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Ron Wyden’s Oregon Updates the Business Plan: Sell Electricity to Data Centers

September 29, 2013 1 comment

In case you were wondering what the deal is with Palo Alto High School alumnus and Oregon Senator Ron Wyden’s interest in Big Tech, maybe it’s this: Amazon, Rackspace, Facebook and of course Google, all have built massive data centers in Oregon that suck down Oregon’s hydroelectric power.

Yes, according to The Oregonian:

Data centers have become one of Oregon’s biggest industries, with Google, Apple, Facebook and Amazon spending billions of dollars to buy and equip online storage facilities in rural parts of the state. They’re lured primarily by tax savings, which can shave tens of millions of dollars from a server farm’s annual operating cost.

Good thing these Gang of Four members are all supporting the local tax base.  Oopsie!  Wrong!

Earlier this week, The Dalles city council and Wasco County commissioners voted to approve a package of “enterprise zone” tax breaks that exempts Google’s buildings and computers from local property taxes. The pact could save Google tens of millions of dollars or more over the 15-year life of the deal.
In exchange, Google will make an up-front payment of $1.2 million to local governments and $800,000 annually after that.
So where does this hydroelectric power come from?
In The Dalles, Oregon–Senator Wyden’s state–Google uses renewable hydropower from The Dalles Dam to run its data center. That hydropower is also relatively cheap, giving the company an economic advantage.
Wait–The Dalles Dam?  Isn’t that paid for by the federal government a/k/a The Congress?  a/k/a the US taxpayer?

Bob Jenks, director of the Citizens’ Utility Board of Oregon, estimates that Google’s hydropower costs the company a little more than half what industrial customers of PacifiCorp and Portland General Electric pay.

Google didn’t break out its energy use in The Dalles, but power usage figures provided to The Oregonian by the Northern Wasco County Public Utility District give some indication of scale.

Five years ago, before Google opened its data center in The Dalles, the PUD provided 31 million kilowatt hours to primary service customers. Today, that number has increased tenfold and makes up nearly two-thirds of all the power the PUD provides.

Google provides computing services that benefit everyone, Jenks said, so it’s hard to evaluate whether its power use in The Dalles is optimal from an economic perceptive. But he said there’s only so much cheap hydropower to go around.

“If they’re taking up more hydro,” Jenks said, “there’s less hydro available for someone else.”

Not to worry, though, the Congress can take care of that little problem given that there are 31 dams on the Columbia River–including The Dalles Dam.  And given that Senator Wyden is the chair of the Senate Energy & Natural Resources Committee.

The Dalles Dam has an interesting history with Oregon’s local Confederated Warm Springs Tribes and the Yakama Indians, too.  Thanks to the ever efficient Army Corps of Engineers and a bunch of federal taxpayer money, the Dalles Dam hoodwinked the tribes into giving up sacred land:

The gates of The Dalles Dam closed in 1957 and the waters of the Columbia River began rising to flood traditional Indian fishing sites, sacred areas, burial sites, and homes. Many Indians stood on the shore openly weeping as the river stopped flowing and began to rise. Celilo Falls, an important resource and spiritual site, disappeared beneath the rising waters. For more than 10,000 years the people had fished in the area between Celilo Falls and Threemile Rapids. The rising waters of the Columbia displaced some of the oldest continuously inhabited village sites in North America. Archaeological sites which had never been studied were destroyed.

In 1958, the Bureau of Indian Affairs (BIA) declared that all of the permanent residents of old Celilo Village in Oregon had been provided with comfortable homes at various places up and down the river and elsewhere. However, under the BIA rules only a small portion of the Indians who considered Celilo Village to be their home actually qualified as “permanent” residents. Part of the old village was given by the BIA to the state of Oregon to be used as a public park. The BIA had no concern for the possible Indian use of this land.

Oh, well.  Just didn’t update the old business model, eh?

And you know what else?  Amazon, Rackspace, Facebook and of course Google are all members of the Internet Association, Big Tech’s premiere lobbying shop in Washington, DC.

Don’t break the Internet, dude.

Getting the Government Out of Songwriting: Voluntary Licenses Should Replace Consent Decrees or Compulsory Licenses

September 28, 2013 4 comments

[Editor Charlie sez, this article originally appeared in the Huffington Post.]

Chairman Bob Goodlatte (R-VA) is holding a useful series of thought provoking hearings before the House Subcommittee on Courts, Intellectual Property and the Internet reviewing the current state of the U.S. Copyright Act. The most recent hearing in this series was on September 18, entitled “The Role of Voluntary Agreements in the U.S. Intellectual Property System“.

This is a very important subject to songwriters. It is not widely known that songwriters are highly regulated by the government through two primary mechanisms — the ASCAP and BMI consent decrees dating from the middle of the last century and the compulsory mechanical license dating from 1909. The Congress should consider abandoning both in favor of voluntary licenses.

Terminate the ASCAP and BMI Consent Decrees

ASCAP and BMI each grant blanket licenses for the exclusive right to publicly perform the millions of songs each represents. The licensee is often a large commercial entity such as a broadcaster network or a media company like Google. Hence, ASCAP and BMI are called “performing rights organizations” or PROs. U.S. songwriters contract with either ASCAP or BMI (or a third non-regulated organization called SESAC). Songwriters authorize their PRO to bargain collectively to license their songs.

The biggest problem for songwriters with the consent decrees is setting the royalty rate. Rates are privately negotiated by the PROs and licensees in the first instance. But if a PRO cannot make a deal with a well-funded licensee, that licensee (such as Pandora, most recently) can go to a “rate court”, a U.S. District Court sitting in New York that conducts an expensive hearing to approximate a market rate. At that point, things start to get very expensive for songwriters, compounded by the fact that the licensee can continue to use the songs under essentially a rateless license pending the court’s decision.

An example of the tortured morass of rate courts is the current Pandora case: The rate court judge has stated that she may ask the U.S. Department of Justice for advice in determining whether Pandora has the right to force a songwriter to license her songs in a particular medium under ASCAP’s otherwise voluntary collective licensing. It’s comforting to know that the DOJ has the resources to devote to this pressing issue!

Rate courts are extraordinarily antiquated and increase both moral hazard and unfair bargaining position. Given the high cost of rate courts, their rates are arguably more a product of who can afford to sustain the litigation rather than fairness for songwriters.

Songwriters find themselves in a rate court proceeding with public companies that are willing to outspend them following a negotiation of dubious bona fides — all to determine a market rate that the government prohibits the market from determining.

Terminating consent decrees would be a big step toward reintroducing market forces while preserving the songwriter’s right to negotiate directly or collectively.

Let Songwriters Opt Out of the 1909 Compulsory Mechanical License

The 1909 mechanical license covers the exclusive reproduction right of songwriters, or the “mechanical reproduction”. Mechanical licenses were first for piano rolls, but now cover both physical and digital records, including on-demand streaming in some cases.

The mechanical license is compulsory in the U.S. After a song is used once (essentially one commercial use), songwriters cannot never stop its subsequent use.

In addition to requiring the mechanical license, the government also sets the “minimum” rate through another extraordinarily expensive rate setting proceeding where the government tries to approximate a market rate. Sound familiar?

To be clear, there are a variety of voluntary mechanical licenses with negotiated terms — other than the rate. In practice, mechanical royalties never exceed the government’s “minimum” royalty rate. Any “voluntary” rate negotiation is usually to drive rates below the government’s “minimum” — more accurately the “maximum”.

Why can’t a market rate be established by the market?

By allowing songwriters to opt out of the compulsory license and negotiate voluntary licenses, Congress could preserve the current regime for those who prefer it, but allow those who do not to enjoy market freedom. It is relatively simple to notify the world that a songwriter opted out of the regime. Songwriters can record a notice with the Copyright Office, or the databases of the PROs as is the longstanding commercial practice for copyright ownership transfers.

Songwriters watch huge public companies essentially given a pass on mergers and other anticompetitive activities that have a profound effect on the U.S. consumers. It’s hard to understand why the government feels the need to continue to protect dominant companies like Google and Pandora from the monopolistic lusting of songwriters.

If YouTube is the New College Radio, Can YouTube Keep the Hate Group Playlists?

September 26, 2013 1 comment

Google is making a big push to get colleges and universities to take their various Google Apps for Education

For “free”, of course.  And we all know who the product is on a “free” Google app, right?

The product is you.

These education apps appear to link the user to Google’s entire suite of products, including YouTube.  And of course as soon as you leave the education environment and go to say YouTube, what happens to the privacy policy and terms of use?  It grows up to the same privacy policy that applies to everyone inside or outside of the Education environment.  And in the case of Google’s case study clients, the New York State K-12 Schools, the Maine Township High School District and the Edmonton Public Schools (in Edmonton, Canada), that includes grades K-12, not just college-age adults.

 

And there’s the real story behind the “free” education apps–these apps are honeypots for data and in the case of education apps driving traffic to Google’s YouTube monopoly, the apps are honeypots for some very young users particularly in the K-12 school systems using Google Apps for Education.  (See also “Google Apps for the Common Core” which seems to be a major focus of use cases for Google Apps for Education integrated into Common Core data collection mandates and testing.)

So from a programming point of view, YouTube appears to position itself as a substitute for college radio or college television.  Google Apps for Education drive YouTube’s scalability on campus–with one big exception.

Do Google’s Hate Group Playlists Violate Campus Hate Speech Policies?

johnny rebel youtube mix

Google has been trying to tell advertisers that YouTube is the replacement for television, and I’m sure if you asked them. Google would also tell you that given the vast presence of music videos including official clips, user generated and cover videos, YouTube is also a replacement for radio.

If Google is pitching its Google education apps to colleges and universities and promoting its YouTube product on those apps, then Google is backdooring a competitor to thinly financed college radio stations in the form of its monopoly YouTube product.

Accion Radical

With one big difference–YouTube can broadcast brand sponsored hate speech videos all the live long day, all of which would violate the university hate speech policies.  And Google profits from hate by selling advertising against these videos, particularly on the lucrative search pages of YouTube–where there is no revenue split.

Bully Boys Google Ad

So what does this tell you?  It seems pretty obvious that nobody is bothering for one second to filter any of this content and that it is intended to take advantage of the YouTube platform to scale the audience for hate.  These groups even have their own cover videos:

Bully Boys Cover Video

And it’s not just the “bigots who rock” who Google education apps drive traffic to–there’s also many films of the well-known Holocaust denier David Irving:

David Irving

Google will say what they always say about YouTube–they respond to “flagging” from the YouTube community to take down videos that offend “the community.”  That is–if enough people–that is, the majority–don’t like the offensive stuff, they’ll take it down.  This is, of course, why universities have hate speech rules in the first place and why “the majority” can no longer require segregated lunch counters.  To protect the minority from the tyranny of the majority.

So how’s that flagging working out on the David Irving video:

David Irving Flags

So under Google’s rules, this video stays up and hate speech policies–not to mention laws–be damned.

Now if the same university’s college radio or television station were to establish a “bigots who rock” playlist, what do you suppose would happen?

So why should YouTube be treated any differently–particularly when the same university is driving traffic to YouTube through Google’s “free” education apps?  The point being that if Google is going to push YouTube to colleges and universities, YouTube should comply with the same rules applicable to college radio and television.  If they can’t come up with a better reason, like say human decency.  Of course that might break the Internet.

johnny rebel youtube

Judges Take Note: MacArthur Foundation Declines Facebook Loophole Settlment

September 23, 2013 Comments off

As Judge Jon Tigar recently held in another Northern District of California case, 9th Circuit judges must follow precedent on class action settlements (even in San Jose).  When it comes to the shady business of using class actions to funnel money to the defendant’s favorite charity/lobbying group/alumni organization (aka the cy pres loophole), the rule is as cited by Judge Tigar in rejecting the proposed cy pres payouts (at page 12):

“A cy pres award must be guided by (1) the objectives of the underlying statute(s) and (2) the interests of the silent class members, and must not benefit a group too remote from the plaintiff class.” Dennis v. Kellogg Co. 697 F.3d 858, 865 (9th Cir. 2012) (citation and internal quotation marks omitted). “To ensure that the settlement retains some connection to the plaintiff class and the underlying claims . . . a cy pres award must qualify as the next best distribution to giving the funds directly to class members.” Id. (citation and internal quotation marks omitted).

Another step that 9th Circuit judges (really all judges) ruling on these sketchy class action loophole settlements may want to take is to be sure that even if they think the cy pres award is proper that the recipient thinks so, too.  And even if the Court doesn’t feel it appropriate to reach out to make that confirmation, it certainly would be appropriate for the Court to require counsel to do so–and you have to ask yourself what in the world counsel was thinking to present a cy pres loophole award to an entity that wanted no part of it.

MTP readers will recall that in the controversial Facebook “Sponsored Stories” class action (Fraley v. Facebook) the “usual suspects” got most of the money: Electronic Frontier Foundation, Berkman Center, Stanford Center for Internet and Society, Center for Democracy and Technology, etc., etc.

And the MacArthur Foundation.  I have to admit I was somewhat surprised to find that name listed there.  And sure enough, that name shouldn’t have been there.  Which presumably anyone who bothered to check could have found out before putting the Court in the embarrassing position of having a cy pres loophole award rejected. 

When we contacted the MacArthur Foundation’s very courteous press office, this is the comment we got about the $500,000 cy pres loophole payment tagged to the Foundation in the settlement:

September 10, 2013

“The John D. and Catherine T. MacArthur Foundation is identified in the settlement of the lawsuit related to Facebook’s ‘sponsored stories’ advertising program as one of several organizations that might receive distributions from the settlement fund. MacArthur did not ask to participate. The Foundation has informed lawyers representing both parties in the settlement that we respectfully decline to accept any settlement funds.  Instead, in this case, we have suggested those funds be redirected to other non-profit organizations engaged in the underlying issues and identified in the settlement as possible recipients. These non-profit organizations can apply the funds directly toward their missions, whereas MacArthur is a grantmaking institution and does not ordinarily make grants directly related to consumer privacy.”

But even if the the cy pres recipients otherwise complied with the rule, if they don’t want the money, they are not required to take it.  Which is the kind of thing you might want to know in advance.  Unless maybe you needed some window dressing and you thought that if you offered anyone $500,000, they’d just play ball and take it.

So now–all eyes on the court to see how that $500,000 that was to go to the MacArthur Foundation will be allocated.  One way might be to distribute it out to the class members.  Oh, no, wait–can’t do that.

Here’s a tip for the class counsel–when did Noah build the Ark?

Before the rain.

Pandora Announces Old Testament Branding: Let There Be Money…uh…Music!

September 23, 2013 Comments off

Spoken like a compulsory licensee–according to FMQB:

Pandora has announced a new brand identity, using the slogan “Let There Be Music,” which the digital service says will reflect “the company’s mission to cultivate a better musical future for artists and listeners alike.”

Whether the artists like it or not.

This rebranding was launched the same week that Pandora raised another $450 million in their second IPO.

Yes, this branding has that certain Old Testament ring, don’t it?  You know when you get to be one of the Most Influential People In The World, you get enthusiasms.

Yes, Tim said, “Let there be music.”  And there was music.  And he divided the music into pre-72 and post-72.  And it was so.

And he saw that it was good.

For Tim.

The Class Action Scam Continues with Facebook Sponsored Stories

September 22, 2013 Comments off

Here’s the way it looks like it works:  Google or Facebook overreach in a way that allows them to be sued for potentially billions in a class action that has yet to be filed, but could be.  Friendly lawyers come forward and offer a deal–we represent the class, we will do a settlement that pays the lawyers a bunch of money and eliminates the company’s liability for everyone except those who affirmatively opt out of the class.  And then the company gets to siphon cash into their favorite lobbying groups and a handful of real foundations thrown in for window dressing through a loophole called “cy pres“.

Lots of cash.

And, oh, yes–pays the class as close to nothing as they can get away with.

Three big settlements in the last few years that take on this appearance including the cy pres loophole are the Google Buzz settlement, the recently concluded Facebook “Sponsored Stories” settlement and the Facebook “Beacon” settlement.  MTP readers will recall we’ve written about this before as has Andrew Orlowski in The Register and Roger Parloff in Fortune.  Facebook has an earlier rather dubious class action regarding its controversial “Beacon” advertising tool that was the subject of excellent reporting by Adam Liptak in the New York Times.  An appeal from the grotesque Beacon class action settlement is on appeal to the U.S. Supreme Court and we should know any minute now whether the SCOTUS will hear the appeal.

As Adam Liptak explains in the New York Times:

Class-action lawyers call the diversion of settlement money from victims to other uses “cy pres.” The fancy-sounding term is derived from a French legal expression, “cy pres comme possible,” or “as near as possible.”

The Beacon Dissent and Appeal

The Beacon class action against Facebook featured a highly innovative technique:  Give the class members nothing and set up a toothless watchdog group foundation controlled by Facebook (which included tech journalist Larry Magid as a board member–his name also appears in a different class action against Facebook for Sponsored Stories because his ConnectSafely.org group gets money from Facebook in another innovative cy pres loophole settlement.  We tried contacting Magid for a comment a couple times over the last year, but got no reply.)

As Mr. Liptak tells us:

The settlement’s central innovation [in the Beacon settlement] was to cut [the class members] out of the deal.

The class members would get nothing. The plaintiffs’ lawyers would get about $2.3 million. Facebook would make a roughly $6.5 million payment — to a new foundation it would partly control.

The appeals court upheld the settlement last year by a 2-to-1 vote, with the majority saying it was “fair, adequate and free from collusion”….

“[The class members] do not get one cent,” Judge Andrew J. Kleinfeld wrote in dissent. “They do not even get an injunction against Facebook doing exactly the same thing to them again.”

In exchange for nothing, the plaintiffs gave up their right to sue Facebook and its partners in [the Beacon] program….The program has been shuttered, but its legal legacy lives on.

“This settlement perverts the class action into a device for depriving victims of remedies for wrongs,” Judge Kleinfeld wrote, “while enriching both the wrongdoers and the lawyers purporting to represent the class.”

You get the idea.

The Beacon case (Marek v. Lane) gives the U.S. Supreme Court the chance to review this cy pres loophole that Silicon Valley uses to funnel money to its lobbying and litigation machine outside of disclosure requirements.  (The EFF, for example, is a 501(c)(3) tax exempt organization–if the SCOTUS was feeling ambitious, a little choice dicta calling into question the propriety of allowing the EFF to function at the taxpayers expense could be quite helpful.)

Constitutional Issues

We make fun of these absurd cases that are mostly thinly disguised payoffs to “advocates” for the company line, but there are serious Constitutional issues involved as well.  Cato Institute has filed an amicus brief in the Beacon case that we hope will be heard by the SCOTUS.  This excerpt from Cato sums up the issues pretty well:

Cato filed an amicus brief arguing that the use of cy pres awards in class actions violates the Fifth Amendment’s Due Process Clause and the First Amendment’s Free Speech Clause. Specifically, due process requires — at a minimum — an opportunity for an absent plaintiff to remove himself, or “opt out,” from the class. Class members have little incentive or opportunity to learn of the existence of a class action in which they may have a legal interest, while class counsel is able to make settlement agreements that are unencumbered by an informed and participating class. In addition, when a court approves a cy pres award as part of a class action settlement, it forces class members to endorse certain ideas, compelling speech in violation of the First Amendment. When Facebook receives money — essentially from itself — to create a privacy-oriented charity, the victim class members surrender the value of their legal claims in support of a charity controlled by the defendant. Class members are left uncompensated, while Facebook is shielded from any future claims of liability.

How do you think Google and Facebook respond?  After all, we’re just talking about the Constitution, the founding document of a mere nation state.  Should something as trivial as the Constitution hold back permissionless innovation?  That might break the Internet.

They’re Not All Bad

Fans of class actions will be pleased to know that there are judges out there who are not fooled by these scams (or who don’t approve payments to their own law schools, like Judge Ware did in the Google Buzz settlement when he approved a $500,000 payment to Santa Clara University–right before he took early retirement to lecture at…Santa Clara University’s law school).

In the Custom LED v. eBay class action, another Northern District of California class action against a tech company, Judge Jon Tigar recently denied approval to the class settlement and highlighted  “obvious deficiencies” in the deal for the class that benefited eBay including that the proposed cy pres award recipients, the National Cyber-Forensics & Training Alliance and the National Consumer Law Center did not have “a nexus to the putative class members and their claims. Accordingly, the Court cannot conclude that the parties’ proposed cy pres award complies with the Ninth Circuit’s standard for such distributions didn’t have a sufficient nexus to the class members and their claims.”

So at least there’s some hope in San Jose federal courts for class members.

Facebook Says, “Me, too!”

Just so you get the idea, here’s a chart that compares the Buzz and Sponsored Stories lucky winners.  Not that there’s a pattern there or anything:

Organization

Sponsored Stories Settlement

Google Buzz Settlement

American Civil Liberties Union $    700,000
Berkley Center for Law and Technology $  300,000 $    500,000
Samuelson Law, Technology and Public Policy Clinic $    200,000
Berkman Center $  300,000 $    500,000
Brookings Insitution $    165,000
Carnegie Mellon Privacy & Security Lab $    350,00
Center for Democracy & Technology $   500,000 $    500,000
Electronic Frontier Foundation $   500,000 $ 1,000,000
MacArthur Foundation $   500,000
Indiana University $    300,000
Stanford Center for Internet and Society (founded by Lessig with $2,000,000 from Google) $   300,000 $    500,000
YMCA of Greater Long Beach $    300,000
Electronic Privacy Information Center $    500,000
Santa Clara University $  300,000 $    500,000
Youth Radio $      50,000
Joan Ganz Cooney Center $  500,000
NYU Information Law Institute $  300,000
Campaign for Commercial Free Childhood $  300,000
Consumers Federation of America $  300,000
Rose Foundation $  300,000
ConnectSafely.org (Larry Magid/Facebook) $  300,000
WiredSafety.org $  300,000

Google’s Fallacious Piracy Self-Study (Part 1)

September 21, 2013 Comments off

[The White Queen] “Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Alice in Wonderland, by Lewis Carroll

Google has released a self-study (How Google Fights Piracy).  While hope springs eternal, the self-study falls quite short of both truth and reality.  Let’s see why.

The Context

Even if you discount the moral hazard involved with funding a study of yourself, the Google survey of Google’s involvement with piracy is a breathtaking document.  I would suggest that the self-study rests on a number of core principles for Google’s business:

1.  Nothing to See Here, Move Along:  First and foremost is Google’s deep and abiding desire to deflect criticism in the press, avoid civil lawsuits and settle criminal investigations.  It has both succeeded and failed at all three.  The fact that a company tries to avoid these things is not special; the degree to which Google tries to manage them is quite special.

The self-study is itself an exercise in all three and supports the most important public perception that Google draws on daily to succeed in its consumer facing business: Sympathetic trust.  To paraphrase an old California pol, you know all the bad they’ve done, but you like them anyway.

This magical thinking only lasts for so long.  Whether its Eric Schmidt’s New York soundproof man-cave from which no scream can emerge, doing a favor for journalist Tom Brokaw by providing a private jet for a Silicon Valley speaking engagement with jet fuel subsidized by the American taxpayer, siphoning piles of data to the National Security Agency under circumstances the average citizen will probably never learn the details of, or paying a $500,000,000 fine for violating the Controlled Substances Act for indiscriminately promoting the sale of prescription drugs (e.g., to addicts and kids), the press and the public is starting to wake up to the game.

And not just the game, but the magnitude of the game.  As a senior chief once said, sorry pal, the BS filter is full.

2.  Google Profits from Piracy and Other Bad Behavior:  If the self-study discloses anything new, it documents that Google profits from piracy.  The self-study also calls the public’s attention to piracy, a topic that Google has spent millions trying to politicize through non-profits like the Electronic Frontier Foundation, academic institutions at universities like Stanford and Harvard, and other public facing groups.

But getting you to focus and talk about Google’s role in piracy deflects attention away from Google’s role in profiting from other illegal behaviors such as human trafficking, continued involvement in advertising for drug sales, and promoting racist and anti-Semitic hate speech as well as jihadi war porn.  There are many others, but take those three as examples.

The Internet, after all, is a reflection of society.  We should not be surprised that bad guys are rampant.  Or more precisely, a reflection of society if the chances of getting caught were very, very low.  Or more precisely still, a reflection of society if the chances of getting caught were very, very low and Omnicom sold advertising to support the criminal economy and Google was the paymaster.

See point #1.

3.  Getting Away With It:  The most important message of Google’s self-study is that they are doing bad things on a grand scale and they are getting away with it.  And they intend to keep getting away with it.

4.  YouTube Is Your Friend:  What Google desperately wants you to believe is that artists need YouTube.  This is a myth—and it should sound familiar.  Terrestrial radio has argued for years that they should not pay artist royalties for public performance because radio airplay promoted artists—so artists should just be happy to get the promotion.

In fact, the value chain flows the other way around—music promotes radio and music promotes YouTube.  YouTube is actually a free rider who skims the value of decades of marketing, promotion and touring, and if they pay at all, they pay a pittance.  This is why the self-study references value created in other channels and attempts to draw a causal relationship between plays on YouTube and an artist’s other revenue streams (such as record sales, touring and sponsorship).

The Author

When analyzing something as sensitive as the moral hazard present in a self-study, it is important to understand who the speaker is and what their biases might be.  (For example, I’d never purport to write a critical study of our business–even though I think I could do it objectively, I’m so obviously biased there’s not much point in going through the exercise.)  Since Google did not include an “about the author” section in the self-study, we will have a little bit of relevant background here.

Google apparently chose Fred von Lohmann to write the self-study.  Von Lohmann comes to Google after a long career of attacking copyright as a private lawyer and as a key member of the litigation team of Google shill lister the Electronic Frontier Foundation—who can forget his stellar presentation of the losing argument in the Grokster case before the 9th Circuit Court of Appeals?  When you realize that the litigation costs of the appeal for his client were paid by the Electronic Frontier Foundation and that the EFF is funded in large part by Google, things should start to clear up.  (Not to mention that Professor Lessig, no small beneficiary of Google’s largesse in support for his projects, stated at the iCommons Summit in 2007 that he had voted to fund the appeal in his capacity as an EFF board member–the next year Creative Commons picked up a cool $1.5 million from Google.)

And who can forget the run-in with the law that some think should have gotten von Lohmann hauled before a State Bar ethics hearing due to his conduct in the Limewire case.  As CNET reported in one of the only press stories about the incident:

In addressing an issue of whether statements made by a former LimeWire executive should be considered by the court, Wood called out Fred von Lohmann, the much-quoted senior staff attorney at the Electronic Frontier Foundation, an advocacy group that fights for the rights of Internet users and technology companies. According to Wood , LimeWire founder Mark Gorton testified that he and former company Chief Technology Officer Greg Bildson received questionable advice from von Lohmann.

“Gorton states that another attorney, [von Lohmann], gave [LimeWire], including Bildson, confidential legal advice regarding the need to establish a document retention program to purge incriminating information about LimeWire users’ activities,” Wood wrote in her decision.

You will not be surprised to know that the EFF went back to court to request that the judge at least remove the reference, which the judge eventually did.  But that’s all she did—she issued no statement that I saw exonerating von Lohmann, possibly because she knew exactly what he did.

Point made.

In the EFF’s filings to get von Lohmann off the hook, there was a general assertion that his “professional reputation” was harmed.  Some long time observers of von Lohmann thought this was hysterically funny, because if anything, his professional reputation was enhanced in his world.

So no one who was familiar with the situation was surprised when Fred von Lohmann left the EFF and went to work for Google shortly after Limewire lost its case.  To use a metaphor that will resonate in the Googleplex, it was similar to two people finally shacking up who had been denying they were having an affair for years.

As an observer of Mr. von Lohmann’s career for many years, I would have to say that in my view, he is the perfect person to obfuscate Google’s true mission.

And it leads me to believe even more firmly that Google must be making a fortune from shady to outright criminal activity through the sale of advertising.

False Premise:  The Music Industry is Not an International Business

In order to reach a false conclusion (“Google Fights Piracy” or “YouTube is your friend”), it helps to have a few false premises to argue from.  In fact, to keep this post at a reasonable length, we’re going to have to pick and choose the false premises we analyze in the Google self-study because there are so many of them.

Here’s one on the first page:

In the past, music distribution had been mostly regional, making it difficult to hear great artists from around the world.

This is, of course, patently false.  I find it hard to believe that von Lohmann does not know that the statement is false.  Here are a few counter-examples in no particular order off the top of my head:  Arcade Fire, Mumford & Sons, Celine Dionne, Adele, Edith Piaf, Shirley Bassey, Dusty Springfield, The Who, Brian Adams, Gerardo, Sting, Oscar Peterson, Led Zeppelin, Nickelback, Triumph, Ozzy Osborne, ELO, and…oh yes, Arctic Monkeys, the Rolling Stones and The Beatles.

And here’s another equivocal statement, a little more subtle:

But with a global platform like YouTube, which is owned and operated by Google, anyone is able to discover and share music from anywhere.  This means new revenue opportunities for artists—according to outside estimates “Gangnam Style” generated over $8 million in advertising deals in the first six months alone and has been purchased digitally millions of times.

As MTP readers will recall, that “$8 million” from “outside estimates” comes from two places: Washington Post coverage of a Google stockholder conference call which erroneously quoted an online publication called Quartz.

The source for the Quartz story was the Associated Press which said this:

With one song, 34-year-old Park Jae-sang – better known as PSY – is set [maybe] to become a millionaire from YouTube ads and iTunes downloads, underlining a shift in how money is being made in the music business. An even bigger dollop of cash will come from TV commercials.

From just those sources [i.e., YouTube ads, iTunes and commercials–not just YouTube as both Quartz said and WaPo implied], PSY and his camp will rake in at least $7.9 million this year, according to an analysis by The Associated Press of publicly available information and industry estimates….TubeMogul, a video ad buying platform, estimates that PSY and his agent YG Entertainment have raked in about $870,000 [not $8 million or $4 million] as their share of the revenue from ads that appear with YouTube videos. The Google Inc.-owned video service keeps approximately half.

So are downloads and endorsements “new revenue opportunities” caused by YouTube?  No.  Downloads and endorsements are what happens when you have an international hit record.  Just like they have been since the invention of the cylindrical disc.

What’s different is the YouTube channel from which YouTube supposedly made about $373,000 by giving PSY a YouTube channel—but how would anyone know that was the right number because the advertising revenue attributed to YouTube is from cross-platform sales on Google properties, allocated entirely at Google’s discretion with no transparency.

This is not to say that YouTube has no value, but we should all understand that the value chain does not start with YouTube, it starts with the artist.  And the artist’s (and songwriter’s) work is worth a lot more to YouTube than YouTube is worth to the artist or the songwriter.

Because what we do know about YouTube—and bear in mind we haven’t even gotten to the piracy stuff yet—is that the biggest mover in YouTube’s short history resulted in an artist royalty of $870,000 for 1 billion views.

$0.000870 per play.

If You Get a Red Flag 4 Million Times a Week, Does that Tell You Anything?

The next obfuscation in Google’s self-study is in the discussion of Google’s treatment of DMCA takedown notices:

GOOGLE SEARCH

We process more takedown notices, and faster, than any other search engine. We receive notices for far less than 1% of everything we index, which amounts to four million copyright removal requests per week that are processed, on average, in less than six hours.

von Lohmann echoes this assertion in his official Google Policy Blog post:

When it comes to Search, Google is a leader in addressing the concerns of copyright owners, responding to more copyright removal notices, and faster, than ever before. During 2012, copyright owners and their agents sent us removal notices for more than 57 million web pages. Our turnaround time on those notices was, on average, less than 6 hours. That’s faster than we managed in 2011, despite a 15-fold increase in the volume of requests.

The fact that Google is “responding to more copyright removal notices than ever before” begs the question:  What is it about Google’s products that is so defective that they are receiving “removal notices for more than 57 million web pages” in the first place?  The fact that they are responding in 6 hours addresses only the “expeditious” requirement in the DMCA–not the threshold question of why Google points users to so much infringing content.

Also notice that this is carefully drafted:  The report says 4 million notices a week–208,000,000 notices a year.  von Lohmann says they received notices for 57 million web pages–considerably less.  One explanation might be that they received multiple notices for the same web page which is what would happen if Google indiscriminately drove traffic to infringing sites.

If you ask the drafters of the DMCA safe harbor whether they intended that anyone who is notified that their product facilitates infringement 4 million times a week would still be eligible for the safe harbor, I suspect they would tell you no they did not.  Rather emphatically.

Recall that in order to enjoy the DMCA safe harbor, the search company must satisfy the knowledge predicate in 17 USC 512(c)(1)(A) that states the service provider:

(i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing;

(ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; or

(iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material;

Once the service provider gets a valid notice, that pretty much satisfies the “actual knowledge” requirement.

But if getting 4 million notices a week doesn’t satisfy being “aware of facts or circumstances from which infringing activity is apparent”, how many would it take?  (And then there is the repeat infringer issue which is beyond the scope of this post, but see the Hotfile case.)

Follow the Money: Where Did It Go?

For reasons I don’t fully understand, Google has latched on to what they call the “follow the money” approach for advertising revenue on unauthorized sites.  This is probably because they would like to lead investigators down a rabbit hole that may well come out in China (as it did in the criminal investigation into Google’s profit from advertising illegal drugs).  But here’s an easier twist.

Google tells us the following about Google’s profit from criminal enterprises (echoed in von Lohmann’s blog post):

ADS

Our policies restrict infringing sites from using our advertising services. In 2012, Google disabled ad serving to 46,000 sites for violating our policies that prohibit the placement of ads on sites with infringing content, the vast majority being violations Google detected before we were notified.

von Lohmann tells us in his official Google Policy blog post:

When it comes to rogue sites that specialize in online piracy, other anti-piracy strategies will have limited effect so long as there is money to be made by their operators. As a global leader in online advertising, Google is committed to rooting out and ejecting rogue sites from our advertising services, to ensure that they are not being misused to fund these sites.

So first of all, how did 46,000 illegal sites get Adsense/Doubleclick accounts in the first place?  And if the sites were already up and generating advertising revenue, how long were they operational?

But most importantly—Google has a revenue share deal with these sites that is somewhere around a 70/30 split.  If these “infringing sites” were operational and generating revenue until Google disabled the accounts, what happened to Google’s share of the money?

I know they were shocked, shocked that infringement was going on in that establishment—but don’t forget that Captain Renault got his share of the house’s winnings.

What’s more likely is that Google kept their share of the money from these illegal sites and when they disabled their Adsense account, Google kept the pirate’s share of any money in the pipeline, too.

Why do I think this?  Because that’s what Google did with advertising revenue for counterfeit Olympics tickets.  According to the Daily Mail (in turn quoting the BBC):

Illegal websites selling drugs, fake passports and unauthorised tickets for the 2012 Olympics have been advertised by Google.

The internet search giant…has removed the ads following police requests and subsequent media attention.

However, the company has said it will keep any money made from those illegal adverts, the BBC’s 5 live Investigates programme revealed.
(See “Google admits profiting from adverts for drugs, fake passports and illegal Olympic tickets.”)

So it appears that in reality, Google actually salts its profits by disabling illegal sites and keeping 100% of the advertising revenue.

46,000 times a year.

So OK, let’s follow the money.  All the way home.

And then there’s this example of Doubleclick profiting from what’s probably hate speech in many jurisdictions:

Johnny Rebel Lyrics_Page_2To be continued in Part 2.

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