Kate Nash leads the way for songwriters and artists who are wondering when the income transfer to Big Tech in the collaborative “sharing” economy is going to start getting shared the other direction by these royalty deadbeats.
Snapchat joins the leading Silicon Valley royalty deadbeats like Facebook with a big IPO filing but relying entirely on losing legal theories like the faux “DMCA license” that was a big loser for Cox Communications. (Ironically, Cox was just ordered to pay BMG’s $8 million and change in legal fees from Cox’s $25 million jury verdict in their losing DMCA defense.)
And how do we know this? Because Snapchat tells us they do in the risk factors of their IPO filing:
We rely on a variety of statutory and common-law frameworks for the content we provide our users, including the Digital Millennium Copyright Act, or DMCA, the Communications Decency Act, or CDA, and the fair-use doctrine. The DMCA limits, but does not necessarily eliminate, our potential liability for caching, hosting, listing, or linking to third-party content that may include materials that infringe copyrights or other rights. The CDA further limits our potential liability for content uploaded onto Snapchat by third parties. And the fair-use doctrine (and related doctrines in other countries) limits our potential liability for featuring third-party intellectual property content produced by Snap Inc. for purposes such as reporting, commentary, and parody. However, each of these statutes and doctrines is subject to uncertain judicial interpretation and regulatory and legislative amendments. Moreover, some of them provide protection only or primarily in the United States. If the rules around these doctrines change, if international jurisdictions refuse to apply similar protections, or if a court were to disagree with our application of those rules to our service, we could incur liability and our business could be seriously harmed.
If $500 million is “nonmaterial” then why does royalty deadbeat Facebook refuse to pay artists and songwriters?
MTP readers may have seen that Facebook’s Oculus virtual reality division lost a copyright infringement case in a $500,000,000 jury verdict for a variety of claims. While that seems like a lot of money to me, the verdict was far short of what was at stake. What is interesting about the case for our purposes was not the details (covered by the Hollywood Reporter and a bunch of other outlets if you want to read up on it).
What is interesting is how Facebook reacted to having to pay $500,000,000 for rights. Particularly since Facebook currently pays zero for music.
According to the Hollywood Reporter:
Facebook COO Sheryl Sandberg on Wednesday told CNBC, “The verdict is non-material to our business.”
A $500,000,000 rights payment is “non-material to our business.” This really is how the other half lives. Without going down the rabbit hole on materiality (see the SEC statement on materiality in financial statements here), let us take Ms. Sandberg’s rather breathtaking statement as true, or at least truthy.
What Ms. Sandberg suggests to me is that any rights payment that Facebook might make for songwriters and artists is also likely to me “non-material” to their business, even if that payment were hundreds of millions annually on an industry-wide basis.
It also makes you wonder why a public company for whom a $500,000,000 copyright infringement verdict is “non-material” prefer to be unlicensed royalty deadbeats rather than pay their fair share? People who have enriched themselves in the public markets that protect their property rights in securities transactions just as the law protects intellectual property–as demonstrated by the Oculus verdict.
Who are these people?
Already we see leaks to the tech press that Spotify is pushing off its IPO to next year while it pursues a “path to profitability”. Now that’s a new one–the company has previously told investors a growth story like many other startups. But unlike most other startups, Spotify now has a $1,000,000,000 convertible loan from private equity companies staring it in the face–along with what will no doubt turn out to be credit card interest rates when the total cost of the money is calculated (interest plus discounts on Spotify’s anticipated public stock).
Why is Spotify leaking this IPO information now? Was any serious person refreshing their news feed in anticipation of a Spotify IPO announcement? My bet is that it is mostly, if not entirely, to get out ahead of an anticipated breakdown in their negotiations with major labels and to try to put some chum in the water about the beastly record companies, greedy artists and nasty songwriters. You know–the people who make Spotify’s only product.
In the meantime–one question about Spotify’s growth strategy is how will they be able to afford their interest payments on that billion-dollar debt–5% plus another 2.5% every six months that Spotify doesn’t IPO (capped at 10%). The clock is ticking toward the one-year anniversary of that loan with its first interest reset.
Of course we can’t know the exact terms as the debt is private and the devil is in the details–but we can guess that it is at least possible that the interest not be paid currently but will roll into a balloon payment at the ultimate maturity date of the loan. A balloon means no loan payments for now, but a relatively big nut to be paid pre-IPO (which will itself be carried as an obligation that will be at least something of a drag on Spotify’s pre-money valuation even if the interest is capitalized).
That balloon–if there is one–will itself likely also be subject to the 20% discount on share price that is another feature of the loan. That means that Spotify’s bondholders might be able to elect to convert the accrued interest into shares as well as the loan principal. A balloon would save Spotify from having to make payments on the bonds in the short run but shove more shares out the door in the long run IPO scenario. (A convertible loan is a special type of security that allows the bond holder to buy shares of a class of a company’s stock in lieu of repayment, in Spotify’s case, probably common stock.)
And let’s be clear–these private equity companies weren’t born yesterday. In order for over a billion dollars of Spotify stock to have value to them, the bondholders have to convert some (and eventually all) of the bonds to shares and sell those shares to somebody in the retail market. An IPO gives them more potential suckers…sorry…buyers. Buyers who are protected by the Securities and Exchange Commission. (Inside joke.)
A billion dollars of Spotify stock hitting the public market all at once will tend to drive down the share price. Getting that much stock sold requires some forethought and probably means selling in tranches. This is why the bondholders will probably want a post IPO follow-on stock offering or two or three that will allow them to get out the door with their cash and a nice premium (sometimes called “demand registration rights” if the follow on is initiated by bondholders or “piggy back” rights for bondholders to participate in a registration initiated by Spotify or another investor with demand registration rights). Remember–“IPO” is “initial public offering,” not the only public offering. (See, for example, Pandora.) It’s also why they got a short “lock up” period that restricts how much stock they can sell in the IPO and after the IPO–which inevitably will be before the employees, and possibly the labels, get to sell their shares.
Markets know this overhang of shares is out there because they weren’t born yesterday, either. That billion dollar overhang will tend to depress the present value of shares of Spotify stock based on technical analysis alone as the stock will tend to price-in the future dilutive effects of the total number of converts hitting the market. This is just math–at best, high school algebra.
Trust me–the bondholders are going to make bank on this deal, or they’re going to take over the company and then make bank.
This should all be a cautionary tale about taking stock for a one-time pop in revenue in exchange for an absurdly low royalty rate with an unsustainable future return. A royalty rate that then becomes the benchmark for everyone who doesn’t get the stock. This is why I for one would rather have the damn money and let them keep the damn stock.
How about that “path to profitability”? Bless their hearts. I love how these guys always stumble on profitability as if it’s some new idea not previously seen by man or beast.
Spotify is now getting a bit long in the tooth to be ignoring how to convince investors that the company will eventually make money, or why the world’s dominant streaming services is not profitable given otherwise decent numbers according to Motley Fool:
Despite the influx of competition last year from big names like Apple and Tidal, Spotify managed to accelerate its revenue growth in 2015. Revenue grew 80% to reach 1.95 billion euros for the year. That’s up from 45% growth in 2014, when it recorded 1.08 billion euros in revenue.
So why can’t Spotify make money? Because the company’s overpaid executives made the costly decision to bet on growth and stand up operations in dozens of countries to achieve market dominance but losses as far as the eye can see? Or because they pay out so much of their revenue to the beastly artists and songwriters? You know–the beastly artists and songwriters whose labels drive traffic to Spotify at no charge and make Spotify’s only product?
Either way, it looks like we’re in for another year of Spotify in our lives. And Apple keeps quietly adding paying customers to Apple Music in anticipation of shutting down iTunes.
Composer and performer Jean-Michel Jarre put his finger right on the right approach to online policy in a recent speech to policy makers at an SIAE event in Italy. (Jean-Michel is the current president of CISAC.) Jean-Michel gave his own interpretation of the “value gap” calling it instead a “transfer of value” which is exactly what it is. And when you consider who is the greatest offender in the “transfer of value” ecosystem, it’s not AT&T or Verizon, it’s not Time Warner or even Cox–it is Google, and, of course, Facebook that is the worst of the worst. And while Jean-Michel didn’t call out Google or Facebook by name, the Leviathans of Silicon Valley were lurking behind every word.
MTP readers will remember that I have been emphasizing the income transfer in the “digital economy” or what Lessig calls the “sharing economy” or what we call “getting Googled.” This income transfer is based on the idea that the people who do the work get little or none of their labor value. This income transfer occurs on pirate sites when artists’ work is literally stolen and distributed in ad supported piracy with advertising sold by the biggest advertising networks.
The income transfer is not difficult to see–the songs, recordings, movies, television programs or books are simply stolen and posted on ad supported sites that directly compete with legal sites. The value of these works are converted into advertising revenue by unscrupulous brands and ad networks and published on pirate sites with that value sucked out by everyone involved.
The fact that these sites continue to flourish is not only attributable to a perverse interpretation of safe harbors–these site flourish because of gutless national governments that allow the income transfer to continue, Kim Dot Com notwithstanding.
The biggest offender, though, is the one search engine that drives the most traffic to these sites (where they are also found on the other side of the transaction selling advertising)–Google. Google is an integral part of the income transfer economy, receiving over 1 billion job-killing take down notices in the last 12 months.
The next biggest offender–and one that many artists are not really focused on–is Facebook. Whatever we may think about Google’s role in the income transfer economy, at least Google acknowledges that it needs a license for its music properties like YouTube. Facebook is entirely unlicensed and operates its own walled garden pirate operation.
Jean-Michel’s speech (as quoted in Complete Music Update (but without the snark)) sums it up:
[T]he truth is that the creative economy, for the creators whose works are driving it, is still under-performing. We need to fix flaws in the environment in which creators are working. And if we do, the economic benefits will be enormous, leading to further growth and many more jobs.
The biggest flaw I want to highlight today is what is known as the “transfer of value” or the “value gap.” To survive and thrive, creators must be fairly paid for their works. Yet today, some of the world’s major digital music services are building large businesses on back of creativity while paying next to nothing in return.
This is not fair. It is a market distortion. And it is holding back growth in the creative sectors.
One way to fix this is not by trying to get rid of the safe harbor which solves a problem by providing a little latitude to reasonable people acting reasonably. To take one example, the ISPs participating in the Copyright Alert System should not be lumped in with Google. Let’s face it–Google is in a class of its own and should not be entitled to benefits for which Google bears no burden.
There is no part of Google’s business that has greater resources available to it than search. Mrs. Palsgraf take note–if Google search attracts over 1 billion take down notices a year, then you can be sure of one thing–search is working exactly as planned, and the plan is to keep transferring the value of everything the network touches including the labor value of every artist and songwriter in the history of recorded music.
Facebook is also working exactly as planned and rips off songwriters, artists, publishers and labels all the live long day–not to mention selling artists names as advertising keywords which is the ultimate insult-to-injury commoditization.
Jean-Michel is exactly right. This job-killing market distortion must be fixed.
MTP readers know I take a dim view of the music business (and the larger entertainment industry) falling over themselves to drive traffic to YouTube. Big Machine is taking a major step in the right direction to protect their artists’ brands from being used to hand Google negotiation leverage on a silver platter. This trend won’t reverse itself overnight, but Big Machine is to be applauded for having the foresight (per usual, frankly) to set the right strategy for the industry.
Here’s the press release:
Big Machine Label Group will soon launch a proprietary digital video platform that gives fans direct access to content featuring the label’s superstar roster of talent. Big Machine TV (www.BigMachineTV.com) will offer music videos and behind-the-scenes content when it goes live in February, later hosting exclusive interviews, announcements, contests and more. All of the label’s artists, including superstars Taylor Swift, Tim McGraw, Reba, Florida Georgia Line, Rascal Flatts and Thomas Rhett, will have individual channels on the platform that allow viewers to seamlessly search for desired content for an immersive online fan experience.
The development of Big Machine TV comes just as Nielsen Music’s recent 2016 U.S. Year-End Report shows that music video streaming is up 8% year over year, reaching nearly 180 billion streams last year. Video viewership on the new BMLG platform will count towards Nielsen’s consumption charts.
“Big Machine has always pushed the envelope, and we found ourselves asking, ‘is there a better way’ when it comes to syndicating our online content, pushing it onto social media, protecting it and ultimately monetizing it at the highest rate possible to benefit our artists,” said BMLG President and CEO Scott Borchetta. “And the answer was ‘yes’. The Big Machine TV platform is an incredible tool to better serve our artists and their fans by delivering content when and how we want, all the while making sure the creators are compensated fairly.”
Big Machine Label Group has repeatedly been known for making groundbreaking moves among the music industry and in 2016 was named by Fast Company magazine as one of the “Most Innovative Companies” in America. In 2012, in an unprecedented deal, BMLG made history by working with Clear Channel, the largest owner of U.S. radio stations, to secure sound-recording performance royalties to the label and its artists. This became the first time in history that artists would get paid of their recordings on terrestrial radio stations.
@thetrichordist: Updated! Streaming Price Bible w/ 2016 Rates : Spotify, Apple Music, YouTube, Tidal, Amazon, Pandora, Etc. — Artist Rights Watch
The problem with a pro-rata share of advertising revenue is that the fraction may well always trend downward and is dependent on the growth rate of the service involved. If that sounds like a ponzi scheme, it is pretty similar.
[your plays/all plays] * [ad revenue]
If the fraction is always your plays divided by all plays, your plays may spike a bit but will always be more constant than the all plays number which continually grows at least on a relative basis as more recordings are released industry wide. The “your plays” number will likely never grow at a rate that is greater than the growth in the “all plays” number. The denominator will probably always grow faster than the numerator, which means the fraction is continually getting smaller.
This may be offset somewhat by growth in the ad revenue, but in order for royalties to grow for any particular artist, the percentage increase in the ad revenue would have to exceed the percentage decrease in “your plays” and your percentage piece of the pie. Based on the Trichordist findings, it looks like the percentage decline in the plays ratio is greater than the increase in ad revenue.
The same will probably be true of subscriber revenue as the “new money” starts to level off or even decline.
That’s why it’s like a ponzi scheme.
The last time we did this was back in 2014, so we thought it was time for an update. Not a lot of surprises but as we predicted when streaming numbers grow, the per stream rate will drop. This data set is isolated to the calendar year 2016 and represents an indie label with an […] […]
The string trio Time for Three and S’More Entertainment filed a class action yesterday (Jan 17) in New York federal district court against “Defendants Entertainment One GP LLC and Entertainment One U.S. LP, doing business as E1 Entertainment and/or Koch Entertainment LP” for a variety of claims relating to the defendant’s direct deal with SiriusXM.
The class action complaint describes the suit:
4. In violation of the Class Member Contracts, Defendants entered into secret negotiations and agreements with satellite radio provider Sirius XM Radio (“Sirius XM”), for the exploitation of Plaintiffs’ and the Class Members’ intellectual property. Defendants have systematically failed to account for any revenue, or pay any portion of the revenue generated from the exploitation of the Class Members’ Musical Works on Sirius XM under this agreement.
5. Plaintiffs bring this nationwide class action on behalf of themselves and similarly situated Class Members arising from Defendants’ failure to properly account for and pay revenues generated for the distribution of the Class Members’ Musical Works on Sirius XM and other digital satellite radio providers. Plaintiffs bring claims including for breach of contract, breach of the implied covenant of good faith and fair dealing, an accounting, and declaratory relief. Plaintiffs seek monetary damages, injunctive, and/or declaratory relief on behalf of themselves and others similarly situated against Defendants’ for their willful violation of the Agreements….
B. Defendants’ Secretly Withheld Revenues From Sirius XM in Violation of the Contracts Resulting in Substantial Damages to the Class Members
24. Pursuant to the 1995 Digital Performance Right in Sound Recordings Act, and the 1998 Digital Millennium Copyright Act, artists, songwriters, and masters holders are legally entitled to receive royalties for digital performances of Musical Works on DEMD, including on Sirius XM. In the absence of a direct contractual agreement between the digital transmission entities (e.g. Sirius XM) and a record company, these DEMD royalties are determined based on federally-approved statutory license rates. By law DEMD royalties generated pursuant to a statutory license—absent an agreement between the parties—are collected on behalf of and distributed to rights holders by the independent non-profit organization, SoundExchange, Inc. (“SoundExchange”).
25. When digital transmission providers contract directly with record companies for DEMD rights, such royalties are paid at contractually negotiated rates, and the obligation to collect, account for and pay such revenues to artists and musicians falls on the record company, instead of SoundExchange.
26. In this case, Defendants secretly negotiated and entered into an agreement for Sirius XM to distribute the Musical Works of Plaintiffs and the Class Members. Defendants had a legal obligation under the Agreements with Plaintiffs and other Class Members to properly and accurately account for and pay the revenue received by Defendants to Plaintiffs and Class Members. On information and belief, rather than fulfilling their contractual obligations, Defendants have systematically, knowingly, and intentionally withheld and failed to account for and pay for revenue generated from Sirius XM Plaintiffs and other Class Members.
27. As a result of Defendants’ conduct, the revenue that Defendants have collected from Sirius XM is never reported, and is never subject to potential remittance to Plaintiffs and the Class Members. Instead, these revenues have been wrongfully retained by Defendants outright.
28. Defendants have engaged in this conduct even though they have no contractual or legal right to do so. It is currently unknown whether there are entities other than Sirius XM from whom Defendants are collecting DEMD revenue, without reporting and paying such revenues to Plaintiffs and the Class Members.
29. Defendants are wrongfully retaining monies that are owed to Plaintiffs and the Class Members. On information and belief, Defendants could easily account for and pay the money owed to Plaintiffs and the Class Members, as required by the Agreements.
This will be one to keep an eye on. The lawyers filing the complaint on behalf of the potential class include some familiar names and are:
Michael R. Reese
George V. Granade
100 West 93rd Street, 16th Floor
New York, New York 10025
Telephone: (212) 643-0500
Facsimile: (212) 253-4272
JOHNSON & JOHNSON LLP
Neville L. Johnson
Douglas L. Johnson
Jordanna G. Thigpen
439 N. Canon Dr. Suite 200
Beverly Hills, California 90210 T: (310) 975-1080
F: (310) 975-1095
PEARSON, SIMON & WARSHAW, LLP
Clifford H. Pearson
Daniel L. Warshaw
15165 Ventura Boulevard, Suite 400
Sherman Oaks, California 91403
Telephone: (818) 788-8300
Facsimile: (818) 788-8104