Home > Uncategorized > Show Me the Money: No Transparency in the Henhouse for the Real Black Box at Spotify and YouTube

Show Me the Money: No Transparency in the Henhouse for the Real Black Box at Spotify and YouTube

October 16, 2015

You may have heard the rumor that Spotify is in the middle of renegotiations with the major label groups–that typically would include publishers.  If Spotify owed you a pile of money and wanted to extend your contract, wouldn’t you expect them to clean up any money they already owed you first?

The Wall Street Journal reports that the “black box” at streaming services is even worse that we thought:

In the 10 months that ended this past January, Spotify users in the U.S. listened more than 708,000 times to “Out of Time” by the pop-punk band A Day to Remember, but the music-streaming service paid no songwriter royalties, according to data shared with the band’s record label and music publisher.

The omission wasn’t an isolated event.

Of the millions of times Spotify users listened to songs distributed by Victory Records and published by sister company Another Victory Music Publishing during the same period, the service paid songwriter royalties only about 79% of the time, according to an analysis by Audiam Inc., a technology company that seeks to recover unpaid royalties.

So how to understand these numbers on a Spotify-wide basis?  Let’s be kind–Spotify is probably paying on the hits at a far higher rate than indie songwriters.  Let’s just assume that Spotify pays on a rough justice number of 60-70% of total streams.  Meaning that they don’t pay on roughly 30-40% of total spins and that of this 30-40% independent publishers and self-administered songwriters are probably over represented.

And that’s just Spotify.  YouTube can’t be much better, and then there’s the rest of the services.   Of course, YouTube is the data mining service owned by Spotify board member Google so the interlocking boards of those two companies have a common interest in seeing that this never comes to light.  (If you think that 30-40% number seems high, remember that in Aimee Mann’s litigation against Medianet, a declaration was produced that showed that 23% of songs available through Medianet were unlicensed and at one point had a “match rate of less than 55%” according to Medianet’s former CEO Stephen Barraclough.

Graubart Affadavit

(Declaration of Stephen E. Grauberger, Esq. in Appalseed Productions, Inc. et al v. Medianet Digital, Inc. et al, currently available at http://www.scribd.com/doc/155513456/grauberger-declaration).)

According to Spotify’s head flack, Clintonista and frequent White House guest Jonathan Prince, it’s all the songwriters’ fault:

“We want to pay every penny, but we need to know who to pay,” Spotify spokesman Jonathan Prince said in an email. “The industry needs to come together and develop an approach to publishing rights based on transparency and accountability.” Spotify says it has paid over $3 billion to rights holders since it launched in 2008.

There  are a couple different ways to back into a number that represents the Spotify black box.  One way is to accept the $3 billion number (which is actually larger now and is increasing at an increasing rate–Billboard reported that Spotify hit that number in first quarter 2015 (so probably earned a bit earlier than that 3/31/15).  If there’s only a 20% shortfall, that would mean that the Spotify black box has something like $60,000,000, rough justice.

But if it’s closer to the Medianet litigation numbers and you assume an underpayment of record royalties as well, that would get you to a much higher number.  I frequently hear from independent artists that they have no idea how their recordings are ending up on Spotify, so anecdotally that’s not so far fetched.  If Spotify underpaid songwriters by the songwriter’s share of about $1.4-$2 billion, rough justice perhaps somewhere around $150 million.  These numbers would also have to be further allocated based on US statutory royalties compared to ex-US.

Whatever it is, it’s not chump change.

So there’s two good ways to “pay every penny”–first way is to pay them pennies.  (Of course, in Spotify’s case, we’re not really talking whole pennies, but how would it sound for Mr. Prince to say “We want to pay every mil”.)

Another good way is to clear the publishing before you use the song.  In Spotify’s case, if the company qualifies for a compulsory mechanical license, there are very clear rules about what to do if you can’t find a songwriter or if there’s an undeliverable notice from a former address.

Who Can Find Out What’s In the Black Box?

A similar version of this issue came up years ago with record companies and publishers.  The New York Attorney General had to investigate because there really wasn’t anyone else situated to take the case.  Given the well known political influence of Google over the Obama Administration, you can just forget the U.S. Department of Justice lifting a finger to help songwriters and artists, and given that Mr. Prince himself is a lot more welcome in the White House than you are, it’s unlikely that Spotify feels threatened much by the DOJ or their buddies at the FTC who opened an investigation into Apple Music for Spotify’s benefit right on cue.

So it’s probably going to take a class action–and since it’s Google you have to say a bona fide class action, not a typical Google scam class action that’s an excuse to give money to the Electronic Frontier Foundation.  Or a State Attorney General who is not afraid to get sued by Google for enforcing the law.

How Big Is the Black Box?

How much money is this really?  Hard to say, but it’s a lot when measured over the statute of limitations for copyright infringement (3 years) and longer for state-law fraud claims.  Of course the smaller the amount owed for any single song, the less likely it is that any one songwriter will sue.  In the case of Spotify or YouTube, it’s hard to even know which songs are involved because the companies fail to disclose whose songs they are using without a license.  Or said another way, Spotify and YouTube underpay because they can get away with it.

The WSJ also tells us that:

When services don’t know whom to pay for publishing royalties in the U.S., they are supposed to hold the money in escrow in case a valid claim materializes.

What that means, if it is true, is that Spotify and YouTube are accruing royalties for actual uses of specific songs at either the statutory rate (most likely in Spotify’s case) or a contract rate that the unknown songwriter is not party to and has not accepted.  I assume someone told this to the WSJ–and it implies that the services know exactly which songs they owe money on and how much they’d like to pay.  (No mention of interest, by the way, so how can this really be an “escrow”.)

Escrowing With Myself

I’ll be interested to know where this “escrow” concept comes from because I can’t find it.  If the service wants to rely on the compulsory license they are supposed to send a notice under the Copyright Act and the regulations.  If they can’t find a writer, they send the notice to the Copyright Office and the Copyright Office publishes a list of unknown songs for which they have received notices.  (A thankless job, by the way, so we should all thank them for it.) In this way, the unknown writer has a hope of finding out that the service is trying to reach them.

This is similar to the unclaimed property office list that states typically maintain for closed bank accounts, utility deposit refunds and the like.  It’s also similar to the settlement between the New York Attorney General and the major labels where the labels maintain a public list of artist royalties for artists they can’t locate.

So if Mr. Prince really does want to pay every mil that Spotify owes, Spotify could very easily comply with its obligations under the compulsory license (which probably means they haven’t and probably means they’ve lost the ability to rely on the compulsory license and probably means they’re a…you know..a watchamacalit…an infringer).  If they would prefer to ignore their obligations and just bully their way through with independent artists and publishers, they could use the song, get no license, send no notice, and then keep it a secret.  Which is what they seem to be doing now (based on the fact that “Spotify” does not appear once on the Copyright Office list of unknown songwriters).

But let’s be clear–this isn’t just a few songs or partial songs that slipped through the cracks.  This appears to be a standard business practice that affects an untold number of songs that may well measure in the tens of thousands if not more.

Here’s the other thing.  An escrow agent once told me instructively that non-statutory escrow instructions have to be agreed upon by the parties, clearly expressed in writing to the escrow agent, the escrow agent has to accept the responsibility for the escrow and that there can never be a moment in the life of the escrow account when the escrow agent doesn’t know what to do based on the escrow instructions.

Of course…if you can’t find the party to pay…then…you can’t have a…you know, a contract…and yet Spotify (or the payors who follow this practice) is purporting to be an escrow agent.  On terms unilaterally established by the service acting as an agent.  You know, as in agency.  As in undertaking a duty of care as a…you know..fiduciary.

There are a couple of escrow accounts established in the Copyright Act, just not for this purpose  (the union share of webcasting royalties [17 USC Sec. 114(g)(2)(B)], the Sound Recordings Fund [17 USC Sec. 1006(b)] and certain rate court situations [17 USC Sec. 513(5)]).

So in Spotify’s case, I’m not aware of any basis for a statutory or certainly not contractual escrow, and it certainly seems that Spotify is unilaterally undertaking the responsibility for whatever funds they are accruing, even if they are doing it otherwise without basis in the law.

As Usual, YouTube is the Worst of the Worst

YouTube’s situation is even more tenuous–there’s no statutory rate for the reproduction of the songs in their videos.  YouTube also takes the rather shaky position that YouTube doesn’t need a sync license because (a) the sync occurs before the video is uploaded and (b) it’s the users that are doing the editing that creates the $6 billion of revenue for Google.  But let’s say that’s all correct, YouTube’s rights come from contract and just like Spotify, you can’t have an escrow agreement about earnings from songs for songwriters who can’t be found because you can’t find the songwriter to have the escrow agreement with.  Because YouTube doesn’t qualify for the compulsory license, YouTube can’t send notices to anyone, including the Copyright Office.

But just like Spotify, YouTube evidently assumes the duty of an escrow agent unilaterally and also unilaterally assumes (I guess) that the unknown songwriter would accept the same terms as their co-writers or if not a co-write, that the unknown songwriter would accept the same terms as other songwriters.

And of course, just to add to the humiliation or the hubris, nobody has the right to audit–the compulsory license does not permit an audit right and since there’s no contract with YouTube, the songwriter would have to sue.  And YouTube knows that songwriters can’t turn to the government to enforce the law.

This situation is, of course, ready made for a class action, or it seems so to me.  Maybe copyright infringement, breach of fiduciary duty, fraud, conversion and misappropriation.  Yummy.

But in the meantime, we have Mr. Prince blaming the victim and giving what I call the Vinny Defense (for Vinny Barbarino, the John Travolta character in Welcome Back Kotter who uttered the classic line “I’m so confused”).  The Vinny Defense is what the fox uses to assuage the fears of the chickens in the henhouse–while the fox holds an armful of eggs with a mixture of yolk and feathers dripping from his jowls.

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