Forty State Attorneys General File Amicus In Support of Mississippi Attorney General Jim Hood’s Fight Against Google
MTP readers will recall that Google sued Mississippi’s populist Attorney General Jim Hood to stop Hood’s investigation into Google’s drug habits.
More on this to come, but the short history of the case is that Hood served a request for documents on Google consisting of a series of questions about Google’s business practices in furtherance of Hood’s investigation into a number of issues, mostly whether Google had violated the nonprosecution agreement Google entered into with the Criminal Division of the U.S. Department of Justice that allowed Google to pay $500,000,000 to avoid being prosecuted–and having its senior executives including Larry Page prosecuted–for violating the Controlled Substances Act.
Hood’s concern was that Google not only violated the terms of the nonprosecution agreement but also may have violated a variety of Mississippi consumer protection laws for advertising illegal drugs in Mississippi.
Let’s be clear–people die from buying illegal drugs online. That’s why we have the Ryan Haight Act carried by Senator Diane Feinstein–a senator from California.
The overwhelming majority of the questions in Hood’s request concerned Google’s compliance. Google promptly sued Hood to stop the investigation. As luck would have it, the case was heard in federal court before a judge who is apparently Hood’s long time political opponent. Google was able to delay Hood’s investigation while Hood appealed to the Fifth Circuit, where the case is now.
The AGs summarize the fundamental flaw with Google’s case:
This is a case about the authority of state Attorneys General to exercise one of their fundamental powers: the ability to investigate potential violations of state law. What should be a routine discovery dispute in Mississippi state courts, resolved under established state procedures, has instead evolved into a contrivance for a company doing business in the state of Mississippi to invoke federal jurisdiction by asserting potential affirmative defenses to claims that have never been filed.
Imagine if the tobacco companies had done the same to Hood’s predecessor and mentor former Mississippi Attorney General Mike Moore to avoid what became a multibillion dollar multistate settlement against Big Tobacco? Remember that one?
So it should be no surprise that forty–count ’em, forty–state Attorneys General filed an amicus brief supporting Hood’s ability to conduct his investigation while affording Google full due process rights to object or otherwise defend itself. As the forty AGs noted, doing otherwise “would provide a roadmap for any potential wrongdoer subject to a legitimate state law enforcement investigation to attempt to thwart such an inquiry.” I wonder what the other 10 are thinking?
I know what these guys are thinking?
And remember–smoking doesn’t cause cancer.
Read the brief here.
For years now–since Imeem days at least–I’ve been wondering why it is that the top videos in Google search results were always from YouTube (or from Vevo through YouTube). Like many others, including…let’s see…Senator Mike Lee and the European Commission for starters…I just assumed that Google was stacking the deck to favor YouTube, its wholly owned subsidiary.
According to Brad Stone writing in Bloomberg, a newly released study by Tim Wu (“Is Google Degrading Search? Consumer Harm from Universal Search”) explains the phenomenon and further backs Google into an antitrust corner. The study’s thesis is that “Google is able to leverage its dominance in search to gain customers for [Google’s competing] content. This yield’s serious concerns if the internal content is inferior to organic search results.” Brad Stone reported:
Google is facing a new high-profile adversary in the roiling fight over whether its monolithic search engine violates antitrust law: Columbia Law School professor and noted Internet theorist Tim Wu. The author of the influential book The Master Switch: The Rise and Fall of Information Empires co-wrote a paper asserting that Google is engaging in anticompetitive behavior by prominently serving up its own content, like restaurant reviews and doctors office phone numbers, in search results….The new study, which was presented at the Antitrust Enforcement Symposium in Oxford, U.K., over the weekend, says the content Google displays at the top of many search results pages is inferior to material on competing websites. For this reason, the paper asserts, the practice has the effect of harming consumers. Wu co-authored the study with Michael Luca, an assistant professor at Harvard Business School, and data scientists at the local reviews site Yelp, which has been one of Google’s primary opponents in the global antitrust fight.
The Wall Street Journal’s Tom Fairless reported on the Tim Wu study saying:
[The study is a] potentially significant twist in Europe’s long-running antitrust investigation of the U.S. search giant….One official at a European antitrust authority, who declined to be named, said any study that showed Google caused ‘quantifiable harm’ to consumers would ‘certainly bring things forward’ for EU regulators.
I’ve been saying for quite some time that YouTube ought to be a prime target for the European Commission’s antitrust enforcers. The Wu study provides further support for investigating YouTube’s business practices and the harm to consumers of providing inferior video search results.
The research seeks to undermine Google’s primary defense against the charges filed in Europe, where competition regulators have formally established a case that Google violates antitrust law.
While everyone else is focused on a potential initial public offering by Spotify–which is the only exit strategy that anyone seems to think Spotify has in mind–Re/Code reports that Google’s YouTube subsidiary is very interested in buying Spotify. (That would be the same YouTube that doesn’t seem to be able to turn a profit after nearly 10 years but can come up with the money to buy Spotify.)
Omid Kordestani, who has just temporarily replaced Nikesh Arora as chief business officer of Google, is joining the board of Spotify, according to people with knowledge of the situation.
In addition, sources said, one of the search giant’s former execs, Shishir Mehrotra, will become a special adviser to CEO Daniel Ek and the company’s management.
The move is a fascinating one, especially since sources inside Google said that new YouTube head Susan Wojcicki has expressed interest in acquiring the popular online music service if it were for sale. It is not currently and there are no such discussions going on between the pair about such a transaction.
Which depends on what the definition of “is” is…that story was posted on July 21, 2014 at 10:18 am Pacific Time–what happened after that day and hour is anyone’s guess. So you have to ask yourself how would the major labels feel if they were suddenly dealing with Google instead of Spotify?
While one could see that the time may not yet be ripe for litigating over the value of the Spotify stock grants widely reported to have been made to the major labels and Merlin, the idea of dealing with Spotify on the issue has more appeal than dealing with the highly, highly litigious Google who will sue over whether the sun rises in the East faster than you can say “Jamie Gorelick”. If anyone thought that doing business with YouTube was like being sewn in a bag with wild dogs, just wait until Google uses its monopoly rents to gets its hands on Spotify.
The 19 Recordings Litigation
If you’ve ever been cheesed about Pandora executives lining their pockets with millions from IPOs, then you’ll understand why labels demand shares of stock when they license their sound recordings to tech companies. And if you’ve ever been cheesed about low royalties for artists and songwriters from tech companies with or without stock, then you’ll also understand why 19 Recordings (an affiliate of the company that developed American Idol) wants to sue Sony Music for granting Spotify what 19 alleges are below market royalty rates in return for stock.
Some of this is still confidential (which is what passes for “unleaked” these days) but was reported by the Hollywood Reporter last week:
Richard Busch (perhaps best known for representing Marvin Gaye’s family in the “Blurred Lines” lawsuit) is representing 19 have been fighting in recent weeks to get Sony to come forward with the streaming agreements because they wanted to see whether streams were being discussed “transmissions.” According to the lawsuit, they were. Sony allegedly tried to “mislead 19’s auditors with highly redacted portions of the [streaming] agreements to allegedly support their mischaracterization of the services’ exploitations.”
But the lawsuit now means even more because it’s the first case to test whether the record industry establishment and tech industry vanguard are in cahoots at the expense of the creatives.
There will be a lot of ink spilled on this story, but it’s that “in cahoots” part that I want to focus on in this post. Mr. Busch will be in an excellent position to “look under the hood” in that dialog and see what Spotify’s role was in the deal.
Because it does take two to tango.
What’s In It For Labels
The most common refrain you hear from labels when trying to license recordings for online services is “we’re not going to create another MTV.” So let’s set aside the 10 examples of creating another MTV (including Pandora and YouTube) and just focus on Spotify.
It is pretty widely reported that major labels and Merlin got stock in Spotify. I would argue that it is entirely fair that they got the stock because there is an intrinsic value for a company like Spotify in having large catalogs available to users, particularly if the company is going to feature the ad supported business model with its shite royalty.
And let’s stop kidding ourselves–Spotify is only about the ad supported model. The subscription part of its business was merely a sop to the labels to close their deals. As Daniel Ek and Google have both made clear, they will never give up advertising driven services. Why? Maybe it might have something to do with admitting Web 2.0 is a disaster for “content” creators? So Mr. Ek and his board member Google are of the same mind on this issue.
So I think a compelling argument can be made for licensors getting shares of stock in Spotify. My problem with the way this has worked out is that the compelling argument wasn’t made strongly enough. Not only should the major labels and Merlin have gotten stock, all the artists involved should have gotten equity or an equity-like kicker or cash bonus in return for granting the license at competitive royalty rate much less taking a below market rate in order for Spotify to get off the ground. (Given securities laws, its a bit simplistic to ask for all artists to get stock–ever try to get a broker to take unregistered private company stock? But cash works just fine, thanks.)
Mr. Busch is now in an interesting position as he may be able to discover exactly what “in cahoots” really means.
There’s some other aspects to this that may start to come out in the 19 litigation given Mr. Ek’s recent protestations of love for the ad supported side of his business. If the reality–perhaps discovered in emails–turns out to be that Spotify never intended to boost the subscription side of their business, told the labels that they did intend to do so knowing that the labels would rely on this material promise, and negotiated a contract that addressed this issue from many different angles and issued stock to those who were induced to license on this basis–well, that’s kind of an interesting possibility.
What’s In It For Spotify?
Streaming services like Spotify and YouTube all pay horrendously low royalties and apparently trade stock-for-royalties in their major label and Merlin licenses. But here’s the trick–once Spotify establishes the subsidized royalty rate, that rate then becomes the top rate they will pay to any other sound recording owner licensing to Spotify. In fact, they have crammed down even worse royalty rates on independent artists (and presumably independent labels that are not Merlin members) who don’t get the stock.
So if Spotify can trade some of its private shares for an across the board crappy royalty rate, what’s stopping them from doing it? Particularly if they never intended to transition to a subscription service? Aside from ethics and stuff like that.
Staying a predominantly ad supported service would be very Googlely after all–and if Google is planning on buying Spotify with all the goodies that would entail for Mr. Ek….Seems like we’ve seen this movie before, I think it was called Rightsflow (the licensing company that couldn’t seem to find the copyright owner for Gangnam Style—very Googlely).
Would Spotify’s board member encourage more conversion to subscription? Here’s what YouTube told Music Ally on the subject:
“It’s in Google’s DNA to be in the ad-supported business. Subscription is an add-on. It’s an adjacent business that we’re building.”
Subscription is an add-on? Is that the approach we would want from an acquirer of Spotify?
What’s In It for Artists?
Record deals typically have language that prevents artists from participating in catalog-wide advances or fees except in extremely rare cases. Given the recent uproar about “breakage”, the 19 litigation seems to come at an opportune time for artists–if the proceeds from the sale of the Spotify stock is treated as unallocated payments or breakage, then it seems like some of those monies will be passed through to artists based on extremely carefully worded breakage policies. (Mr. Busch will also be in a position to encourage a court to make sure that policy is enforced.)
Remember, the value of private stock is essentially set by the issuer’s board of directors (with reference to valuations set by the lead investor in private equity rounds). That’s why Spotify’s valuation is jacked up so high beyond any possible reality. The investors want it that way to hype their exit. We’ve seen that before–it is called the Dot Bomb Explosion. (Or more accurately, Implosion.)
In order to sell the shares either privately or in an IPO there’s usually some restrictions from the issuer as well as statutory holding periods. For example, if the label shares (probably preferred stock) are able to be sold in an IPO, that usually means that (after converting preferred to common stock) the stock held by a label can be registered along with the IPO common stock shares. After the company’s registered stock is available on a public stock exchange, the holder of the label stock can sell the shares to the public after “lock ups” come off. Lock ups are a period of time that is usually set by the company in which holders are prohibited from selling their stock (to prevent a rush of selling). There may be other restrictions.
So valuing those shares and also getting the cash from that valuation to distribute as breakage is not quite so easy. Then there’s the question of how to distribute the cash value among artists and one thing we know for sure is that no record deal addresses this issue head on (although presumably superstar lawyers have got this figured out by now). I’m looking forward to seeing how Mr. Busch solves these problems–although I fully expect the resolution will be a confidential settlement.
Tango for Two
Don’t let your eye get taken off of the ball here. You can say that Sony (and probably all the others) negotiated a lower minimum guarantee and royalty in return for stock. Or you can say that the stock was a way to capture an intangible value that would have been distributed to artists under Sony’s breakage policy. That may or may not have been fair to the artists depending on what the breakage policy was. If you’re like me, you’d want the stock and the market-price royalty, too.
But what we do know is that Spotify profited from the stock-for-royalties subsidized rate to jam it down everyone else’s throat without giving them equity or the cash equivalent. That benefit flows strictly to Spotify and likely had nothing to do with the labels that got equity.
And that sounds like a Spotify class action to me.
After pulling out all the stops in the smear campaign against Apple, the Spotify/Google juggernaut got a pause this week courtesy of @taylorswift13. Mr. Ek–and potentially the entire ad-supported business model touted by The Man 2.0–may need some help. You know, buy a vowel, phone a friend–just not one named Sean or Larry. Courtesy of Complete Music Update, a summary of indie label reaction:
Helen Smith of pan-European labels group IMPALA: “This is a great precedent in any sector on the benefits of working together and taking a stance to achieve a fair result. With 80% of all new releases produced by independent labels, this is also a great result for Apple. Their launch will now incorporate the very music that makes an online service attractive to music fans. The involvement of Merlin is vital considering its fundamental role in strengthening the independent sector. IMPALA has repeatedly called on online platforms to ‘play fair’ and this is an impressive outcome for independent labels and artists”.
Darius Van Arman, Secretly Group: “Apple listened to our community and then revised its music service agreement, demonstrating that it is committed to treating fairly all creators – labels, artists and songwriters. Secretly Group is proud to continue its partnership with Apple towards making music truly indispensable”.
Tom Silverman, Tommy Boy: “Today’s agreement shows Apple’s concern for the issues of the artist and independent label creative community. We look forward to Apple achieving huge and rapid success with its subscription service”.
Oke Gottlich, Finetunes: “The German indie sector is very happy and grateful that Apple has returned to the table, starting a dialogue again and involved our members – the small and middle-sized labels – for making the new Apple Music experience a real game changer for the whole music sector, finally”.
And from MTP’s favorite, Martin Mills, Chairman of Beggars Group and records man extraordinaire:
“Over the last few days we have had increasingly fruitful discussions with Apple. We are now delighted to say that we are happy to endorse the deal with Apple Music as it now stands, and look forward to being a big part of a very exciting future”.
Here’s a quick trip down a Spotify short-term memory lane for some long-term problems.
1. Contract Leaks: Nobody believes that Spotify had nothing to do with leaking Sony’s contract. At least they didn’t try to blame it on the North Koreans! Why would you ever trust Spotify to hold on to a piece of paper?
2. Blaming the Labels for Low Artist Royalties Hasn’t Worked: There are way too many indie artists who collect the label and the artist share to buy into this crap. In case you haven’t noticed, it’s the indie artists who do get the total label, publisher, artist and songwriter pie who are complaining about how their royalties are shite while Spotify gets multibillion dollar valuations. And who could forget Sean Parker’s line about what’s really cool, like dude. Once they’ve insulted you and tried to interfere with your relationship with your label and vice versa to masque their own shite deals and cronyism, who would trust their spin?
3. Complaining to Antitrust Authorities Hasn’t Worked (Yet): And probably won’t. It’s pretty clear now that Apple’s supposedly “take it or leave it” terms weren’t getting taken and so were left. With 50% control over the global subscription market according to Spotify analyst Will Page, I would not be too quick to cast stones. Particularly not with Google as a member of the Spotify board of directors. Stones have a tendency to boomerang. So unlike Mr. Ek’s refusal to cooperate with @taylorswift13 and YouTube’s threats to indie labels and independent artists, Apple came back to the table.
4. Daniel Ek is in the Advertising Business: Mr. Ek has been very clear just how wedded he is to the advertising model–you know, the one where his board member Google sells advertising on Spotify (and YouTube and everywhere else). In fact, he supposedly said he’d rather shut down the company than give up “free” music, i.e., ad supported.
Which is fine, but he should stop fooling himself that he’s in the music business. He’s not. He’s in the advertising business. That’s what he is committed to, not the subscription business. And certainly not the music business.
If artists want to be in the advertising business, too, then fine. Make your deal with Spotify. But don’t do it thinking you’re “helping” Spotify get into the subscription business. Not at a multibillion valuation. They don’t need your help.
5. If Apple Can Pay for Free Trials, So Can Spotify: Of the many things we can thank Taylor Swift for point out is that it’s just as unfair to give any digital service a break on “try before you buy” as it was to give away dozens of CDs in a record club. No more free trials–services should either pay the artists–all the artists and songwriters, that is–or find some other way to market their service. Maybe marketing the music might be a place to start. Just sayin’.
6. There’s A Heart in that Machine, Not a Ghost: Remember the Tin Man in the Wizard of Oz? Did he want an algorithm or a heart? One thing we’ll find out with Apple Music is whether fans really do want real people suggesting music to them on Beats 1 and whether artists can develop a sustained relationship with fans through Connect. I’m very optimistic about these things.
Why? Because I think what drives fans to music is heart. And that’s what’s always made Apple different–to coin a phrase. Because it takes courage to use your brain and listen to your heart. And check it out Toto–you’re not in Kansas anymore.
MTP readers will recall that I said of Spotify’s Taylor Swift debacle that it was unfathomable how Spotify CEO Daniel Ek could allow there to be a Taylor Swift reality that did not involve Spotify. The fact that he did it while renegotiating Spotify’s license with Universal, nominally Taylor’s label, was grounds for termination for cause.
Then came Apple Music, emphasizing an artist-oriented music ecosystem that omits the free tier that has failed so miserably with Spotify. Is it business genius not to copy a failed model? Not really. But there are some really genius aspects to Apple Music that have a lot of promise (such as Connect and the Beats 1 station with Zane, Ebro and Julie). Music genome fans will probably not dig it, but then the Tin Man wanted a heart.
My sense is that the Apple Music service launched without all the deal points fully baked, and God knows that wouldn’t have been the first time that happened. Apple wanted that 90 day royalty free period–meaning Apple wanted artists to take the ride with them on the 90 day trial period.
That was a cringeworthy idea when first proposed and it didn’t go down well. Lots of handwringing, and then Taylor Swift wrote one of her incredible letters–kind of like she did with Spotify.
Here’s the difference: Rather than publicly taunting her, Apple did the right thing. Eddie Cue said, you know, you have a point there. Let’s not do that, thank you for pointing it out to us.
Or more precisely, he said this:
And Taylor said:
“They listened to us.” How gracious.
And that was that. No fuss, no muss. Why?
According to Billboard:
Once the decision was made by Cue and Apple CEO Tim Cook, Cue called Swift on the phone from her tour in Amsterdam. “I let her know that we heard her concerns and are making the changes. We have a long relationship with Taylor so I wanted her to hear directly from us.”
Ahem…”a long relationship with Taylor.” My point exactly.
Because even Apple knows that there cannot be a Taylor Swift reality that does not include Apple Music. They know that Taylor is a thought leader for thousands of artists, if not tens of thousands. And because Apple is by and large an artist friendly environment. They’re smart enough to know when to listen to a good idea from a smart artist. No threats, no lawsuits. Just a polite ask and an equally polite yes.
And that’s why they win.
Oh, and Mr. Ek. Sorry, I forgot you were there. That’s how you get it done, son.
Save the Date, July 8 at @thecsusa in Austin: Panel on the New Grassroots, #irespectmusic and the Fair Play Fair Pay Act
The Copyright Society of the USA Texas Chapter and the Austin Bar Association Entertainment & Sports Law Section have been kind enough to co-sponsor a panel that I will be on with Austin manager Ray Flowers with this title that pretty much sums it up:
“We’re Not Going To Take It”
Wednesday, July 8 2015
Jackson Walker L.L.P.
This event is particularly timely given the expanding campaign to get artist pay for radio play. Don’t forget to join 13,000 of your friends and sign the #irespectmusic petition at IRespectMusic.org! If you’re in Austin, follow IRespectMusic Austin @irmaustin and online at www.irespectmusicaustin.org.
You may have heard of “The Music Business Podcast.” It appears to be produced by a fellow named Kyle Bylin. His bio says “Kyle Bylin is a user researcher at SoundHound Inc.” Soundhound is a Spotify partner and is well integrated into the Spotify app. See the Spotify FAQ. Soundhound also has a voice recognition app that seems to be a direct competitor with Apple’s Siri (Siri with a PhD).
Why do I mention this? The Music Business Podcast (link to Soundcloud) has an interview with an artist named David McMillin entitled “It’s Time to Stop Hating Spotify” that has some flaws. One thing Mr. McMillin definitely got right is that Spotify needs to do a much better job of converting free users to subscriptions and he did point out the trap that artists are in because Spotify was allowed to get away with offering the free tier in the first place.
However, Mr. McMillin and Mr. Bylin’s podcast proceeds on the premise that I think can be fairly summarized this way: If you are an artist who has CD or download sales that are displaced by streaming, i.e., something to lose, you’re going to complain about your micropenny streaming royalty. If you are also signed to a major label, the reason you’re complaining is not because of the micropennies but because your label is screwing you.
If you’re an independent artist who never had significant CD or download sales, i.e., nothing to lose, then you’ll be willing to accept your micropenny streaming royalty because it’s great promotion for….something. And of course, don’t get the wrong idea, because Mr. McMillian would love to have a major label record deal.
If you stay with the interview, the typical ageism creeps in. If you’re one of those artists with something to lose, you’re old. If you don’t, you’re young. That’s only a slight gloss. Then it comes out that Mr. McMillin is 31 and his interviewer is 35.
These are obviously people who have never been to Silicon Valley. A hot tip: 31 is OLD in the Valley. Why do you think Peter Thiel, the techno utopian monopoly promoter, is paying STEM-high schoolers to develop apps for smartphones instead of going to college?
So here are some other flaws. As you read the rest of this post, just be clear–I’m not saying that Mr. McMillin was paid by Spotify to do the Music Business Podcast interview. I’m not saying that Mr. McMillin was paid by his distributor Tunecore, either, that he spoke well of in his original blog post. I’m not even saying that Mr. Bylin was paid by Spotify to promote Mr. McMillin, or that if Mr. Bylin did the same thing as an employee of an FCC licensed radio station that he could possibly be charged with the crime of plugola.
I’m just saying that Mr. Bylin’s apparent employer is highly integrated with Spotify. Whether that colors his editorial decisions when he promotes messages that are also promoted by Spotify without acknowledging the obvious is between him and his conscience.
(As an aside, Mr. McMillan and his interviewer showed a stunning lack of awareness about book piracy–obviously never looked for pdfs on torrent sites or fake medical text books. So figure that out. Also Mr. McMillin does not seem to be aware that Taylor Swift took down her catalog from YouTube and limited the availability of her current videos. (PS not to “judge”, but like the reason Soundcloud doesn’t like pay artists is like because they are like ripping off like artists, however like useful the like site may like be.))
But let’s not be nitpicky. First, it’s interesting that the interviewer said “people” are suggesting that labels are essentially at fault for low Spotify payouts. Let’s be honest–the “people” who are making that “suggestion” start with Spotify itself. Daniel Ek is screaming it from the rooftops. The “people” start with the one that’s partnered with Mr. Bylin’s employer. Those people.
Aside from focusing on major label artists without mentioning that those artists get advances that need to be recouped and aside from never discussing the mega valuation of Spotify, they only tangentially mention that Spotify’s all-in royalty rate is horrendously low. (“All-in” meaning the total gross royalty, artist share and label share combined.) For example, Zoë Keating who disclosed her royalty statement also gets an extraordinarily low all-in royalty from Spotify. Mr. McMillin also likely gets an all-in royalty rate as his band is paid through their aggregator, Tunecore–as he’s only too happy to tell you. To the point that he sounds like he’s a spokesman and one could get the impression, albeit erroneously apparently, that there’s something in it for him.
A point that both miss is that the aggregate value of all music on streaming services is being transferred in large part to equity holders in the service which in part explains why Spotify can raise huge amounts of venture capital. This is especially obvious with Spotify but is also true of YouTube (and Professor Jonathan Taplin might argue is true of Silicon Valley companies generally).
In a prescient 2008 book review of Nicholas Carr’s The Google Enigma (entitled “Google the Destroyer“), antitrust scholar Jim DeLong gives an elegant explanation:
Carr’s Google Enigma made a familiar business strategy point: companies that provide one component of a system love to commoditize the other components, the complements to their own products, because that leaves more of the value of the total stack available for the commoditizer….Carr noted that Google is unusual because of the large number of products and services that can be complements to the search function, including basic production of content and its distribution, along with anything else that can be used to gather eyeballs for advertising. Google’s incentives to reduce the costs of complements so as to harvest more eyeballs to view advertising are immense….This point is indeed true, and so is an additional point. In most circumstances, the commoditizer’s goal is restrained by knowledge that enough money must be left in the system to support the creation of the complements….
Google is in a different position. Its major complements already exist, and it need not worry in the short term about continuing the flow. For content, we have decades of music and movies that can be digitized and then distributed, with advertising attached. A wealth of other works await digitizing – books, maps, visual arts, and so on. If these run out, Google and other Internet companies have hit on the concept of user-generated content and social networks, in which the users are sold to each other, with yet more advertising attached.
So, on the whole, Google can continue to do well even if leaves providers of is complements gasping like fish on a beach.
You could replace “Google” with “Spotify” in this passage and I think it would work as well. (And, of course, Google recently joined Spotify’s board of directors, knowing a good commoditizer when they see one). These are facts that seem to escape Spotify boosters.
For whatever reason, the fact that “people” are getting extraordinarily more wealthy than any artist on their service or even all artists on their service (Daniel Ek $250 million net worth, Tim Westergren making $1 million a month or more) doesn’t seem to bother Mr. McMillin (or Mr. “McMilion” as he’s ironically referred to by the podcast–spellcheck, people).
But here’s the main flaw in Mr. McMillin’s reality: He seems to think that the reason he does better than a major label artist is attributable to his distributor who he just pays on an annual flat fee basis and not that he gets an all-in royalty from Spotify or other streaming services. The idea that an annual flat fee distribution fee is somehow not a distribution fee is really hard to accept.
A flat fee distribution fee that the artist pays rain or shine is simply another way for the distributor to push 100% of the distributor’s risk onto the artist. If the distributor takes a distribution fee that is dependent on sales, the distributor only makes money if the artist makes money. This seems to be pretty obvious. And frankly a far better allocation of distribution risk.
Why? Because the artists who do best on a purely distribution fee basis are those who sell a lot. As you will see below, those artists who don’t sell a lot are essentially paying a colossal distribution fee and are also protecting the distributor’s downside risk. Which can also translate into the distributor not being incentivized to fight for the best terms in their own deal with, say for example, Spotify. I’m not saying they did or didn’t just asking the question: How would you ever know?
Why an artist would be proud of the fact that they have taken 100% of the distributor’s risk onto themselves is beyond me.
Those same flat fee distributors also don’t allow you to audit and won’t show you their direct deals with any digital service, so no one knows whether they pass through the terms or if they are keeping a vig for themselves off the top. That’s not an accusation, it just seems to be the fact–no one knows. If that’s wrong, please send me the terms and we will post them.
Here’s an excerpt from a post about digital distribution deals I wrote a few years ago that addresses this issue (Digital Aggregator Deals: Is the New Boss Worse than the Old Boss?). I think it’s still relevant with one caveat: I used a download model for comparison purposes. If you use streaming revenue instead, make sure you have a scientific calculator. You’ll need more places to the right of the decimal.
Commission Rates: Percentage vs. Subscription
How the aggregator is compensated is also an issue of concern. In the traditional model, the aggregator took a percentage of sales as their compensation. This meant that the aggregator only made money if the artist made money. Some aggregators charge a flat fee on some basis (such as a per-retailer basis) instead of a percentage, or an annual flat fee. This makes the aggregator deal more like a subscription model where your credit card is banged every year for a magazine subscription.
Each model has its strong and weak points. The percentage model pays the aggregator a percentage of your gross revenue that the aggregator collects regardless of whether they are making an effort to stimulate sales (which few of them do in any event regardless of how they are compensated). However, under the percentage model the aggregator only makes money if you make money, so at least the incentives are aligned. The percentage should be low (15% or so is fairly typical) to take into account that the aggregator has lower incremental costs over time of maintaining content in their catalog.
The flat fee model has the artist pay the aggregator a fee for distribution instead of paying the distributor a percentage. While this is attractive from the point of view that the artist knows what their distribution costs will be up front, it also transfers all of the risk of distribution to the artist. In order to determine which is the better model, the artist should compare their most favorable percentage based offer to the flat fee model and see what the breakeven point will be. Try using a formula like this and solve for “X”:
[Flat Fee]/[percentage] = Gross Income
Gross Income/wholesale price = breakeven units
or, for example if the flat fee is $100 and the comparable distribution fee deal is 10% (which would be very low but this is an illustration):
$100/.10 = $1,000 (Gross Income)
$1,000/$0.70 = 1428 units (rounded down)
In the example, a $100 flat distribution fee is equivalent to a 10% distribution fee model if you sell 1,428 units at a wholesale price of $0.70 (a typical wholesale price per track for permanent downloads). That means that if you sell exactly 1,428 units you will be indifferent between the two models. It also means if you sell fewer than 1,428 units, you will be better off under the percentage model. If you sell more than 1,428 units you will be better off under the flat fee model. (You could argue that the units would be 10% higher to get to a net number to the artist, but we are trying to keep it simple. That difference would be another 159 units [(1428/.90)-1428], rounded.)
This example is only for one accounting period and only uses one revenue stream–permanent downloads. It is more likely that you will see blended revenue streams, but we factor out limited downloads and streaming because permanent downloads are the overwhelmingly dominant revenue stream for most artists. That may change over time or be different for you. Also, as you extend the distribution costs and revenues over longer periods of time (with additional flat fee payments per year under the subscription distribution model), your results may vary.
To take another example of the flat fee model, what would the flat fee equate to under the percentage model at 500 units at a wholesale price of $0.70 (a typical wholesale price for permanent downloads)?
[Flat Fee]/[Gross Income] = Distribution Fee as a percentage
$100/[(500) x ($0.70)] = 28.6%
Under these assumptions, a 28.6% distribution fee for an accounting period would be in the astronomical zone for a digital aggregator–who should be getting around 15%. It would even be on the high side for a major label distributor who was also giving signficant (and expensive) marketing, PR, sales and radio promotion support.
But these are just assumptions to illustrate the issues. In any of these examples, you will need to use your own projections on sales, wholesale price and configurations in order to get a projection that is personalized for you.