the idea.

Now lets say Not So Big Records wants to get a higher per stream royalty rate. Who benefits from that? The artists signed to Not So Big Records for one. The label, of course.

The artists. Get it? The higher the royalty rate, the more the artists get paid.

Now who doesn’t benefit from that higher rate?

The online service who has a Most Favored Nations clause in their license so that if Not So Big Records wins their negotiation, the online service has to pay Big Records the same rate.

That’s got to make the online service feel desperate enough to make it worth launching a few sock puppets in the blogosphere, don’t you think?

It’s also why it is really, really bad form to mock a label trying to get a higher rate in an arms length negotiation. One thing that most artists are realizing is that the people in the DMCA industry are not their friends.

Friends don’t let friends get ripped off on YouTube.

Your Tax Dollars at Work Part 2: The Barter iTax

January 24, 2009 3 comments

“File sharing” is a term that entered the popular vocabulary as a bit of double speak about 10 years ago to put a “feel good” spin on behavior that was unauthorized at best. As one ISP executive succinctly put it in an e-mail: “….‘piracy’ is a loaded term. Could we say ‘sharing’ – ‘piracy’ implies there’s something wrong with it. Think of it as helping the health and good living of rich cocaine-sniffing rock stars by leaving them with less free money to spend on sex and drugs.” (His company subsequently adopted the near-standard “3 strikes” policy.)

However you feel about the term and the behavior it describes, “file sharing” networks clearly are intended for the exchange of music, film, books, illustrations, photographs, song lyrics, needlepoint, whatever–“ripped” originally from a legitimate device that permits the “ripping”. The “file sharing” networks increase in popularity with a steady inventory of files being made available for “sharing.”

This means that a “file sharing” network is really a marketplace in which “file sharers” come to “share” files, meaning that they upload a few and download a few. This is also known as “barter”. (Albeit on a black market, but that’s not a tax issue.)

Those who use the term “file sharing” typically get nervous when you start calling it “file bartering”. “Barter” sounds like trading beads for Manhattan, barter sounds like something commercial, something where each side gets something for the exchange of something else (also known as consideration), “barter” sounds—oh, I don’t know…taxable.

New York Governor David Patterson included a 4 percent sales tax on digital goods in his State budget. The tax is on downloaded music, ring tones, movies, books, photographs, and games, among other online items. Sounds like the same stuff as is traded on file bartering networks, yes?

As Mark McKinnon recently noted in a piece on the Governor Patterson’s “iTax”: “Add a tax to broccoli, and you’ll sell less broccoli; there’s no convenient, underground tax-free broccoli market. But add a tax to digital goods, and you won’t just discourage consumption of legal downloads; you’ll push people in the direction of the easy, free alternative: illegal file-sharing.”

This is, of course, exactly correct. Unless there were a counterbalancing tax on the underground broccoli market.

I would suggest to the governor that if he wants to make the real money, he needs to tax file bartering networks operating in New York State on the fair market value ($1.29 for music downloads) of each of the digital files being bartered. The file bartering networks can choose to pass on the tax to their users if they like.

A barter tax doesn’t require any lawsuits about copyright infringement. Whether User A has the rights to the beads they trade for the island owned by User B, or whether User B owns the island she trades to User A is of no import. That’s between User A and User B to figure out, possibly with the help of the lawful owner of the beads. The state makes little inquiry into who holds proper title to anything that it taxes. When they charge you the parking tax, they don’t ask if you own the car.

The state can still tax the beneficiary of the transaction—the p2p or Bit Torrent software owner or operator who gets the benefit, i.e., either the upstream beneficiary in the hybrid economy (like YouTube or Limewire) or the downloader. Or the more findable one, probably the operator. This isn’t a question of who has liability for copyright infringement, a much murkier issue. This is very clear cut–there’s a tax and the state will put the collection and record keeping burden on the one most likely to pay at the lowest compliance cost. (The state could allow all employees to pay on a 1099 basis, but they don’t.)

Some file bartering networks are easy to find. Limewire’s DMCA agent is:

Lime Wire LLC
377 Broadway Fl. 10
New York, NY

Some are not so easy to find, but finding a taxpayer has never been much of an impediment to imposing a tax. The tax enforcement folk can probably take care of that problem without too much trouble. And then there’s YouTube.

And if the file bartering networks can’t be found by tax enforcement professional investigators, I guess they’d have to keep an eye out for the owners if they ever pass through–or maybe over–New York.

Aside from the externalities created by the iTax that Mark McKinnon correctly notes, the Governor should go for the real money and maybe do some good in the process.

And let’s acknowledge for once what is really going on–trading of goods in gigantic swap meet. And before we hear from the Cassandra EFFluviati wringing her hands about how “this won’t stop the beloved file sharing”, the barter tax isn’t designed to “stop” file bartering. It’s designed to slow it down and to make somebody pay something for their actions. You can download away and thumb your nose at your favorite artist, you can thumb your nose at that artist’s producer, road crew, booking agent, manager and their respective families, you can express your disgust with the record company of all of the above, you can even thumb your nose at US attorneys and say catch me if you can–you can do all that. But remember that thumbing your nose at the IRS has not worked out very well for certain people in the past. This would just be one more of the thousand cuts, albeit a pretty important one. The free riding has to stop.

There’s no such thing as a “free culture”.

Your Tax Dollars At Work: The Boston University IT Network, where Elites Meet to Trade God Knows What

January 21, 2009 Comments off

I ran across an excellent piece by Tom Sydnor (“Has Boston University Left Its Safe Harbor and Become Liable for Students’ Piracy?”) on the IP Central blog (which should be read regularly) discussing a recent ruling that Boston University apparently has shielded itself from legal liability according to a federal district court in Boston–by commiting acts that protect the identity of lawbreakers. Talk about your Chappaquiddick moment:

“[A] federal judge has reportedly held that Boston University (BU) is such an incompetent internet-access provider that it cannot disclose the identities of allegedly infringing users of its network….'[BU] has adequately demonstrated that it is not able to identify the alleged infringers with a reasonable degree of technical certainty.’

For those seeking to enforce federal laws or rights other than copyrights, this order is all bad news. London-Sire suggests that BU has made its campus network into a de-facto safe harbor for anyone using the Internet to commit any crime. It would seem that terrorists, pedophiles, phishing-scheme operators, hackers, identity thieves, and copyright pirates who can access the Internet through BU’s network now have a get-out-of-jail-free card–a judicial decision holding that any identifying data provided by BU is too hopelessly unreliable to support so much as the filing of a civil lawsuit….BU’s IT Department might also consider the potential legal implications of acts that tend to conceal the identity of lawbreakers. See, e.g., 18 U.S.C. §§ 2, 3, 4, 241, 307, and 2319.”

Once again, our government sanctions the cruel theft of labor value contributed by artists and songwriters–who are not asking for a bailout, although if anyone is entitled to one, it’s them. Compare BU’s treatment to that in Napster, where the company was told filtering to a certainty of 99 1/2 just won’t do. Talk about getting home towned.

Tom’s post gives a really first rate legal analysis of this bizarre decision and provides excellent context. It is precisely this kind of adjudicating, this lazy thinking, that must be criticized thoroughly if our culture is to survive the attack of the machines. Decisions such as this are negative externalities that use the government to impose costs on artists and songwriters to deny them their economic liberty.

Every time the government uses its mighty force to defeat artists and culture, the government denies the people and itself a key soft power tool to better our international relations and avoid conflict.

In the words of President Obama, “[o]ur economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.”

What he said.

Soft Power and the Death of Free Culture

January 19, 2009 4 comments

Appointments in the Obama Administration make it clearer every day that the President-Elect fully understands the fundamental economic principle taught in every freshman econ class around the world—there is no such thing as “free” culture.

President Elect Obama also is an unambiguous supporter of the doctrine of “smart power” as articulated by the Report of the Smart Power Commission of the CSIS. Secretary of State Select Hillary Clinton mentioned the importance of “smart power” many times during her confirmation hearings.

“Smart power” is a foreign policy doctrine that balances the use of “hard power” (such as weapons or bribes) with “soft power” that uses a country’s cultural attractiveness to persuade opponents. Or more simply—stick and carrot.

Soft power includes the dissemination of popular culture, and there are few countries that have benefited more than the United States from the attractiveness of its popular culture. Soft power does not expressly offer a metric of the commercial success of popular culture as a driver for the success of a country’s soft power in the struggle for the hearts and minds of other peoples, but at the time it was written, that metric was unnecessary as the Pirate Bay did not exist when Joseph Nye introduced the concept in his seminal 1990 book Born to Lead: The Changing Nature of American Power and was not fully part of the public debate in 2004 when Professor Nye published Soft Power.

But it is now. Because in order for popular culture to remain part of the tools available to those charged with operating a successful foreign policy for the United States, it is of critical importance for that culture to survive and grow, not fail and be regurgitated. The importance of these tools are not to be underestimated. Professor Nye notes in Soft Power “Long before the Berlin Wall fell in 1989, it had been pierced by [music,] television and movies….Lennon trumped Lenin….One [Chinese] dissident told a foreign reporter [during the Tiananmen Square massacre] that when she was forced to listen to local Communist Party leaders rage about America, she would hum Bob Dylan tunes in her head as her own silent revolution.” (Soft Power 49-51.)

These are all examples of the importance of maintaining cultural contact with both our friends and enemies. Unfortunately, the engine that drives the production of popular culture, including that of the U.S. and the U.K., is under a historic level of attack in the virtual world that undermines smart power options.

The thought leaders of the anti-copyright crowd (such as Lessig, Fisher and Geist) lead the grand apology for piracy from the amen corner (see In Defense of Piracy, about Lessig’s new book). They have a distorted view of the artistic world they study but never experience. These ivory tower academics position an artist’s struggle for economic freedom as a “war” that pits Silicon Valley Leviathans like Google (aka “innovation”) against “Hollywood” (aka “Hollywood”)—while incongruously trumpeting the democratizing influence of the Internet to open up new distribution channels for the “little guy” to go around “Hollywood”. But when the little guy gets to the promised land of innovation, she will find The Man 2.0 lunching on her work—for free.

Hang on Snoopy: The Man 2.0 as explained by Lessig to Colbert

January 10, 2009 Comments off

Remember The Man 2.0 in the Grey Flannel Suit? Lessig’s display–jumpy knees and all–on the Colbert Report has to be seen to be believed. He reminds us again that just like the $1.65 billion Google paid for YouTube, the point of the “hybrid economy” is for value to be captured by everyone BUT the creator.

Lessig made the mistake of going on the Colbert Report to pump his current book (see In Defense of Piracy), a common mistake in the Harvard set (see Nesson interviewed by Colbert about his lobbying for the online gambling industry).

Hulu has the entire Colbert show with Lessig, and the Lessig bit starts around 14:00. (The rest of the show is much funnier, so be sure you watch all of it.)

The key part of the exchange between Lessig and Colbert is about Lessig’s “hybrid economy”. It follows Lessig’s stunning attempt at reverse victimization featuring Lessig pounding the table about a “war” waged against “kids” (meaning prosecuting p2p users for piracy, piracy that some would say Lessig encourages–see In Defense of Piracy). I thought, this guy thinks he can go on a comedy show with talking points.

Smart. Talking points for comedy. Very smart. Original, too.

First of all, the only people (aside from 13 year olds) who use the word “war” to describe anything other than a war are people who have never been to a war. Second of all, the people who ran Kazaa, Morpheus, Grokster, et al are not “kids”. “Kids” don’t write checks for $100 million. So I don’t think that I’m the only one who was puzzled–even quizzical–about what in the world Lessig was talking about.

My favorite part came in the first minute or so. I realized that the world was watching Lessig realize that he was going to get interrupted, pushed around, and generally lampooned and there was not one thing he could do about it. This is a guy who is just not used to being made an ass and that display in and of itself is rather priceless.

I think–and one cannot be sure about these things–I think that Lessig thought that after a very rocky start, he needed to switch his tactic to “Try To Be Funny”.

With Steven Colbert. Right.

And we all know how forgiving comedians are when someone tries to out-funny them. Even when it’s the infirm. Smart. He’s a cagey one, that Lessig.

In the most telling section, Lessig gives the example of Flickr as a “hybrid economy” model (although he could just as easily chosen YouTube but I guess that might have been a bit much given that Comedy Central’s parent Viacom is suing Lessig’s benefactor Google). Colbert tries to understand what he means by “hybrid economy”:

“Colbert: The ‘hybrid economy’ is that everybody else does the work and Flickr makes the money?

Lessig: Don’t tell any anyone!

Colbert: This is like our green screen challenges, they do all the work and I get all the ad revenue?

Lessig: That’s the point, that’s exactly the point.”

Welcome to The Man 2.0

You have to see it to believe it.

The Cynical Musician

January 1, 2009 Comments off

A very smart post by a Polish musician regarding ISP licensing that runs through some numbers about why the EFF’s “voluntary collective licensing” scheme largely adopted by Choruss is daft.

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