In Defense of Mīnīmüm Gūärantēēs

Emperor Joseph II

My dear young man, don’t take it too hard. Your work is ingenious. It’s quality work. And there are simply too many notes, that’s all. Just cut a few and it will be perfect.

From the motion picture Amadeus, written by Peter Shafer

Digital Music News reports today that Cür Music is struggling to come up with the minimum guarantees necessary to license all the major labels’ catalogs.  In case you were not aware, the umlaut (as in “Cür”) is rumored to be unicorn dialect for “what’s really cool is a billion dollars.”  But I digress.

DMN don’t mention minimum guarantees for publishing, so that must mean the songwriters are stuck with the good old fashioned boot of the government for dinner, also known as compulsory licensing.  Hey, if it worked in 1909, it’s good enough for progressive Silicon Valley companies feeling the Bern in 2016.  Try calculating how many streams are required to earn one hour of minimum wage if you want to really feel the Bern–be sure to bring your scientific calculator so you have enough zeros to the right of the decimal place.

And that’s what the problem is here, isn’t it?  Instead of too many notes, there are too many zeros.  For Cür Music, representing the Umlaut Class, there are too many zeros to the left of the decimal place.  For the artists and songwriters, there are too many zeros to the right of the decimal place.  Here’s a deal that will quickly be rejected:  You start the royalty rate with a whole integer that’s not zero to the right of the decimal place, and I’ll help you on your zeros to the left.

The answer, we are almost invariably told, is that major labels ought to reduce their demands for minimum guarantees.  (As an aside, let it not be lost on you that this and other similar stories are circulating at the same time, perhaps even the very moment, that YouTube is renegotiating its deals with major labels and the blood is running high.)

Let me give you the unvarnished truth about minimum guarantees, the umlaut free truth.  The baseline reason for minimum guarantees is what I call the “Venezuela Rule”:  If you think you’ll never get paid or that you’ll have to sue in uncomfortable territory (such as the Ninth Circuit Court of Appeals), get all the money up front.  Put the risk on the licensee since they want your business so badly.  Makes sense, right? (I exclude the Ninth Circuit where bankruptcy is actually a fair use.  Or at least one factor to be considered.)

Because remember–these are startups.  However much our society wants to lionize startups, the fact remains that they are startups–new businesses with no operating history who may themselves be or be funded by people who don’t like us particularly well. They have the Venezuela Rule problem because people do not believe that they will make good on the promises they assume by contract for a host of reasons, one of which is that they simply run out of money because their venture capital backers simply stop funding them.  Their VC don’t mind–in fact may actually enjoy–sticking it to major label artists in bankruptcy.

Case in point: Spotify is simply not accounting to songwriters for a significant portion of the catalog it licensed and promised to pay royalties for.  The government’s compulsory license does not permit the Venezuela Rule because the compulsory license allows users to keep getting new compulsory licenses even though they have not paid on the ones they have even if the company is being sued for failing to do so, as Spotify is being sued.

Spotify knows this.  Given that Spotify just raised $1 billion in debt, do you think they would rush to pay songwriters what they are owed or go off on an acquisition binge?

Case in point:  Rdio is bankrupt and some of its executives are being sued by Sony for fraud in the “renegotiation” of–minimum guarantees.  According to Sony’s lawsuit (and there will be another side to this when the defendants answer), these executives looked Sony right in the eye knowing that Rdio was going under and promised to pay the minimum guarantee essentially the same day they knew the company would file for bankruptcy protection.  Forgetting the Venezuela Rule for a moment, Sony actually believed them and now is scrapping for what they are owed in a…that’s right…bankruptcy proceeding.

Creditworthiness.  It matters.  If you can’t demonstrate you have it, you will be required to protect your vendors from your own bankruptcy risk well before any bankruptcy rules for preferences or fraudulent conveyance come into effect.

And you can take that to the bank.  Or tō thē bø̄nk for that matter.