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Who Owns What Under the Music Modernization Act and What Effect on Valuations?

February 19, 2018 Leave a comment

There are two imponderables under the Music Modernization Act that I think could have a significant effect on valuations and investment: the designation of the mechanical licensing collective by the Register of Copyrights and the contemplated global rights database.

First the initial and any re-designation of the collective by the Register.  It must be said that it would be nice to have the process by which the Register is selected be finalized in the pending legislation sitting in the Senate titled the Register of Copyrights Selection and Accountability Act (S. 1010).  The House version of the bill has already passed on a near unanimous vote so hopefully the Senate will get around to voting on it sometime soon.

It must also be said that the statutory requirements to guide the Register in selecting the collective make it almost inevitable that the selection process will be the sound of one hand clapping.  Given the bill’s supporters, it would only be surprising if that were not the case.  After all, who can forget the drafting contortions of the Section 115 Reform Act to avoid calling the general designated agent by its true name.

But the remarkable part is in the re-designation of a different collective, the “new entity”, assuming that  a latter-day Diogenes scours the countryside to discover that one can be found that meets the standards.  Here’s what’s supposed to happen then:

PERIODIC REVIEW OF DESIGNATION.—Following the initial designation of the mechanical licensing collective, the Register shall, every 5 years, beginning with the fifth full calendar year to commence after the initial designation, publish notice in the Federal Register in the month of January soliciting information concerning whether the existing designation should be continued, or a different entity….

If a new entity is designated as a mechanical licensing collective, the Register shall adopt regulations to govern the transfer of licenses, funds, records, and administrative responsibilities from the existing mechanical licensing collective to the new entity.

Now…I know that they don’t worry themselves too much about the details in Washington (which can always be fixed through ever more regulations after all), but what if the collective being replaced by the designated “new entity” has made a substantial investment in its operations.  This will be particularly true of the first collective.

Since the MMA doesn’t really state it, who will own the global rights database for example?  That database of databases?  The collective is going to have to manage that database and get it built (unless they outsource it to Google, I guess).  That database will be the core asset of the collective’s business in all likelihood.  Is it to have zero value?  Is the Register going to be able to just take it?  (There’s that word again.)

If you happen to be a publisher that has not been allowed to enter a direct license with digital music services, what assurances are there that there will be no interruption in your cash flow to be paid by the collective when the designated new entity takes over?  This will not be a trivial undertaking, especially since the collective will control the revenue for every song ever written or that ever will be written that is exploited in the US and is not subject to a direct license.

If you’re an investor in a publisher that is owed money by the collective, is this “new entity” risk likely to drive up your valuation or multiple?  Or drive it down?

And don’t forget that the MMA allows the collective to invade the black box for operating cost overages.  If the Congress doesn’t fix the black box invasion problem, what assurances to you have that your black box money once taken will be replaced properly and timely?  (Assuming the Congress will let the collective get away with what would very likely be a breach of fiduciary duty absent Holy Potomac Water being sprinkled on it.)

If you are the designated “new entity” what kind of indemnification against claims for improper accounting or audits will you be able to get from your predecessor?  If you’re the predecessor, why would you ever give such indemnification?  You’re likely out of business as there probably won’t be much of a market for former collectives.  And will any of the collective’s board members stand behind those indemnity claims?

And the lobbyists say but the MMA can get passed!  And that’s the most important thing!

 

 

Black Box Invasion! Duties of Collective’s Board Under Music Modernization Act

February 17, 2018 Leave a comment

One of the most unusual aspects of the non-profit collective to be established under the Music Modernization Act is the method of codifying the number of seats on the board of directors (and a couple other boards) and designating the characteristics of the kind of person who gets to hold those seats.  (Of course, it must be said that if there is any language in the bill that actually says who gets to appoint members of the collective’s board of directors in the first place, how long they can serve and how they can be voted off, I can’t find it.)

As the implications of the collective’s Congressionally mandated board composition starts to be understood by songwriters and publishers it is increasingly viewed a highly unusual–and, frankly, extremely patriarchal and expansionist–role for the federal government.  The composition of an organization’s board is something that is always handled in the organization’s by-laws.  By-laws are rules enacted by at least the board of directors of a private company for its own government and are sometimes thought of as a contract between the board and the shareholders, or in this case the governing (the board) and the governed (everyone who has ever written a song and everyone who will ever write a song in the future).  (Some nonprofits may appoint a by-law committee that then reports to the board on recommendations to amend the by-laws, then voted on by the board of directors.)

What is interesting about the MMA board of directors from a process point of view is that because the number of directors and committee structure are fixed by statute, changing the composition of the collective’s governance will probably require an act of Congress.  Which is like saying this may never change and the initial board members are appointed for life and maybe the afterlife.

Of course, the collective is to be a nonprofit corporation.  That means that the nonprofit corporation itself will have to incorporate somewhere in some state, often Delaware, which will have its own rules on by-laws and that pesky voting stuff that the MMA does away with.  It appears that the MMA will immediately cause the collective to come into conflict with state corporate law.

Since the MMA is the greatest expansion of federal power into the lives of songwriters in the history of the United States (a fact not lost on our opponents in the copyleft who might like to get some, too), I would imagine that the response will be the usual don’t worry, be happy.   Federal preemption will fix everything and simply override state law by fiat.  Because they’re from Washington and they’re here to help.  In case you haven’t noticed, not all states are huge fans of this kind of thing.  I live in one such state.

But then I’m just a country lawyer and I’m not as smart as these city fellers.  I’m sure they have it all figured out.

One thing I fully expect to start hearing as the response to the many, many holes in the MMA is not to let the perfect be the enemy of the good enough and that regulations will fix it all.  I have actually heard this said.

That’s right–regulations–as in more regulations.  And if all corporate formation and governance issues are to be handled by regulations, that’s one pile of regulations.  All of which are likely subject to discovery under the Freedom of Information Act, including all board minutes, correspondence, agendas, votes, transcripts, etc.

And then let’s not forget that the MMA has to get signed into law by a President who is making it his business to cut regulations.  Radically.  Whether you like him or not, whether you are a populist or a resister, it is an obvious fact that cutting regulations was definitely a part of the Trump platform and it is definitely something he is doing every day.  So think about how that‘s going to go over.

Back to ignoring reality.  First of all, more regulations require a rulemaking, probably by the Copyright Office.  Ever notice how long it takes for rulemakings to get finalized?  Public comments, etc.?  Is the Copyright Office really up for handling the governance structure of the collective?  Is the collective a government agency which would require rulemakings and regulations to operate or is it a private nonprofit that handles its own rules through the same process that have served organization well in America for a couple hundred years.  You know, that pesky voting thing without the feds looking over your shoulder.

One more thing–remember that the MMA has this clause (aka the “Black Box Invasion”):

INTERIM APPLICATION OF ACCRUED ROYALTIES.—In the event that the administrative assessment, together with any funding from voluntary contributions as provided in subparagraphs (A) and (B), is inadequate to cover current total costs of the mechanical licensing collective, the collective, with approval of its board of directors [unanimous?  simple majority?], may apply unclaimed accrued royalties on an interim basis to defray such costs, subject to future reimbursement of such royalties from future collections of the assessment [to be paid by digital music services after a final, nonapealable judgment].

That’s right–“they” intend for the government to fund the collective’s overbudget out of the black box.  (We can’t know who “they” are because the MMA does not say.)  Well, at least this time they’re honest about it.

And what is the most likely common characteristic of anyone whose money is in the black box?  Songwriters with no direct deal with the services aka the little people in the majority of songwriters.

Remember–the collective has no business plan and no budget.  Yet the board is at least permitted if not required by law to use unmatched money they hold in trust to pay overbudget–for which there is no approved budget so could literally be someone’s cigar bill, legal fees, who knows what.

Note the “subject to future reimbursement of such royalties from future collections of the assessment”.  What if the judges don’t agree to the assessment or that the Digital Media Association appeals every ruling for years which I fully expect them to do because they don’t care about songwriters.  And if you think that’s extreme, name five things quickly that they’ve ever done that would make you think otherwise?

Remember–it’s not their money.  It’s not the government’s money either.  This is why all the black box needs to put in a true escrow account held by an independent third party or escheated to the state like your utility deposit you forgot to collect.  If it’s good enough for your electric bill, shouldn’t it be good enough for your royalties?

The board will be acting as a trustee for that black box money.  Trustees don’t get to make themselves or their companies loans from the money they hold in trust.

Remember–songwriters have been suing to find a fiduciary duty owed to them from their publishers under their publishing contracts for a long time.  It may not be under their publishing contracts, but the MMA hands songwriters that fiduciary duty on a silver platter with the black box invasion.

Board members–serve at your peril.

 

 

 

Call to Action: Please Help Support Our Musical Legacy and Tell the Congress #irespectmusic on the CLASSICS Act

February 15, 2018 Leave a comment

joanaIRM

I don’t often ask MTP readers to agree with me, much less sign a petition.  But the exception proves the rule and I’m asking that you please sign the petition to support legislation in the U.S. Congress that would close the loophole that some digital music services have been leveraging for quite some time on so-called “pre-72” recordings.

If it sounds implausible that the date a record was released should make a difference in copyright protection or entitlement of the artists to the same royalties as everyone releasing records after that date–that’s because it is.  It’s actually worse–it’s the kind of thing that someone would do if they truly viewed music as a commodity.

But that’s exactly what Pandora and Sirius started doing a few years ago when a truly meanspirited bunch of lawyers and bean counters decided they could save a few bucks by stiffing old guys and dead cats and their heirs.  Between Pandora and Sirius, this bunch of rocket scientists have paid out $300 million in settlement to the major labels and will pay even more in that Turtles class action to the indie community.

And that’s right–these geniuses could have come out better if they had just paid the damn royalties in the first place.

So you know what this is about–it’s a piece of the #irespectmusic campaign for artist pay for radio play.  Except this time it’s about reclaiming rights we already fought over back in 1995.  It’s about claiming a little piece of righteousness for those who can’t do it themselves.

What these jerks at Pandora and Sirius (and the Digital Media Association) were really about was bootstrapping an issue into a bargaining chip by withholding payment on pre-72 recordings like bullies do.  And here’s why:  Remember Blake Morgan told us that the U.S. is one of the only countries in the world that doesn’t recognize a performance right for sound recordings?  Well, before 1972 the U.S. didn’t recognize a federal copyright in sound recordings at all.

The Congress amended that astonishing oversight in 1972 to recognize a federal sound recording copyright and then in 1995 and 1998 adopted a limited performance right in sound recordings performed in a digital medium.  You know–back when it didn’t seem like this funny digital thing didn’t matter much.  Under certain circumstances, there is also a royalty paid for digital performances for webcasting, simulcasting, satellite radio and a few other radio services.  That’s basically your “SoundExchange money.”

Sounds good, right?  Do you think that there was one member of Congress in 1995 who voted for the limited performance right but secretly said king’s x–a royalty for everyone except James Brown, Duke Ellington, Aretha Franklin, Ella Fitzgerald, Louis Armstrong, Jimi Hendrix, Willie Nelson, Buddy Holly and ZZ Top?  No, but that’s what the Digital Media Association, the NAB and their knuckleheads would have you believe.  Remember–not even Pandora believes this bunk anymore.  Amazing what new lawyers will do for the soul.

So the Congress has been forced to introduce legislation to fix the pre-72 loophole once and for all–and that’s what I’d really appreciate your support for.  The bill is called the CLASSICS Act and it’s supported in the House by Ranking Member Jerry Nadler (D-#irespectmusic) and Rep. Darrell Issa (R-CA) and in the Senate by Sen. Chris Coons (D-DE) and Sen. John Kennedy (R-LA).

We have a lot of people to thank for advancing the ball to this point, especially all the folks carrying the legislation, but especially Ranking Member Jerry Nadler who thankfully believes in this so much he’s always up for another fight for artist rights.  We also have to thank The Turtles and their team, SoundExchange CEO Mike Huppe and his team, and Chris Israel and his team at MusicFirst.

You told them how you feel about #irespectmusic and I would ask you to please do it once again because we can’t stop fighting until the fight is done.  But don’t do it for me, do it for Ella, Aretha, the Duke, the Count, Maceo, Jimi with an i and Hendrix with an x.  Do it for all of those who came before, both living and back home and those they left behind.

We never ask you to sign anything you don’t understand, so if you’re still unclear, please let me know.

The MusicFirst Coalition has a petition here.  I’d really appreciate your signing up.

@hitsdailydouble: Thoughts on a Perfect Storm

February 14, 2018 Leave a comment

The music business is guilty. Guilty of sexism, guilty of shielding harassment, guilty of an old-(white) boy network that has deep and seemingly intractable roots. It would be pointless to pretend otherwise.

The behavior and attitudes represented by this fraternity aren’t all-encompassing; plenty of people in the business have long fought against them. Still, these old-boy traits remain defining characteristics of some parts of our business.

It would also be wrong to suggest that these conditions evolved in a vacuum. They can be found in every sector—Silicon Valley, Wall Street, Washington D.C. and Madison Avenue. They are vestiges of systemic inequality, when women and people of color were legally—or at the very least practically—accorded the status of property….Crucial to that change is the #MeToo movement, which entered the mainstream as part of the larger uprising of women most conspicuously evidenced by the massive worldwide women’s marches of 2017 and 2018.

Then there is #TimesUp, which is not about chronicling past wrongs but preventing future ones.

These threads came together, in our demimonde, at the Grammys, which reflected both the gathering voice of women’s protest and the obstacles to change….

Those obstacles are both institutional and attitudinal. Male domination in the boardroom is matched by male domination on the charts. Only six female artists made the overall Top 50 of 2017; only 10% of the Top 50 tours of 2017 were by female acts (half as many as in 2016). While more than half the acts on the year-end 2017 Top 40 Pop radio chart were female (or had a key female performer), Rhythm had seven such acts—and the Country and Alternative radio charts fewer than 10%.

A recent Annenberg study, meanwhile, found that women received less than 10% of the most recent Grammy nominations. As has been reiterated with considerable fervor since Grammy night, only one female artist accepted an award during the telecast—and the only female Album of the Year nominee wasn’t given a spot to perform.

Which is part of why Neil Portnow’s ill-advised comment about women needing to “step up” became such a flashpoint, turning the Recording Academy boss into a walking example of the problem; thus the letter from female industryites demanding he step down, and a subsequent missive from six top-level biz women insisting that he implement serious changes. His words represented a status quo that is increasingly out of touch with the direction of the biz and the culture.

The response to his words from a number of industry professionals—notably, “The Six,” aka  Jody Gerson, Michele Anthony, Julie Swidler, Sylvia Rhone, Julie Greenwald and Desiree Perez—is chronicled elsewhere in this issue, and is far more eloquent than we could hope to be.

For the music world, the Grammys thus became a point of inflection, thanks to the perfect storm of the repressive Trump-era climate—with the government’s unapologetic embrace of injustice and prejudice—and the post-Harvey Weinstein eruption of the #MeToo movement, which many had been expecting to reach the music industry for some time.

THE NEW LEADERS
In recent years we’ve seen the emergence of a wave of new, young leaders, many of them women and many people of color, who are clearly ready to break with the excesses of the past. Leaders whose hiring and policy choices are changing the culture.

This is happening in all sectors, no matter how many old (white) boys run amok.

Our own business is seeing profound growth in female leadership. Women are running major companies, piloting artists’ careers and plenty more—and refocusing the cultural conversation via activism. A young, diverse wave is coming, and it will in all likelihood alter the dynamics across the biz.

 

Read the post on HITS

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@musicbizworld: An Interview with The Great One: Bruce Allen: ‘ARTISTS TODAY HAVE MORE POWER THAN THEY REALIZE’

February 14, 2018 Leave a comment

This is a must read interview with Bruce Allen, one of the great managers in the history of the music business.

Read the post on Music Business Worldwide

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The Music Modernization Act’s “In Terrorem” Clause

February 11, 2018 1 comment

The more the “Music Modernization Act” is discussed, the more rocks get turned over and the more toads jump out from under the rocks with nasty surprises.  Even before it is passed, the MMA is already disrupting private contracts, well settled expectations and a century of law.  Which is a real neat trick by Big Tech, this time in the form of the Digital Media Association (or “DiMA”).  And the most punitive aspect of the proposed bill appears to exist for no reason that relates to the proposed bill’s primary purpose–creating a prospective safe harbor for Big Tech to exploit every song ever written by anyone in the world and every song that may be written in the future by anyone in the world. But it also creates a “snap back” retroactive safe harbor that will scare songwriters into not filing infringement lawsuits before the bill even gets a vote, or what the law calls an “in terrorem” clause.  Those clauses are designed to scare people into not taking legal action to protect their rights and the MMA has a huge one in the first of several brand new safe harbors that will be way worse than the DMCA.

Here’s the first and most punitive safe harbor that insulates music services from lawsuits for “prior unlicensed uses.”  In case you missed it, “prior unlicensed uses” is a nice way of saying “prior copyright infringements.”

(10) PRIOR UNLICENSED USES.—  ‘‘(A) LIMITATION ON LIABILITY IN GENERAL.—A copyright owner that commences [a lawsuit] on or after January 1, 2018 [i.e., before the enactment of the MMA], against a digital music provider for the infringement of the exclusive rights…arising from the unauthorized reproduction or distribution of a musical work by such digital music provider in the course of engaging in [uses covered by the new blanket license in the MMA] prior to the license availability date, shall, as the copyright owner’s sole and exclusive remedy against the digital music provider, be eligible to recover the [statutory streaming mechanical] royalty [in that lawsuit]…from the digital music provider, provided that such digital music provider can demonstrate compliance with the requirements of subparagraph (B) [searching for copyright owners that 60 million mass filings of “address unknown NOIs suggest they are incapable of doing], as applicable. In all other cases the limitation on liability under this subparagraph shall not apply.

What this paragraph means is that unless a copyright owner has already filed a lawsuit against a service for infringing uses that occurred prior to January 1, 2018, that infringing service can only be sued for the measly streaming mechanical royalty–which almost guarantees that the service will never be sued.  No statutory damages, no attorneys’ fees, no injunctions.  This is why Wixen Music Publishing filed a lawsuit against Spotify on December 29, 2017.  (Note that suing for unpaid royalties is the only type of claim the copyright owner can make against the infringer.)

The “license availability date” is the January 1 following the second anniversary of the date the bill becomes law (assuming it ever does).  I have no idea why this section is written this way which seems designed to confuse anyone who is not already familiar with it.

I also have no idea what is so special about January 1, 2018 aside from the fact that it was a matter of days after the bill was quietly introduced, before a copy of the bill was made publicly available, and was most likely to protect further lawsuits that might affect the rumored Spotify IPO.  (Which is why some call the MMA the “Spotify Preservation Act”.)

So, for example, if the bill became law on June 1, 2018, two years following would be June 1, 2020, so the next January 1 would be January 1, 2021.  That means that the new safe harbor applies to any infringements between January 1, 2018 and January 1, 2021, or for lawsuits not yet filed for infringements occurring before January 1, 2018 that are still within the Copyright Act’s three-year statute of limitations.  That’s right–the safe harbor applies before the Music Modernization Act was given legal effect.

And of course the clause that limits the safe harbor to situations where the “digital music provider can demonstrate compliance with the requirements of subparagraph (B) [searching for copyright owners that 60 million mass filings of “address unknown NOIs suggest they are incapable of doing]” would itself require a lawsuit.  How do you think Big Tech would respond to a request for proof?  Probably a two world answer “we complied” followed by another two word answer to the inevitable challenge.  That means that every songwriter would have to be willing to sue some of the biggest corporations in the world with no guarantee of the statutory damages and attorneys’ fees in the private attorney general provisions of the Copyright Act.

Yes, as Tom Waits teaches us in Step Right Up, “the large print giveth and the small print taketh away.”

Ask yourself this–if a copyright owner didn’t know about this bill and filed their lawsuit after January 1, 2018, what would happen if the bill is subsequently enacted into law with this in terrorem clause intact?  When you ask people who were involved with the closed door negotiations of the bill that produced this clause, you get the answer “DiMA wouldn’t agree to take that out”.  Well, no kidding.  The very presence of this clause in a draft bill creates the in terrorem situation that is the clear object of the exercise.  So much for closed door negotiations.

Aside from the whole MMA being very poorly thought out and a vicious attack on basic rights of songwriters, Attorney Richard Busch, among others (including me), believe this section to be violative of several of our most cherished protections in the Constitution and it certainly doesn’t pass the smell test for work the government should be about.  If anyone thought that this bill was designed to get the government out of the music business, that is just a laughable assertion.

More on this later, but I’d be interested in hearing from anyone who has an idea how this in terrorem provision would be given effect if someone dared to test the punitive legislation and filed an infringement case after January 1, 2018 for “prior unlicensed uses” that occurred before the enactment of MMA but within the statute of limitations.  My view is there’s no fixing this section and it just needs to be stricken now rather than wait the five to ten years or so it will take for a case to reach the Supreme Court or WTO.

 

Guest Post by @schneidermaria: The Music Modernization Act – The Devil is in the Details

February 8, 2018 1 comment

[We’re pleased to have another guest post by a frequent and gifted MTP contributor, Maria Schneider.  In addition to being a first class commentator, Maria is a five-time GRAMMY-winning composer and bandleader. Her GRAMMY awards including two 2016 GRAMMY Awards, Best Arrangement, Instruments and Vocal for “Sue (Or in a Season of Crime)” recorded by the Maria Schneider Orchestra and David Bowie, and Best Large Jazz Ensemble Album for “The Thompson Fields”.]

 

When it comes to the newly introduced bill called the Music Modernization Act (the “MMA”), there’s good news and bad news.

First, I want to offer some good news.  Many lawmakers from both sides of the aisle appear to be finally waking up to the fact that, in the absence of updated copyright laws, present-day technologies are destroying the livelihoods of music creators, especially workaday creators.  Our elected leaders recognize that changes in the law need to be made.  I think I speak for most music creators in saying, we are very grateful for that.  We are grateful, because the big data companies (like Spotify and YouTube) and the big publishing/record companies (like Sony/Warner/Universal, who have equity in Spotify) have been systematically destroying the ability of most workaday music creators/musicians to make a living.  So, there’s a new bill in the works, that on its face, might seem good – good enough that many are touting it.  It would insure that a stream pays a mechanical.  In theory, that would indeed be great news, and many of our lawmakers, and many in our industry have initially backed this bill.

But now, I need to report the bad news.  The MMA was drafted primarily by lobbyists for the huge corporations that control the music industry.  The MMA is over 100 pages long, and is “Exhibit A” for why people hate lobbyists and lawyers so much.  When you dig into the carefully worded text (which I now have), it becomes very clear that the MMA is the result of cunning drafting that even further protects and insulates the all-powerful publishers and the big data companies.  They’ve paved their own 4-lane highway to drive their Mack trucks over music creators yet again.

Let’s not forget that the copyright rights of all creators, workaday and hugely successful, are so important, that the drafters of the Constitution protected them right in the Constitution itself.  But as I’ll explain in detail below, the MMA basically “outsources” the management of music copyright rights to two separate, “to-be-created” private corporations that will be entirely controlled by these very all-powerful industry players.  That’s like outsourcing the environmental protection from oil spills to a private corporation controlled by BP and Exxon.

Here’s the outsourcing scheme the lobbyists driving the MMA have created: a newly-formed Corporation A will administer the payment of a streaming mechanical royalty that will be implemented, and Corporation B will essentially serve as the tax collector, seeking “assessments” from industry to pay for Corporation A’s activities.  Even if it’s high time for a streaming mechanical, and if the outsourcing of something so important as the management of music copyright must be done, it should be done in a “bullet proof” manner, where the public’s interests, and music creators’ rights, are fully and carefully protected.

The need for that “bullet-proof” structure is made even more critical by the fact that the MMA offers these multi-billion dollar companies (some of the most powerful companies in the world) virtual immunity from copyright infringement.  The MMA bargains away the right of any music creator to seek damages from these companies.  But rather than it being bullet-proof, I see the current draft of the MMA as Swiss cheese in this regard.  It seems pretty clear who has controlled this drafting process, as they have set aside the public’s interests and the independent music creators’ interests.

I want to highlight ten examples of gaping holes in the current version of the MMA.  And for each hole, I suggest a common-sense solution that would not water down the purported purpose of the MMA.  So consider the list below as a litmus test of sorts:  If the bigshot lobbyists who have drafted this MMA throw a hissy fit over any of the following solutions, then that exposes ulterior motives behind the MMA.  In other words, all I am asking for below is that the MMA respect the two main pillars of good government: accountability and transparency.  If these big powerful companies are afraid of these important pillars on which we all depend, then they shouldn’t be signing up to take on the government’s responsibilities.

Here are just TEN BIG HOLES in this outsourcing scheme, along with my proposed solutions:

Hole 1.  No Business Plans. The MMA requires no projected budgets or staffing needs for either corporation, or any requirements about who will actually manage these corporations.  There’s no requirement for a business plan or budget (e.g., salary caps, etc.)  to be approved or to receive independent and objective scrutiny.

Solution:  At a minimum, the MMA should require the Copyright Office (“CO”) to build those requirements into a RFP (Request for Proposal), so that possible entities have to compete for the position.  The RFP should be created with input from all interested parties, not behind closed doors.  The manner in which the CO selects each of these two outsourcing corporations should be based on real and well-thought-through business planning, not on a hope and a prayer.

Hole 2.   No Requirement for Competitive Bidding.  The MMA contains no requirement that either of these corporations be selected through a competitive process.  And there is absolutely no justification for this sort of “sole source” government contract.  The outsourcing scheme in the MMA would never pass muster under regular government procurement regulations that prohibit such insider conflicts.  Actually, the vague “designation of an appropriate entity” language, is unclear, but I’m assuming there would be a government contract.  If the drafters would suggest that no contract is needed, then that would open up many more serious issues way beyond those I’ve addressed here.

Solution:  The MMA should contain language requiring that the CO issue an RFP through an open process, and that each of the two Corporations be selected through competitive procurement that is governed by standard government rules and requirements.  There should be no fast track here for a sweetheart deal for those who happened to have an inside track.

Hole 3.  No Ongoing Government Oversight.  The MMA’s list of responsibilities for Corporation A is long, and will require a huge staff, and that runs the risk of ballooning into a massive enterprise with no real government oversight over a 5-year period.  In addition, under the MMA, if Corporation A runs over its budget because it plans poorly, it can “borrow” from unclaimed royalties–royalties due music creators–to make its budget whole.

Solution:  The MMA should require a greater degree of accountability and the need to report to the CO on at least an annual basis on its progress toward meeting the objectives and timelines in its contract.  If either corporation is failing to live up to the performance milestones stipulated in a real business plan (which are obviously necessary to protect the public), there should be termination rights.  Corporation A should not be allowed to have a magic slush fund to cover its own poor performance, and that compromises the rights of music creators or publishers.  There should be no assumption that “borrowed” funds will be paid back, since the entire business model is untested.

Hole 4.  Governance of These Outsourced Corporations Is Controlled by Those Who Stand to Benefit.  Even if it is a competitive procurement, the current MMA “requirements” for the board for each of Corporation A and B remove any possibility of real competition (e.g., fair competing proposals) for who this selected corporation will be.  For instance, Corporation A is required to have “the endorsement and support” of the majority of publishers, which obviously means Sony/Universal/Warner themselves.   Never mind, I guess, that those three own a huge chunk of equity in Spotify which creates a huge conflict given their responsibility.  Thus, whoever the Big 3 align with, that’s who will get selected to do this.  This is essentially an under-the-radar “sole source selection” – or in other words, a sham.  And of course, once selected, those three get to stack the deck of the corporation’s board itself, as the MMA gives them the vast majority of seats on the board.  As for the songwriter seats (only 2 allotted) – there might as well be zero, because the MMA’s “songwriters” don’t have to have contributed to any more than just a “part” of “a” composition or lyric to hold a songwriter seat.  Spend a ½-hour digging for the MMA’s definition of “songwriter” if you don’t believe me.  Wow!

The same situation exists with Corporation B: the MMA requires the “endorsement and support from majority market share.”  That, by definition, is Spotify and Apple.  It’s impossible for there to be any real competition the way the MMA has set up governance.  As it is, the MMA sets up two corporate boards where the fox is watching the chicken coop.  The dialed-in conflicts of interest are absolutely enormous.

Solution:  The MMA’s governance requirements for each Board need to be changed so that the industry groups with the direct financial interests do not control either entity.  Rather than requiring each corporation to have “the endorsement and support” of the massive corporations who already control the industry, there should be a requirement of real competition in the marketplace.  Additionally (and importantly), both entities should have: a) outside independent board members, b) CO representatives who serve as “ex officio” members of the board (their presence will help enforce the public interest at stake – sorta like having your mother come to your bachelor party), and c) legitimate, independent, full-time, musicians who have no affiliation with any interested party.  It is absolutely not enough for the lobbyists to offer one or two more board seats to their twisted definition of “songwriters,” while still holding the majority.  As between publishers and songwriters, it should be at least, 50/50, and both boards should also include independent board members and ex officio CO employees.

Hole 5. Conflicts of Interest Abound in Funding This Outsourcing Scheme.  The provisions of the MMA describing how Corporation B will be funded are rife with conflicts of interest.  The MMA says there will be an assessment on the digital music services (i.e. Spotify, Apple, et al), and there will also be “voluntary payments” by these same digital services.  This makes absolutely no business sense.  To have this whole unusually complex corporate outsourcing scheme premised upon the HOPE of “voluntary” payments is irresponsible.  It’s also a total conflict of interest, as the proposed governance of Corporation B would be controlled by these very companies that would be expected to make voluntary contributions.  The lobbyists drafting the MMA expect us to have blind faith in the ability of these huge companies to police and tax themselves.  It would support H. L. Mencken’s definition of faith where he says, “Faith may be defined as an illogical belief in the occurrence of the improbable.”

Solution:  I believe the MMA should require any entity seeking to become Corporation B to produce a coherent business plan and budget for the entire 5-year period that includes responsible projections of actual revenue.  And that financial plan (and revenue production) should be monitored throughout the 5-year term on an ongoing basis.  If a major component of a proposed budget is based on the “hope” of voluntary contributions, that proposal should be eliminated from the competition.

Hole 6.  MMA Has Nothing In Place To Assure The Public That These Outsourcing Corporations Claim Nothing Proprietary.  There are no requirements in the MMA that the entity selected to serve as Corporation A maintain open books, open board meetings, open processes, and systems built upon open source code where possible.  That is unacceptable.  To outsource is one thing.  But to outsource into a “black box” system run by (and kept secret by) the biggest players in the industry would be irresponsible.  This entity could end up building and controlling software, data, data analytics capabilities – all that would be privately controlled and owned, and the architecture and ownership of that code would be private as well.

Solution:  There should be a clear requirement that all data, all algorithms, all software written and compiled and maintained by Corporation A (or its subcontractors) be auditable, open, preferably based on open source, and all of it owned by the government, not by the corporation or by any subcontractor.  The MMA, and the contract between the CO and Corporation A, should expressly state that the corporation will have (and assert) no proprietary rights (including copyright and/or trade secret) in any of the software, tools, database, APIs, algorithms, or other documentation or records it creates or compiles.  This would need to include, not just the data, itself, but what is often referred to as the “resultant data,” and/or the “aggregated data;” i.e. any data that either Corporation A or B derives or creates based upon the original data.  Bottom line: These two outsourcing corporations effectively serve as the “trusted agent” of the government, and owe it (and us) a fiduciary duty to protect the public’s interests.  That needs to ring CLEAR in the MMA.  The LAST thing we need is another private big data company that hoards as an asset the data it derives from the public.

Hole 7.   Independent Creators Aren’t Being Given Real Audit Rights.  Once an independent songwriter wants to find out whether he/she has been paid fairly under this two-corporation outsourcing boondoggle, he or she will find that the audit rights under the MMA are horrific.  The songwriter needs to hire a “qualified” accountant (that’s defined loosely, and of course the corporation is not likely to agree to anyone easily).  Then, the notice of the audit needs to be prepared, and actually published in the Federal Register.  Then, the auditor needs to obtain the relevant records from the corporation.  There’s no obligation for Corporation A to provide records within any time period, or in any format.  The devil is definitely in those details.  THEN, the auditor needs to prepare a draft report and send it to Corporation A.  Then, Corporation A gets to pore over the draft, and send back any questions and caveats.  Then, the auditor has to issue a new report.  Even if the auditor ends up finding an amount is owed by Corporation A (even a big amount), the musician has to pay all costs for the audit.  I find it very telling that the lobbyists who drafted the MMA, put such detail and concern into my right to audit, but there is absolutely zero detail describing most other key business terms about how Corporation A will operate.  It would be laughable if it wasn’t so scary.  This laborious and expensive process is the equivalent to me having NO audit right, because the dialed-in audit costs are guaranteed to be in excess of $50,000.  Given the fact that streaming revenue for most independent musicians doesn’t even amount to pocket lint, let me tell you how many of us would spend this amount on an audit to “recover” pocket lint: zero.

Solution:   First, for independent musicians who own their own music and haven’t given it away to the “big three” – give us a simplified audit path that is cost-effective and reflects the amount in issue.  Second, if any music creator does undertake the monumental effort of an audit, and if it is found that Corporation A has underpaid by a large margin, it should be responsible for the costs of the audit.  And third, at a bare minimum, the MMA should require the CO to conduct “spot audits” of independent music creators’ accounts and records throughout each year of the contract, to ensure that proper payments are being calculated and sent, and to ensure the overall robustness of Corporation A’s systems and processes.  Spot audits should be conducted throughout each year, and deficiencies should be required to be addressed as a part of a formal review process.  Although the specific financial information from an audit should be protected as confidential, any deficiencies found by the auditors should be public.  That is standard, and the lobbyists who drafted the MMA surely know that.  This potential liability would create a direct incentive for this private corporation to be diligent and accurate.

Hole 8.  The MMA Doesn’t Require Respect For International Standards for Data and Metadata.  The MMA only makes the most cursory mention of metadata.  However, at least one of the big industry players has been complicit for years in systematically stripping valuable metadata from creators’ works.  Any successful future for digital and streaming music relies on the integrity and protection of metadata.  And this issue has major international implications, with the need to interface with, and collaborate with international entities and data rights organizations that may have different views and different interests from the “big three” and from the NMPA and the other groups that have driven the drafting of the MMA.  The MMA should not grant this black box Corporation A a free license to develop its own private data management system that is not integrated with the world around it.

Solution:  The MMA should require that any database respect the integrity and value of all existing metadata, and that no systems or processes used by Corporation A should diminish or impair the value or function of any such metadata.  Similarly, the MMA should require that Corporation A use its best efforts to harmonize its systems and processes with other important international systems and standards.  The “advisory board” on such issues should be given much greater authority.  We all know that most advisory boards are only for show, but this one needs to have teeth and government mandate.

Hole 9.  The MMA Strips Away Individuals’ Rights to Protect Their Copyright Rights.  The MMA does not appear to deal with the issue of the massive Notice of Intention (NOI) documents filed with the CO by Google, Amazon and others.  There is a huge unresolved financial liability associated with that maneuver.  The filings are impenetrable, and the big data lords who have filed them have made a mockery of an old provision in the copyright law.  But instead, the MMA seems to simply provide some sort of virtual immunity for any such past acts, if the infringers cooperate with Corporations A and B.  Of course, the inherent conflicts of interest in such an immunity scheme are manifold.  Immunity is usually a constitutional sort of thing, and should not be handed out lightly.  For sure, an infringer should not be given immunity for agreeing to follow rules and procedures that were established by the infringer itself.  That’s like a get out of jail free card printed by the prisoners.  It’s completely absurd, but that’s essentially what the MMA does.

Solution:  The MMA should not “retroactively” absolve any company from previous copyright infringement.  It is not up to Congress to bargain away a creator’s right to sue for copyright infringement.

Hole 10.  The MMA Strips Workaday Music Creators of Their Rights Under International Treaties Adopted World-wide.  The language of the MMA seems to prejudice the rights of musicians who, for whatever reason, choose not to formally register their works with the CO.  To prejudice any such rights would be a violation of international treatises that the U.S. has signed, including the Berne Convention, which recognizes the copyright rights of a creator, even if the work is not formally registered.

Solution.  It is critical that a statement be added to the MMA that “Nothing in this Act is intended to diminish or impair the rights of any copyright owner who has chosen not to register a copyrighted work with the U.S. Copyright Office.”  It is also incumbent upon the drafters to address the rights of international musicians and songwriters.

I’ll stop here, but this is only a sampling of the holes in this bill.  The fact that our lawmakers are considering fixes to the copyright law is very promising.  But if the approach is to outsource the solution to private companies, it should be done in an iron clad way that protects the music creators themselves, not just the behemoth publishers and data lords that get wealthy off of the creative works of hardworking musicians.

As I wrote earlier, these 10 points should be a litmus test, showing us the real intentions of those who drafted the MMA.  And for those organizations that have not fully thought this through, and have too hastily come out in favor of passing the MMA as it presently exists, I hope this will make you say to yourselves (like Fagin sang in Lionel Bart’s “Oliver!”) – “I think I’d better think it out again.”

Maria Schneider

 

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