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@zoecello’s Royalties Give the Lie to Daniel Ek’s “Greedy Middlemen” Rant

May 31, 2015 2 comments

Sony Contract Leak: The Bright and Shiny Object

Regardless of who you believe actually leaked Spotify’s contract with Sony Music, Spotify’s CEO Daniel Ek certainly is trying to capitalize on the leak.  (“Spotify CEO says middlemen gobble cash“)  It sounds like this is just another indication of how badly a defiant Spotify has broken trust with its label “partners” and their artists.

The spin from Mr. Ek is that he wants you to believe that the reason that artists think Spotify’s royalties are low is not because of Spotify, it’s because of the greedy major labels.  More accurately–with the benefit of the contract leak–any label that has MFN treatment with Sony Music.  (Because if you’re leaking contracts, you can’t really leak all the contracts, but you don’t need to if you can leak a single MFN contract from which terms can be extrapolated due to the MFN treatment.)   Because I don’t know all the labels with “most favored nation” treatment, I’ll refer to those labels as “MFN labels” rather than major labels (partly because the MFN definition in the Sony Music contract is not limited to other major labels).

Of course any labels or distributors licensing to Spotify get a share of the royalty payments, like they do any other service.  (Even if a distributor covers its downside risk with a flat fee payment instead of sharing the risk with its artists, there’s still an imputed share of Spotify royalties which could be massive or tiny depending on how the artist does.)

How much labels take is not well known and varies from label to label and artist to artist.  This makes a label’s share of royalties ripe for conspiracy theories that Mr. Ek appears to be fomenting.  And is a great “bright and shiny object” to deflect attention away from a simple truth:  Spotify loses money hand over fist, pays terrible royalties, and is cannibalizing higher margin sales.  Its valuation is driven solely by venture capitalists with liquidation preferences that make a down round unthinkable and a compliant press that in some cases is in the streaming business themselves.

The Empirical Check

So how would you know whether Spotify’s artist royalties are low regardless of the label’s share?  Easy.  Look at the royalty Spotify pays to an independent artist who does not share their royalties with a record label.  This won’t tell you what the MFN labels get, but it will tell you that the MFN labels should get no less than the independent artist collecting 100% of the Spotify revenue.  You can also assume that Spotify’s independent royalties are a cram down of lower per-stream rates than what Spotify pays the MFN labels.  Why?  Because they can.

Of course, the argument could easily be made that if Spotify’s goal is fairness in all things and world peace, Spotify would actually pay independent artists more than the MFN labels because Spotify doesn’t have to pay all the extras–starting with an advance and equity–to the independent artists.  (Whether services ought to pay extras is a whole other conversation.) Even so, if Spotify’s royalties are as great at Mr. Ek would have you believe, you should see that uptick in the “source” Spotify royalty paid to an artist who collects 100% of the royalty and not just the artist share under an MFN label contract.  

Last week, Zoë Keating courageously published her most recent royalty statement from Spotify.  As usual, Zoë makes an outstanding contribution to the knowledge of all artists grappling with life in the Age of the Internet.  Zoë’s Spotify statement gives a great example of the true royalty rate that Spotify pays to record labels–without the big advances and other financial incentives paid under the MFN label deals as seen with the leaked Sony Music contract.  Not to mention the cost of the detailed reporting required under the Sony Music contract.  A couple things jump out.

First, it’s not really sound to speak of a global “per stream” rate for Spotify except in the most generic sense.  As you’ll see from Zoë’s statement, there are many, many different rates.  I would guess that these rates vary based on some high level variables and rule sets such as ad-supported or subscription and mobile or desktop.   The statement doesn’t break this out and just refers to “streams”.  Not all streams produce the same value as the statement reveals.

Then there are different rates for each country where Spotify operates, just like on a record company royalty statement.

As you will see in her statement, Zoë’s per-stream royalties ranged from $0.0000013284 to approximately $0.01 per stream, except for 3 streams in “CH” (presumably Switzerland) that broke $0.02.  I would guess that the lowest royalty rates are from ad supported streams and the higher rates are likely from subscriptions.

Remember–this is 100% of the Spotify royalty, not shared with a label.  So Mr. Ek would have you believe that if it just weren’t for the greedy middlemen, artists would find Spotify profitable, because, after all, Spotify pays millions to superstars–the superstars whose labels spend millions marketing their records and driving traffic to Spotify.  Low royalties are not Spotify’s fault, it’s the greedy middlemen.  (This rhetoric also resonates with the Google and Pandora-backed “McCoalition” that is running those tired 1999isms to try to divide our community.)

Mr. Ek points to the leaked Sony Music contract to justify his position, and I point to Zoë’s statement to ask who in their right mind would think that Spotify royalties (or streaming royalties in general) are worth the trouble.

And don’t forget that Mr. Ek is quick to point out that streaming revenue is a growing share of overall digital revenues and displacing downloads.  Yes, that’s right.  In a race to the bottom, micro-margin streams are replacing high margin downloads.  Correct, it’s called cannibalization.

That cannibalization is happening across the board, too, not just to major labels.  “CD release parties” that used to generate a significant contribution toward recording costs for local independent artists now are a rapidly vanishing share of artist revenues (right alongside cover charge).

So Mr. Ek’s misdirection doesn’t work when you look at the numbers.  Evidently, Spotify hopes you won’t.

More is Less: Why Do Artist Revenues Increase at a Lower Rate than Artist Streams?

But here’s another interesting metric.  Zoë’s spreadsheet shows that in 2015, Zoë had 1.4 million streams and $4,821.07 in royalties or an average of $0.003 per stream.  I’m using a per stream average as a way to compare per-stream value over time because the spreadsheet also shows Zoë’s royalties from 2013 and 2014.  I don’t recommend using a per stream average for any other purpose because it tends to overstate the ad-supported royalty and understate the subscription royalty.

Zoë’s per stream average from 2013 was $0.0042, in 2014 it was $0.0040 and was $0.0032 in 2015. So even though Zoë’s own total streams increased from 416,112 to 1,487,584 during the 2013-2015 period, her average per stream royalty declined from $0.0042 to $0.0032.

Given that a simple per stream average tends to understate the subscription revenue, wouldn’t you think that a 350% increase in streams would result in a higher per stream average?  Particularly because Spotify wants you to believe that it is growing its subscription business as well as its business in general, hence its massive investment valuation.  Even if you consider the difference in Zoë’s gross revenue, her total royalty payment increased by 271%, much less than the increase in her overall streams.

Maybe there are anomalies that explain this, maybe there are specific attributes of Zoë’s fans that explain that difference, but it seems very, very odd.

Who Are the Real Greedy Middlemen?

Face it, the streaming business is a horrible business.  Everyone in it loses money based on cash flow and the only people who make bank are the executive teams who get stock in the enterprise.  Remember, Spotify has a bigger valuation than the entire music business.  If that’s not a bubble, I don’t know what is.

It’s only a matter of time before Spotify does exactly what Pandora is doing–comes to the government and tries to force a lower royalty down our throats so Spotify can stay in business.  Spotify will likely do it through manipulating the antitrust law (notwithstanding Spotify’s own self-admitted monopoly on music subscription services.)  There’s only one thing such people fear more than an artist who publishes their royalty statement.

That’s a venture capitalist collecting a preference on a down round–so the valuation has to constantly increase even if it is not connected to reality.  And if reality ever catches up to Mr. Ek, all he’ll do is flip the keys to the first bum on the street after he cashes out–and destroys our business.

Remember–he’s not in the music business.  If Spotify fails, Mr. Ek will just go into some other “disruptive” tech company that preys on people like child data profiling.

Thanks to Zoë Keating, we once again can see that Spotify gives truth the back of the hand in its rush to IPO riches.  As long as the VCs keep rewarding fast buck artists like Mr. Ek and governments turn a blind eye toward Bit Torrent, the race to the bottom will continue and artist innovators will keep being punished.

Guest Post: Five Reasons Why The Major Labels Didn’t Blow It With Napster by @thetrickness

May 30, 2015 2 comments

[Editor Charlie sez: We’re pleased to get a chance to repost this must read piece by industry veteran Jim McDermott who brings great insights into the Napster history and the flaws in the narrative that the tech press has so eagerly promoted. You can also read Chris’s 2008 interview about Napster with Andrew Orlowski in The Register, The Music Wars from 30,000 Feet.]

Guest post by Jim McDermott, originally posted on trickness.com.  Follow him on Twitter @thetrickness

For a long time, pundits have been saying that the major music labels blew it by suing Napster instead of doing a deal with them. It’s as though they’re obligated to repeat this like a mantra; the labels didn’t get it, they were clueless, they were asleep, how could they have missed such a golden opportunity, yadda yadda. Sift through all the reverential twaddle that’s written about Napster, and you’d think they walked into the major labels offering trays of gold and precious gems but were rebuffed.

These pundits weren’t there when Napster was going down, so to a degree they can be excused for not understanding all the complexities that were in play at the time. But increasingly, I’ve noticed a trend amongst former colleagues, people who worked at majors during the dawn of Napster and saw the rise of file sharing, people who should know better, saying we blew it with Napster too. Could be they’ve read so many articles spouting this opinion that they’ve adopted it themselves. Or maybe they say it because they don’t want to seem, you know, unhip.

Whatever the reason, it’s bullshit. The major labels were right not to compromise with Napster. I was VP of Electronic Music Distribution at Sony Music at the time, dealing with these issues day to day. Understandably, some people may think, what does it matter if the majors were right or not? They lost. But I think its important to understand the various facets and history of these events, if only to provide perspective for issues the industry is still dealing with today.  So, at the risk of being unhip, here are Five Reasons Why The Major Labels Didn’t Blow It With Napster.

1) The Economics Sucked: Here we are in 2015; Spotify, Pandora and other streaming services are struggling to become profitable. Artists complain how little they’re being paid, and consumers seem unwilling to pay more than $9.99 a month. It’s clear that selling music profitably, even all you can eat access that’s totally portable and personalized via widespread adoption of mobile devices, is difficult.

Now let’s look at things from the perspective of a major label in 2000. CD sales have contracted a bit, marketing costs are rising, but the music business has bounced back from economic challenges many times. The music business in all facets is cyclical. CD sales generate over 13 billion dollars in 2000; via an ecosystem that, despite flaws, is working fairly well. Artists are getting signed, records made, distributed, marketed, put on the radio, and sold. There is not only a perception that music has value, it is the reality. Then along comes Napster. Napster’s play is that their distribution network has par or greater value than the content, and that a nominal monthly fee ($10-20) is what the consumer would tolerate. This fee would be split between Napster and the labels.

Now, Napster didn’t approach labels to get licenses before they launched, they just put their software out there. Major labels were not in the habit of giving anyone licenses for unlimited replication and distribution of their masters, which is what Napster enabled, again, without consent by the rights holders. If you could even put a number on what such a license might be valued at by a major label in 2000, it would certainly be in the billions of dollars (because remember, 13 billion dollars worth of CDs, a tangible, countable product, were being sold annually at that time.)

So here are these Napster guys, sitting across from you in a meeting, saying “let’s make a deal, we’ll give you ten bucks a month per user, and hey, if you don’t do a deal with us, we’ll keep doing this anyway, because (smirk smirk), “fair use” enables us to do so.” Honestly, why would anyone do a deal under these circumstances? You’re got 13 billion dollars in revenue on one hand, and on the other a couple of guys politely extorting you to settle for ten bucks a month per user. NO WAY was that going to be a deal that happened in 2000; it’s not even a deal that makes sense today.

2) LOTS of Experimentation Was Happening: There’s a perception that the music industry did nothing but sue people during the Napster years, and that it wasn’t until Steve Jobs pushed the majors to license iTunes that anything got done. This is not correct, I know so because I was there and involved. The Madison Project was an experiment some of the majors did with Roadrunner cable in San Diego to test the viability of consumers buying, downloading and burning their own CDs. And this 1999 year end review in Billboard Magazine details a bunch of other projects and digital licensing deals that were happening at the time. At Sony Music, we were working with Liquid Audio, A2B, RioPort, Microsoft, Real Networks, Intertrust, Launch, and many others. In 1999/2000, Apple wasn’t really a player in digital music. It barely made sense to talk to them because they had no audience for music; the only presence Apple had at this time was when startup guys bought their pretty Powerbooks into meetings. Nobody was waiting for Apple to come along and save digital music (they had to buy SoundJam MP first anyway). Everyone was learning, but we had a responsibility to minimize mistakes while we learned. Rushing into a deal with Napster would have rendered all other efforts to develop a legitimate digital music marketplace stillborn – and frankly, it would have made the future success of the iTunes Music store literally impossible. Had a deal been done with Napster, iTunes would have looked radically different, if it existed at all.

3) The Responsibility to Artists & Stakeholders: Ahh, that word, responsibilityNapster was never burdened by that word. They couldn’t even promise they’d be able to say what tracks and which artists were downloaded on their service, because for one, the consumers were creating the metadata associated with those tracks when they uploaded them. Napster didn’t have to concern themselves with  getting publishing clearances from all the songwriters of a given track, or mechanical rights fees, or locating the film for the album artwork, or making sure the digital masters they uploaded had no artifacts – they didn’t care, and neither did the users of Napster, because it was all free. A label has a responsibility to the artists and their art, the rights holders, and yeah, to the retailers who are selling legitimate music products. We couldn’t wake up one day and say, OK Napster, you’ve got a GREAT idea, screw all those agreements, all that legacy and stewardship!

Invariably, people point out that labels exploited artists for years, and use that as some rationalization for file sharing. But all it really means is that Napster made it easy for the fans to screw the artists too, and a few entrepreneurs got really rich instead of label guys. You can’t support Napster by claiming some moral high ground.

4) The Genie Was Never Going To Get Back In The Bottle: It is wildly naive to think that doing a deal with Napster would have somehow contained file sharing. All you need to do is look at the decade following Napster’s demise and see that it was replaced by a never ending variety of peer-to-peer players, including services like Limewire and The Pirate Bay. Signing a deal with Napster, which would have turned it into a paid peer-to-peer service, would have instantly created a market for competing free (or ad-based) services. People get very philosophical about what Napster did to the marketplace, and the opportunities it created. But all it really proved was that all the music you can download for free with no consequences had great appeal. Once people got charged a fee, or got sued, they’d go elsewhere for their free music. Napster was never going to be an answer to anything, just the first in a long line of questions we’re still pondering today.

5) Legal Precedents Had To Be Established: I heard it in meetings many times – “we can’t do any deal with Napster until the court case is resolved and we have legal precedent on file sharing.” In the early 2000’s in the USA, majors were either licensing content to digital music services, or developing their own. If it was found that file sharing was “fair use”, as Napster argued, then the digital music marketplace would be dead overnight. Napster was available from June 1999 until July 2001 when it was ordered closed, just two years. But that was a very long period of “foundational erosion” for anyone trying to build a legitimate download marketplace to endure. It cannot be overstated how important it was to assert legally that the majors owned the digital distribution rights of their masters, and that file sharing was not “fair use”. That had to happen before any compromise could be considered.

Outside of America, the digital download marketplace was evolving a little bit slower; internet media consumption was limited due to bandwidth constraints, and some markets were more enthusiastic about mobile. It wasn’t certain that existing artist contracts included rights for digital downloads and streaming in all territories; in 2000, we had a whiteboard of tracks cleared for download sale in the USA, and for months it was just 80 songs – and Sony Music had a catalog of millions of tracks. So it wasn’t just about establishing legal precedent about fair use and file sharing, it was about labels proactively confirming their rights by actively exploiting/licensing them. This took time, which became compressed because of Napster’s arrival.

OK, here’s a bonus 6th reason 🙂 Just Because You Lose, It Doesn’t Mean You Did The Wrong Thing Fighting The Battle. Sometimes in life, you fight battles that end up being futile. Nobody wins all the time. But that doesn’t mean that fighting wasn’t the right thing to do just because you lost. In a December 2014 video piece from the New York Times, one of the original developers who worked on Napster recalls thinking, “If this piece of code works, this is going to be huge. And I had a moment there where I asked myself, is this morally correct? Technology’s advancing, this is going to happen anyway.” And of course, they launched Napster and it became huge. So you’ve got premeditation, prior knowledge of wrongdoing, an understanding that this would hurt someone – but they did it anyway.

There’s an old adage, and it applies all too often in the growth of giant digital media players: if you’re going to steal, steal big. Boost a $1000’s worth CDs and get caught, you could do four years in jail. Bootleg CD and record plants routinely got raided in the physical product days, product confiscated and arrests made. But Napster facilitated the theft of billions of dollars of intellectual property, and nobody really got punished. Well, certainly not the guys who created and ran Napster; although, quite a few music fans who used the service and got caught file sharing suffered hefty fines.

Obviously file sharing didn’t go away when Napster was shut down, and a segment of people still get music, movies and software this way. But file sharing didn’t end up being predominant way music gets consumed. The legal download business blossomed for a time, and now streaming is where things are happening – with licensing fees potentially headed upwards. So perhaps we didn’t “lose” the battle after all.

Napster really only proved that many people love free music, and if you enable them to steal something without feeling like they’re doing anything wrong, they’ll do it without qualms. These facts are nothing to build a business on, or get nostalgic about. No matter how hip it may be to do so.

If you made it this far – thanks for reading!

Jim McDermott

(note, these are just my opinions.)

House Hearing on Compliance with Freedom of Information Act Requests

May 30, 2015 Comments off

The House Government Oversight and Government Reform Committee is holding a hearing next week that may be of interest to MTP readers.  On June 2, the Committee will hold a hearing entitled “Ensuring Transparency through the Freedom of Information Act (FOIA)” to “explore the barriers that exist in limiting effective access to public information under FOIA.” The witnesses will be investigative reporter Sharyl Attkisson, Emmy Award winning former CBS News veteran reporter and author of Stonewalled, Jason Leopold of HBO’s Vice, Leah McGrath Goodman of Newsweek, Terry Anderson formerly of AP and currently with the University of Florida, and a New York Times counsel.

MTP readers will remember the tussle we had with the Government Accountability Office getting them to disclose who was consulted in the preparation of their “stealing is good for you” report that recommended the government consider the consumer benefits from fake goods and pirated materials.  The GAO refused to provide the names of those who participated in the preparation of the report.  The “stealing is good for you” recommendation is straight out of Lessig and his anti-artist followers among the shadowy Google backed lobbying groups and academics on the take listed in Public Citizen’s comprehensive study of Google’s massive influence peddling.

The hearing will be live streamed through this link.

@zoecello, @theblakemorgan, @themisreadcity, @thatkatetaylor at Global Forum on #irespectmusic, artist rights

May 28, 2015 Comments off

Once again, MusicCanada’s Global Forum at Canadian Music Week in Toronto gives a major platform to creators to discuss the human rights of artists and how to deal with the Silicon Valley onslaught.  This year featured a great interview by Kate Taylor of the Globe and Mail with Zoë Keating, Blake Morgan and Scott Timberg.  Watch the full video for the most insightful commentary on our struggle you’ll hear for a long, long time.  And consider this an invitation to sign the #irespectmusic petition and support artist pay for radio play!

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Also big thanks to Toronto Mayor John Tory for showing his support for artists in Toronto and beyond!

And an especially warm homecoming show by Canadian born Zoë Keating, achingly cool memories for all who heard her.

Another Artist Rights Victory: Turtles Win Class Certification in Class Action Against SiriusXM #irespectmusic

May 27, 2015 1 comment

Ruling on Turtles’ Class Certification

More on this later, but great news from the Turtles class action against SiriusXM.  The Turtles struck another blow for artist rights when the Court approved the band as representatives of the class of pre-72 artists similarly ripped off by Sirius.  The Turtles lawyers Gradstein & Marzano were also appointed class attorneys.

A good day for those who respect music.

Uncle Sugar Wants Your Kids: Google Patents a 3D Joe Camel

May 26, 2015 Comments off

An anthropomorphic device, perhaps in the form factor of a doll or toy, may be configured to control one or more media devices. Upon reception or a detection of a social cue, such as movement and/or a spoken word or phrase, the anthropomorphic device may aim its gaze at the source of the social cue. In response to receiving a voice command, the anthropomorphic device may interpret the voice command and map it to a media device command. Then, the anthropomorphic device may transmit the media device command to a media device, instructing the media device to change state.

It’s a good thing that Google hasn’t gone into the cigarette business.  Quartz reports that Google is developing a robot to monitor children based on a recent patent filing:

[A] toy that monitors your every move, created by the company that already knows pretty much everything about us adults. The patent application suggests its toy robots would be able to “profile” users to interpret visual cues differently in multiple users. Presumably this would require cameras constantly capturing and processing images while the device is on, and the patent suggests that data would be stored on a Google server.

Of course, Google is already scraping data about kids from YouTube and music business marketers have totally fallen for the idea that they just can’t get along without the YouTube data honey pot.  No doubt Eric “Uncle Sugar” Schmidt is laughing his tail off at how much of an administrative burden and royalty rip off he can impose on us, all the while keeping us focused like idiots on the bright and shiny object of the YouTube thimblerig.  IT’S THE DATA, STUPID!

Remember Joe Camel?  He doesn’t hold a candle to Uncle Sugar’s teddy bear.  Or to YouTube for that matter.

Central Texas Flooding

May 24, 2015 1 comment

 

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Downtown Austin

If you would like to help out with the flooding in Central Texas, you can contribute $10 by texting REDCROSS to 90999 or contact these agencies.

Austin Disaster Relief Network: http://www.adrntx.org/index.php/memorial-wknd-flood-fund/

American Red Cross of Central Texas:
http://www.redcross.org/tx/austin

Capital Area Food Bank of Texas:
https://www.austinfoodbank.org

Thanks.

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