Home > artist rights, Spotify, Uncategorized > The Marginal Value of Infringement in the Wrong Tail

The Marginal Value of Infringement in the Wrong Tail

January 11, 2016

It looks like Spotify has got hold of the wrong tail.  Spotify is doing back flips to blame others for its manifest failures to lawfully obtain mechanical licenses.  Spotify’s transgressions are currently the subject of two different class actions brought by songwriters.  According to press reports, 10% to 25% of the songs on Spotify “are not properly licensed and/or not distributing royalty payments.”  Spotify also claims to have licensed approximately 30 million recordings (of 30 million songs, give or take for covers).

Based on these assumptions, that means there are three million to 12 million songs that “are not properly licensed and/or not distributing royalty payments”.  This is not a few new releases, a 1/16th of a song for a sample, the odd songwriter who cannot be found or who is non responsive.

Millions of unlicensed songs isn’t an acceptable accident, it’s an unacceptable policy.  In fact, it’s exactly what the compulsory mechanical license was designed to prevent.

At the end of the day, the policy, i.e., the choice, to go forward without licenses, rests solely with Spotify.  The company could have complied with the compulsory license–enacted by the U.S. Congress for this exact situation–but Spotify chose not to.  Whoever Spotify hired to undertake the mechanical process of mechanical licensing, someone at Spotify decided to go forward without complying with the law and they did so on a grand scale.  It appears that the thinking was that the upside value of having “all the world’s music” was greater than the downside risk of getting caught.  The marginal value of another few million songs was greater than actually complying with the law and paying songwriters.

This decision is what is called “business risk.”  Incredible as it may seem, this decision–this willful decision–to accept the business risk of using millions of unlicensed songs was apparently driven by a belief that in order to have an effective consumer offering, Spotify had to have tens of millions of tracks available to consumers.  This policy of using millions of unlicensed songs may well have been informed by the “long tail” theory and thought experiment posited by one Chris Anderson (in case you forgot him).  You can read all about it in Anderson’s counterintuitive utopian book The Long Tail: Why the Future of Business is Selling Less of More which was based on a 2004 article in Wired.

I’d be very interested to know exactly where this consumer research is that shows the marginal value of an additional 12 million songs is so meaningful to a music service that it trumps the infringement exposure.  I frankly have never seen it–aside from Spotify’s reliance on Anderson’s version of the long tail.

Anderson goes down the wrong rabbit hole by relying on anecdotal observations of “Ben” an anonymized (or perhaps fictional) character who is a teenager from an affluent family in Silicon Valley who gets most of his music from “friends” and “Bit Torrent” (recall that Spotify’s CEO was a developer of uTorrent, a key piece of the piracy picture acquired by Bit Torrent in 2006).  So Anderson starts by analyzing a legal market with comparisons to the black market.  That obviously wasn’t going anywhere logical.  Neither is any market of what the New York Times called “pixel-size niches“.

Anderson’s long-tail thought experiment has been criticized by a number of people such as Harvard Business School Professor Anita Elberse in the Harvard Business Review and most famously in the music business by Will Page, the former economist for PRS, the UK performing rights organization.

Any record company production manager could have chimed in–and perhaps would have if it wasn’t so obvious that it did not really bear much discussion.  The corresponding transaction costs of a variety of functions including rendering royalty statements for minuscule unit sales were not worth keeping the title in the catalog.  You know, kind of like sending a royalty statement for three streams.  Preparing the statement may well cost more than the royalty even if the statement is itself digitally delivered.  Not to mention taking the phone call from the angry songwriter who got a statement for $0.19.

Record companies are no strangers to the long tail–that’s often called classical and instrumental jazz.  It is worth noting that record companies have for decades deleted titles that didn’t sell enough to justify keeping the title in the company catalog.  This is consistent with Professor Elberse’s research demonstrating that “the tail increasingly consists of titles that rarely sell and that are produced by smaller-scale players.”  Professor Elberse assumed that there were no infringement costs associated with those “titles that rarely sell” thus exponentially increasing the cost of the tail, or as this particular tail is known in some circles, the wrong tail.

Then-PRS economist Will Page reached a similar conclusion after analyzing PRS royalty payments in 2008.  Those who have had about enough sanctimony from Spotify about how it is God’s gift to fighting piracy will find this nugget of interest when wondering how much the marginal value of the last 12 million tracks that don’t sell really is worth if they are all unlicensed:

Will Page, the former economist for PRS, found in a 2008 study of PRS revenues that famously debunked Chris Anderson’s absurd “long tail” theory, the “long tail” is pretty meaningless for music services:

[PRS] found that only 20% of tracks in our sample were ‘active’, that is to say they sold at least one copy, and hence, 80% of the tracks sold nothing at all. Moreover, approximately 80% of sales revenue came from around 3% of the active tracks. Factor in the dormant tail and you’re looking at a 80/0.38% rule for all the inventory on the digital shelf.

Mr. Page now works for Spotify.  They could have just asked him before taking the business risk of failing to get compulsory licenses.

Was the marginal value of the long tail worth it for Spotify when compared to statutory damages?  Commentators often mock statutory damages, especially for willful infringement, as being over the top.  In the case of the compulsory mechanical license, you can look at this another way.

Congress did backflips to make the compulsory license easy to get.  If a well funded company like Spotify (last valuation $8 billion) chooses to ignore Congress’s efforts, then Congress wants to make sure that the marginal value of ignoring the compulsory license is always less than the statutory damages for choosing to do so.

%d bloggers like this: