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Is YouTube The Lyor Show?

MIKE

Christof, let me ask you, why do you think that Truman has never come close to discovering the true nature of his world until now?

CHRISTOF

We accept the reality of the world with which we’re presented. It’s as simple as that.

from The Truman Show, written by Andrew Niccol

You’ll hear a lot of trash talk about Lyor Cohen, but credit where it’s due–he gave an interview that interested me about how he sees his role at YouTube.  I actually think he’s got some old school ideas that may be fundamentally sound, but are not connected to the Google reality.

I submit that his problem is that either he’s getting paid so much money he doesn’t need to be attached to reality or he doesn’t understand that Google does not give a rip about us.  Or maybe it’s a little of both.

Lyor’s main problem is that he either doesn’t understand or chooses to ignore Google’s exploitative business model.  MTP readers will recall a prescient 2008 book review of Nicholas Carr’s The Google Enigma (entitled “Google the Destroyer“), by antitrust scholar Jim DeLong that gives an elegant explanation of Google’s mindset:

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 – [music,] 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.

And that was the truth in 2008 and its still true of Google ten years later because that’s their business model.  So when Irving Azoff says of Google that YouTube doesn’t pay artists and songwriters adequately–even the top songwriters in the world who are members of Irving’s Global Music Rights–that’s entirely consistent with the predatory business model Jim DeLong identified.

And when Lyor tries to flatter and deflect his way around Irving’s criticism, he’s missing the point entirely which is not surprising given that he works there.  But it doesn’t change the fact that Irving is right—Google is built on an exploitative business model that depends on using the DMCA safe harbor to undermine basic private property concepts and complete one of the biggest income transfers of all time to the great detriment of artists and songwriters.

MTP readers will also remember my 2007 post, The DMCA is Not an Alibi, now called “the value gap.”  That was the one that really started criticisms that I had a Google problem.  I can’t tell you the number of times that people have come up to me and confessed that they didn’t see what I was driving at until years after.  Not that it matters, but important years were lost when people in positions to marshal resources to combat them simply failed to do so.

Nothing has changed since Jim and I wrote those pieces and nothing will change until there are tectonic shifts in how Google is permitted to operate and the loopholes it relies on.  We’re thankful of the victory in Europe, but as one loophole closes in Europe, another opens in the US through the Music Modernization Act’s inexplicable and likely unconsitutional reachback safe harbor.

In a recent Billboard interview, Lyor said:

“Prior, [YouTube would] make a deal with the industry, go away for a few years and then come back. And that, to me, is where misunderstandings happen,” he explains. “It’s really hard to find an artist and break that artist — I mean, it’s almost impossible. So if Google and YouTube understand how difficult it is, maybe they could think about ways to improve that part of the business….”

How did you alleviate the disconnect between YouTube and the music industry?

Just going back to back with them. Demystifying our intent. Understanding how hard it is to break artists and to go to work on behalf of the creative community and the labels.

I think Lyor is essentially correct in his old school assessment of Google’s “new boss” problem, but he’s treating the wrong symptom.  It’s not that Google doesn’t understand anything, they understand just fine how hard we think it is to break an artist in the music business.  They just don’t care and to the extent they think about it at all, they think that we don’t understand because they think they “break” YouTube “stars” when those “stars” get corporate sponsorships.

And that is because their business model is based on manipulating loopholes and not on “breaking artists,” if “breaking artists” means establishing artists as able to have successful careers apart from YouTube.  And that dependency has become clearer in the years since Jim wrote his “flopping on the beach” post which makes Google’s commoditization even more insidious.

So while we’re happy that the Europeans have seen the light on the “value gap,” the DMCA is still not an alibi–unless the U.S. government continues to fail to address the underlying cause of the new Darwinian music business that is gradually asphyxiating artists and songwriters.

And while we can appreciate Lyor’s old school view of his role in the Google Nation, no one should be persuaded that his approach will change anything as long as one of the largest corporations in commercial history is allowed to weaponize the DMCA safe harbor.  The artists Lyor is focused on “helping” aren’t just flopping on any beach, they are flopping on Google’s beach, one way or another.

Songwriters Guild President Rick Carnes testifies on the Need for Copyright Small Claims Court

June 18, 2018 Comments off

Strangely overlooked in the hoorah about the mechanical licensing collective is the CASE Act that would finally establish a small claims court for copyright infringement.  If Big Tech is going to give themselves another safe harbor in MMA for the mechanical licenses they failed miserably to obtain, the least that the Congress can do is pass the CASE Act to establish some remedy for copyright infringement that is available to all copyright owners.

Rick Carnes gives an excellent explanation in his testimony.

Misreading Spotify’s Stock Behavior

June 17, 2018 Comments off

MARK

We live in an era of fraud in America. Not just in banking, but in government, education, religion, food, even baseball… What bothers me isn’t that fraud is not nice. Or that fraud is mean. For fifteen thousand years, fraud and short sighted thinking have never, ever worked. Not once. Eventually you get caught, things go south.

From The Big Short, screenplay by Charles Randolph and Adam McKay, based on the book by Michael Lewis

A quick aside–Billboard recently quoted the consultant Mark Mulligan as saying the following about Spotify (which is listed as a client of his MIDiA company, among others):

MIDiA Research managing director Mark Mulligan says Spotify’s general tune has changed since the company was listed on the New York Stock Exchange in April and must now aim to become profitable. “As the bellwether of streaming, Spotify has been dictating the narrative for years, but always with the focus of being a partner for rights holders. Now that it is public, Spotify has found that tough talking trumps sweet talking,” wrote Mulligan in a June 12 blog post. “Speaking from the experience of months of deep conversations with large institutional investors, Wall Street has pumped money into Spotify stock not because of how it will help labels’ businesses, but because they expect it to replace labels, or, at the very least, compete with them at scale.”

If “pumped money into Spotify’s stock” means, among other indicators, a wave of buyers, that’s one thing that Spotify’s stock does not have and so far never has had as measured by the lower chart below (see arrow):

Spot Chart 6-17

Also remember–in Spotify’s “Direct Public Offering” model, the lion’s share of Spotify stock is initially being sold by insiders with no “lockup” restrictions (which could include consultants who got compensated in shares and cash), aside from a very, very thin public float.  A thin float is not surprising for a stock that was intentionally priced out of the range of retail traders with the cooperation of the Securities and Exchange Commission.

That means that all the Spotify insiders have a strong interest in that price staying high–aside from any big blocks of shares that are being sold in dark pools, of course, which could also be an explanation for the very low reported volume.  Traders I’ve spoken to are all watching the extraordinarily low Spotify volume and high price as are some other people.  A cautionary tale for the Securities and Exchange Commission.

So I’m not really sure what “money” that “Wall Street” has “pumped” into the Spotify stock and even if they did, you should understand that money is not going to the company–it’s going to the insiders.  The company is not issuing any new shares.

That’s because the very rules of a “direct public offering” preclude an underwriting syndicate that would actually be pumping money into the stock in a full commitment underwriting of newly issued shares.  In that situation, the underwriters would be buying new shares from the company not from billionaires like Daniel Ek.

The only pumping I see going on in my opinion is spinning that there’s pumping of cash going on.  And I’ve found that kind of pumping usually precedes the dumping.

Before we mix correlation and causation, I’d like to see some confirmation in the volume for the SPOT shares–which ain’t there as far as I can tell.  The trading pattern looks a lot more like automated market making to me (which may explain the odd support level at $150).   There’s also a “head and shoulders” technical pattern if you believe in that kind of thing or if you can believe in it on low volume and early days.

Even though it’s a truism, time really will tell.  I’m not quite sure what you can tell about SPOT right now aside from asking yourself what would you sell to buy Spotify at $170?  For most retail investors, my bet is that the answer is nothing–particularly if they remember people like Mary Meeker in the Dot Bomb crash (who avoided prison and went from “laughingstock of the Internet boom” to “legendary venture capitalist” in about ten years–welcome to Silicon Valley).

And as far as “talking tough” goes, there’s lots of people who are ready to talk tough to Spotify and there’s one big difference between them and the labels.  Some of them also carry badges.

junk-bond-koenig-michael

 

 

The Return of the Fifty Dollar Handshake: Are Spotify’s Direct Artist Deals Really Less Than Meets the Eye–or Are We Looking in the Wrong Place?

June 17, 2018 Comments off

If I gave two fucks – two fucks about streaming numbers
Would have put Lemonade up on Spotify
Fuck you, fuck you, you’re cool, fuck you, I’m out (Ah!)
I ain’t never seen a ceiling in my whole life, that’s word to Blue
Freestyling live, blueprint from my Jigga who never bribes

From Nice performed by The Carters

I guess Beyoncé & Jay-Z didn’t get the memo: Spotify is pumping up the earned media about its “direct artist deals” and also trying to pump up the bizarre behavior of its low volume stock price (and that story has yet to be told but is for another day).  But the question is why would managers go through the headaches if there wasn’t more to it–like playlist placement, for example.  Think about it–if Spotify said here’s some cash and we’ll give you a better split if anyone plays your tracks, is that as enticing a story as if they also said they’d guarantee placement on key playlists?

If a terrestrial radio station did that, my bet is that would be an…uh…a whatchamacallit.  A crime.  In most if not all states, undisclosed payments for placement would very likely violate consumer fraud statutes.  So we’re way past antitrust now, boys and girls.  Fifty state attorneys general knocking on your door can ruin your whole day.

Radio payola is often referred to as “the fifty dollar handshake”–when a radio promoter would slip a $50 bill to a DJ during a handshake.  If it’s illegal on terrestrial radio, why should it be legal online?  I’m a big believer in platform parity and a level playing field, don’t you know.  Also known as Moondog’s Revenge.

As the erudite David Oxenford noted a few years ago:

The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves…But that does not end the inquiry.  Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute.  Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage.  Such statutes are in no way limited to radio, but can apply to any business.  Thus, Internet radio stations would need to be concerned.

Let’s look at two questions:  Payment for playlist placement and potential infringement of song copyrights in a post-Music Modernization Act world.

Here’s a summary of financial terms of these deals from Billboard:

Over the past year, sources say, Spotify has been offering to pay a number of artist-management firms several-hundred-thousand-dollar advances in exchange for licensing their acts’ music directly to its streaming services. These deals cut out record labels and independent distributors, yielding more revenue per stream for Spotify, the musicians and their managers. Since Billboard reported the terms of some of these offers on June 6, Spotify’s stock has climbed more than 8 percent, to about $178 per share, as of its June 14 close….

Some acts say they are tempted to sign direct deals with Spotify not just for the advance fee and the higher potential payouts per stream, but for the prospect of better placement on top playlists — key real estate that some managers say has become increasingly difficult to score.

Now why would the “prospect of better placement” be a factor?  More likely the guarantee of “better” placement–in terms of both the playlist and the ranking on that playlist?  And this makes the stock market “cheer” as opposed to run for the exits?

Remember that Spotify is reportedly making deals with “artist management firms” to license directly to Spotify in a way that “cuts out record labels and independent distributors”.  That also tells you that it is unlikely that any of these artists are already signed to either a major or to a digital distributor or else there’d be no one to “cut out.” Of course if they aren’t signed then no one is actually being cut out, they’re just being denied an opportunity.

So that means that either the manager has already negotiated an out in their indie distribution deal that would allow them to take the $50 handshake…sorry, the Spotify money…or their participating artists don’t have a distribution deal yet.

The manager then shops the artist to a distributor who apparently has to take subject to the Spotify carve out.  This will not be attractive to a digitial distributor who works on a distribution fee basis, and may not even be attractive to a Tunecore that puts all the distribution risk on the artist through up front fees with no risk to Tunecore.  This is perhaps because the Tunecore fees appear to be based on amortizing collection fees against the pass through float and the float will be much lower without Spotify.  This is particularly true now that streaming has destroyed the download business.

Coming to digital distributors without Spotify in 2018 is probably like coming to them without iTunes in 2008–not attractive.  But as Billboard notes, the people who really get hosed by Spotify are–predictably–the indie labels.  This will be particularly true even if the manager was able to negotiate a buyout from the Spotify deal if the artist has an opportunity to sign to a label.

So once again, a tone-deaf Spotify steps in it because they just can’t leave well enough alone.   And they are very likely selling the deals to managers and artists based on payola-style playlist placement that benefits “their” artists on Spotify’s own playlists and the consumer is none the wiser.

I haven’t seen these agreements in the flesh, but I would also bet there is another clause in there–song clearance.  Spotify is very likely putting the song clearance onto the artists so that they get fully cleared recordings delivered to them.   Understandable given Spotify’s abysmal track record on screwing songwriters, but is it realistic?

Maybe.  As long as the artist has written one hundred percent of the songs recorded–which means no publishers, no covers, no outside writers and no samples–the artist can promise to deliver fully cleared recordings including the songs.

How likely is that to happen?

Now uncleared songwriters–before you call your lawyers, remember that after the Music Modernization Act you can’t sue Spotify for statutory damages and attorneys fees for copyright infringement if you didn’t already bring your case before January 1, 2018–even if you didn’t know you had a case.

So assuming MMA becomes law later this year, you’ll have to find something else to sue for, and good luck with those attorneys fees.  Thanks, Congress.

So maybe we all have our eyes on the wrong ball.  We expect that from Spotify, but the managers can do better.

And then there’s state law prosecutions for commercial bribery.  Helloooo state attorneys general.  Not to mention federal mail and wire fraud and, of course, RICO.  No safe harbor for Danny on the RICO.

How are those copyright infringement lawsuits looking now?

 

Save the Date: “Music Publishing After the Music Modernization Act” at Texas Bar Entertainment Law Institute on November 9

June 15, 2018 Comments off

I’m pleased to let you know that veteran music publisher Richard Perna and I will be presenting “Music Publishing After the Music Modernization Act” on November 9 at the 29th Annual Entertainment Law Institute in Austin co-sponsored by the State Bar of Texas Entertainment & Sports Law Section.  You can get more information and register at this link.

If the bill fails by November 9, we will discuss why.

If the bill has become law by November 9 we will discuss:

–the future of voluntary licensing and payment of minimum guarantees after passing;

–how will local repertoire be represented in the U.S. collective;

–practical aspects of transferring all existing NOIs to the collective;

–operational deadlines for collective;

–the reachback safe harbor and valuations;

–hidden administration costs and who bears them (unfunded mandates of the federal government);

–the practical aspects of engaging with the new “mechanical licensing collective” for U.S. and international publishers;

–what kind of publishers and valuations are likely to be most affected by the law;

–what kind of publishers and valuations are likely to be unaffected by the law;

–how songwriters and publishers will collect monies owed to them;

–ethical implications of withdrawals from the black box by the collective’s board of directors;

–ethical implications for CPAs ordered by the government to seek benefits for digital services against their client’s interest.

 

 

Spotify’s Latest Wrong Turn: Direct Licenses With Managers for Rights They Don’t Control

June 10, 2018 1 comment

Billboard reports that Spotify’s latest and greatest is paying a minimum guarantee (aka an advance against royalties) for direct deals for artists:

Under the terms of some of the deals, management firms can receive several hundred thousand dollars as an advance fee for agreeing to license a certain number of tracks by their independent acts directly to Spotify.

That is an odd sentence for a number of reasons.

Management Agreement:  Crucially, managers typically do not (or should not) own the rights to either songs or recordings created by their artist clients.  They also typically do not (and should not) have the right to sign license agreements in the name of their artist clients.

Both these points are usually the subject of some agita in the negotiation of management agreements.  Smart managers want nothing to do with signing agreements or cashing checks in the name of their clients.  If you look at some of the prominent artist-manager disputes over the years, they almost always revolve around some version of this story (see Richard Pryor, Billy Joel, Amy Lee).

I also find it hard to believe that the artist’s lawyer would allow the client to get into one of these situations if the lawyer knew about it.

If a manager is receiving “several hundred thousand dollars” there’s also the question of double dipping or other conflict of interest if the manager is also commissioning the advance and perhaps royalties after a theoretical recoupment point.  Again, smart managers usually stay away from this kind of thing.  If you try hard enough, payments like this can look like an umm…uh…a whatchamacallit.  A bribe.

Cross-Recoupment:  Let’s say that Spotify somehow gets around these wrinkles in the management agreement, there’s a simple question of calculating recoupment since the advance will be recouped from different artists at different rates.  Let’s say that Manager X signs artists A, B and C to this arrangement, and allocates an equal portion of the advance to each artist (after commissions).  Then the algorithmically fortunate Artist C lucks out and gets into the super-popular Men of Rock playlist and recoups Artist C’s share of the allocated advance.   Artists A and B are not so lucky and are unrecouped.

Artist C will be payable, but Spotify will say not so fast…your manager is unrecouped so no cheese for you.  How is that going to go over if Artist C cares about the $0.0003 per stream?

Or what if Artist C is so algorithmically blessed that they recoup the entire advance to A, B, C and the manager’s commission.  Since Artist C only got their allocated share of the advance, Artist C’s earnings applied to Artist A and B are actually payable royalties to Artist C (as the earned royalties exceed the advance paid to C.)  Spotify will say, sorry, no cheese for you, go to your manager we already paid.  How is that going to go over?

Pre-Existing Distribution Agreements:  If an artist distributes through an indie (either digital only or full service) the artist has already given away the rights that Spotify purports to license from the manager.  Pulling tracks out of that distribution agreement is probably a breach of the exclusivity clause, particularly if the distributor already paid an advance for the recordings.

That may sound like intentional interference in a contract–but of course Spotify’s deal is with the manager, not the artist, and any distribution agreement will likely not be with the manager but with the artist.  So Spotify probably has no provable knowledge of the distribution agreement.

Future Term Recording Artist Agreements:  If Artist C gets an offer to sign to a major label during the term of this Spotify license, the label is probably going to expect these “prior masters” to be included in their deal.  No matter how impressive the algorithms, there are some basic deal points to satisfy, and the label is going to expect to see those streams show up on their account.  This can be solved pretty easily as long as no one gets greedy–the label simply buys out the unrecouped balance.

But–Spotify doesn’t have to agree to those terms and may not.  Artist C may never have had a chance to negotiate such a clause in “their deal” because the manager–who was supposed to be looking out for their client–may have “forgotten” to raise the point with Spotify and the artist is not under contract with Spotify.

If the artist is also simultaneously firing their manager as they sign with the major (which certainly has been known to happen), the manager may not be too terribly inclined to modify the terms of the manager’s deal with Spotify after the fact.

Yes, it’s sheer genius from the Spotify A&R Department (does that stand for “Algorithms and Redirects”?).

Again.

Must-Read by @LizPelly: Discover Weakly: Sexism on Spotify

June 8, 2018 Comments off

De6lz41WkAA6SNa.jpg-large

Liz Pelly demonstrates how Spotify perpetuates gender stereotypes.  Spotify–where A&R stands for “Algorithms and Redirects .” Why are we helping these people again?

“Spotify has actively steered its listeners away from the album as a format and toward playlists. This serves Spotify’s interests: a music culture dependent on playlists is dependent on Spotify, whereas a music culture dependent on albums is dependent on record labels. As Spotify vies to become more powerful and influential than labels, emerging as the music industry’s new center of power, one of its primary strategic focuses has been on playlists—curated by humans, algorithms, and sometimes a hybrid approach—making the process of navigating its platform more convenient and ever more personalized.

As a result, Spotify’s most popular playlists have emerged with outsize influence. After I created a new Spotify account earlier this year for this very listening experiment, when I clicked the “albums” tab on my brand-new account, Spotify responded, “Your favorite albums will appear here,” followed by, tellingly, “Go to your Browse page to find amazing playlists for every mood and moment.” A small but powerful gesture: at every turn the platform encourages playlists over albums. This, of course, raises several concerns regarding how fans relate to music and even this music’s context. Which is all to say: in the realm of Spotify, playlist placement matters. A lot.”

Read the post on The Baffler (h/t Artist Rights Watch)

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