Producer’s Share of SoundExchange Royalties

We often get questions about whether producers get a share of webcasting royalties.  Let’s get one thing straight first of all: SoundExchange deals with the limited performance right for sound recordings available in the U.S.  This is not about songs or publishing.

Remember–producers get paid a share of the artist royalty, usually from all sources.  Take the example of a producer getting a royalty in a mid-to-major label deal structure.  The artist has already signed to the record company and is getting paid an “all-in” artist royalty.     The artist’s record deal will almost invariably require the artist to hire the producer, mixer, engineer and other recording personnel and pay them out of the recording budget.

Producers will typically get paid a cash payment, some or all of which will be an advance, and will also receive a producer royalty.  (Some mixers or remixers also get a royalty, and the structure is essentially the same in those deals.)

An “all-in” artist royalty means that the label and artist have agreed that no matter who the artist hires as a producer, that producer’s royalty is included in the artist’s royalty.  Another way of saying this is that the producer gets a share of the artist’s royalty and the producer’s share reduces the royalty the label pays to the artist.  In order for the artist to pay royalties to the producer directly from their record company, the artist must send the record company a “letter of direction” that instructs the record company to pay the producer according to the producer’s contract with the artist.

This is because the producer is hired by the artist and not by the record company (or at least not since about the mid-to-late 1970s or so) and the producer is not a party to the record deal (assuming the artist is signed directly to the label and not through a production deal).  Artists and producers solve this by the artist sending an instruction to their record company (the “letter of direction”) telling the label to pay the producer’s royalty directly and reduce the artist’s royalty by the amount paid to the producer.

Because producers were not allocated a share of artist royalties by law when the webcasting royalties were passed, the artist must follow an analogous process by sending  SoundExchange an instruction to pay a share of the artist’s royalties (called the “featured artist” share of royalties) to the producer.  That instruction is called a “letter of direction”.

How much should the producer be paid?  This will always be expressed as a percentage of what the artist would otherwise be paid.  This can be a little confusing because in the record deal context we speak of producers getting “points” as in “she’s a 4 point producer”.  What does this mean?

A “4 point producer” means that the producer gets a royalty rate of 4% on the same basis as the artist.   Let’s say an artist gets a 16% all-in royalty.  In that case a 4 point producer would get 4 of those 16 points leaving the artist with 12.  That rate gets applied to what are typically called “royalty base price” sales that involve a wholesale price, like CDs or permanent downloads.

If there is revenue to the artist from something other than a royalty base price sale, let’s say a master license for a movie or statutory royalties from SoundExchange, there’s no royalty base price but the producer’s contract still entitles them to a share of that revenue.  In this case, we have to calculate that percentage.  The way that calculation is typically done is by expressing the producer royalty as a percentage of the artist revenue.

In our example, a 4 point producer on a 16 point all-in artist royalty is actually getting 4/16ths of the revenue, or 25%.  So in the case of the movie license, the producer would get 25% of the artist’s share of the license fee.  In the case of SoundExchange royalties, the producer’s letter of direction would instruct SoundExchange to pay the producer 25% of the featured artist share of royalties.

If you have questions about how to get paid as a producer or how to pay your producer if you are an artist, the best place to start is at the SoundExchange website and download the SoundExchange letter of direction packet.

No one can know how a statutory share of performance royalties would be given effect in the future, but it would probably be administered by SoundExchange the same way that the featured artist share of royalties is currently administered.  Because we can’t know how much that statutory rate would be, artists should negotiate with producers for the lesser of the statutory rate or the contract rate, and producers should negotiate with artists for the greater of the two.

Needless to say, there is a lot more to producer agreements than what we have covered here and there may be a lot of twists and turns as more companies use direct deals.  One thing is certain: if there’s no letter of direction, you’re not starting from a good place.

Spotify’s Songwriter Charm Offensive Stops Short in Sweden with STIM

Music, and especially songs, are treated differently in digital commerce than are other products.  Amazon won’t sell you a CD or a download without a credit card on file, and they won’t ship a CD without a credit card payment authorization.  Neither will Spotify sell you a subscription without a credit card to charge it to.  No payment, no product.  Amazon, Spotify and other online retailers protect their accounts payable risk carefully, and consequently their revenue.

Songs are different, particularly on streaming services like Amazon and Spotify.  The services get to use the song first, and then songwriters often have to chase them for payment.  This chasing is particularly true with songwriters who are not writing the current hits, but even hit writers may be chasing payments.  Or more accurately their publishers or collecting societies are.

In fact—chasing the money is becoming an increasingly common exercise for songwriters with companies like Spotify, Amazon, Pandora, Google, Loudr and others.  And through the manipulation of loopholes, these companies get the benefit of the product without paying at all in the case of the mass NOIs in the US.

Bad Timing on Spotify’s Charm Offensive

But this play and no pay is not just an American loophole.  According to MusicAlly, Spotify has recently taken dodging songwriters to a whole new level by refusing to pay the Swedish authors’ collecting society Svenska Tonsättares Internationella Musikbyrå or “STIM.”  That’s right—Spotify the Swedish company is stiffing the Swedish collecting society STIM for payments to Swedish songwriters (and any other writers STIM collects for).  And in a great example of Spotify’s seemingly endless right hand/left hand problem, Spotify is stiffing STIM at the same time as Spotify is launching its high profile charm offensive for superstar songwriters (“Spotify Secret Genius”) and trying to get a federal judge to approve a class action settlement.

It is a common mistake (or dodge) for music users to think that there should be some great master database for songs like the county recorder’s office keeps for real estate.  This is a fundamental mistake–they’re not making any more dirt (Mischief Reef notwithstanding) and so a database for relatively static ownership information for real estate is a manageable problem.  New songs are written every minute somewhere in the world, so asking for this Great Pumpkin database of song ownership is clearly inapt (which is probably why it has always failed).  There being no connection between real estate and songs, attempting to connect the two is what Mill would call a fallacy of analogy.  Yet it is one of the most importune asks and is the principal Great Excuse from the Unlicensed.

Remember when Spotify complained of the lack of comprehensive ownership information on all the world’s songs in their response to David Lowery’s class action lawsuit?  That was, of course, after they used the songs anyway (see “Sorry We’re Not English”).  An underlying theme of that unavailing defense was America lacks the blanket license the rest of the world provides through authors’ collecting societies like STIM.   And yet here we are again.

How the Blanket Licenses Work (More or Less)

So how can Spotify get away with this latest dodge?  At a high level, the way these ex-US blanket licenses work is that a service like Spotify sends each society a data feed of its song usage under the terms of the society’s blanket license with the service.  (All these ex-US deals work essentially the same way in countries with a single authors’ society.)

Having received that data feed, the society then determines how much of the usage for that accounting period is from songwriters it represents.  That society then determines how much money the service owes in royalties by applying the terms of the society’s blanket license to the usage.  The society then sends the service an invoice for the royalties and—way, way after the moment that the song is performed and the service gets the benefit of the song—the service pays the invoice.  Or is supposed to.

This whole process has to take place in a hurry in what is obviously a give to the services—reportedly the society has to invoice millions if not billions of transactions for an accounting period in a matter of a couple months, or potentially lose the right to claim payment for that accounting period.

Like everything else in music publishing for the last 100 years or so, sometimes there are conflicts between what the societies claim and what they actually represent (either over or under 100%).  Given the importance of Sweden in contributing some of the world’s top songwriters like Max Martin (who is a member of STIM if I’m not mistaken), you would think that any company, much less a fellow Swedish company like the monopolist Spotify, would not want to be holding Max Martin’s money hostage.

But Spotify Leverages Its Market Power

And yet—here’s the story broken by Stuart Dredge in MusicAlly:

“[STIM] have informed our rightsholders that the royalties from Spotify will be delayed, since Spotify has not yet payed the invoice regarding Q4 2016,” STIM’s spokesperson told Music Ally.

“We have invoiced according to the same routines as during the whole of 2016, but Spotify now makes a new interpretation of the terms of our current agreement. STIM’s position is that already agreed principles and business standards shall apply.”

The spokesperson added that STIM is in “constructive discussions with Spotify to have this resolved in a quick manner”, so that it can pay out the royalties as soon as possible.

For its part, Spotify’s spokesperson provided this statement to Music Ally:

“We are always working to ensure that royalties are paid out to rightsholders in a correct and efficient way. Spotify offered to pay STIM the full amount to matched rightsholders, but STIM declined,” said the spokesperson.

“The amount in dispute relates to unmatched tracks. We are actively working with STIM on having this resolved in order to present rightsholders with their earned royalties [when they get a final nonappealable judgement?].”

This is the second time that STIM’s Spotify payouts have been delayed. In September 2016, payments for the first quarter of that year were delayed for two weeks, although that was due to negotiations still being finalised at the time those payouts should have been distributed.

The way this process works is that it is possible that all the societies together may claim more than 100% of the revenue because of the usual glitches in the claiming system.  The likelihood of overclaiming is increased given the time pressure to render the invoice (for the service’s benefit).  Any digital service that is paying attention knows going into the deal that this glitch will happen, so has an opportunity to negotiate a solution in advance.

It is likely STIM’s responsibility to make adjusting payments to sums it collects which is one of the reasons why the societies have interlocking agreements about how these matters are to be addressed.  It is also STIM’s responsibility to credit Spotify’s account with any overpayments.

One possible reason why STIM does not want a partial payment is the astronoimical transaction costs of determining who gets what on a partial payment, then determining it again when claims are resolved on a rolling basis.  This is a prime example of when the transaction costs of accounting for streaming exceed the miniscule royalties payable.

Not only would the transaction costs of administering the Spotify license in this case likely exceed the payable royalties, such an accommodation allows Spotify to use the songs at issue without paying at all until some future time that may never come.  Given Spotify’s spotty—see what I did there—reputation on paying publishing royalties, there are few guarantees that the second adjusting payment will ever come in.  Not to mention the third, fourth, fifth or sixth iteration of the September 16 payment as more songs are matched on a rolling basis, answering songwriter questions, and bank fees.  And of course there’s always a risk of a Spotify bankruptcy that can’t be completely discounted to zero.

In other words—just because a song is unmatched does not mean that Spotify doesn’t owe someone for the stream.  It is more likely that STIM will find out who that someone is in the normal course of business than a company with a monopoly position in streaming that is looking at a never ending cascade of copyright infringement litigation for failing to keep its publishing house in order like at least one of its competitors.  You know, the competitor they complain about to any government agency who will listen in an infinite loop.

Is It Retaliatory?

For a company that has been the subject of two multimillion dollar songwriter settlements–that we know of–to be expecting trust in its payment of songwriter royalties is a bit much.  The right move would be to audit STIM if Spotify feels it has overpaid and make sure that it gets credit for the right amount of any overpayment.  Surely Spotify’s lawyers would not allow their client to suffer the indignity of being prohibited from auditing STIM.

Unfortunately, any Swedish songwriter who has licensed Spotify under the U.S. compulsory mechanical license system doesn’t have the same audit right against Spotify in the US due to the oppressive mechanical licensing rules.

You have to wonder if it is just STIM that the monopolist Spotify is refusing to pay.  The same overclaiming problem potentially exists at all collecting societies.  It is also a bit odd that we haven’t heard Apple complain of the same problems.  Or any other service for that matter.

It’s also worth noting that Swedish songwriters and STIM members signed an open letter to Spotify last year demanding fair royalties which probably did not help Spotify’s cred with the songwriting community.  There’s no evidence that Spotify has singled out these Swedish songwriters for retaliatory treatment, at least no evidence yet, but it does seem awfully coincidental that STIM members complained about Spotify and it appears that STIM is the only society being treated this way by Spotify.

Do you wonder how the songwriter “ambassadors” in Spotify’s “Secret Genius” charm offensive are doing on getting paid?  Since they all wrote mega hits, my bet is that they are in the group that is getting regular payments and is consistently matched to revenue.

The rest of the world’s songwriters must have a genius that’s so secret they are unmatched in earning power.

The Value Gap is Bigger Than You Thought: Member of EU Parliament Calls Out Google’s Data Harvesting

According to MusicAlly, a Member of the European Parliament from Germany has called out Google’s non-display uses of music that are pure profit for Google.  Christian Ehler has his eye on the right ball:

“The American platforms have been very successful as it’s a liar’s poker that suggested an alliance between the consumer and their commercial interests. We have heard the notion that it is free and for consumers. This is a pretension as [YouTube is] not for free. [YouTube] gets access to you and you are bombarded with advertisements. We are living now in the time of the second level of revenues – this is the data the consumers are giving to these platforms […] Consumer data becomes more and more important and it’s not well understood that this is not for free […] We are selling our future. Creativity is the USP of Europe. They [the digital companies] accumulate money. Why is Netflix producing TV series? Why is YouTube creating YouTube stars? They do understand that their business is content, not distribution […] We are simply selling our economic future if we are going to lose this battle.”

I have been banging the table for years about Google’s non-display uses of music and the fans that we drive to their various platforms so MEP Ehler’s view is very welcome.  “Non-display uses” include data scraping but could mean virtually anything because Google cannot be trusted to disclose what they are really doing with any of their products because they have a long history of not telling the truth about their business practices.

Google’s business practices raises several important questions for artists that no one is asking.  The first question is do you want your music and your fans to be used in this way in the first place?

And since this is all a byproduct of what Mr. Ehler correctly describes being “bombarded with advertisements”, it is important to understand that even if you use YouTube’s tools to block YouTube from selling advertising against your work, Google’s exploitation against your fans doesn’t stop there.

Google routinely captures data from every conceivable contact with your fans and they do it surreptitiously, in relative secrecy in the background.  How they do it is not easy to discover, but a significant number of their techniques and implementing technology was disclosed in a recent class action brought against Google by consumers for privacy violations of Gmail.

As Jeff Gould wrote in a highly recommended article “The Natural History of Gmail Data Mining” Google’s plan is to be able to scrape as much information as possible in return for the “free” use of Gmail:

The most striking thing about the early Gmail patents is how exhaustive they were in attempting to anticipate every conceivable attribute of an email message that might one day be exploited for ad targeting purposes. In many cases it would be years before Google was actually able to make these ideas operational in Gmail. The first version of ad serving in Gmail exploited only concepts directly extracted from message texts and did little or no user profiling — this method would only be put into practice much later. Some attributes have still not been implemented today and perhaps never will be. For example, as far as I know, Google does not reach into your PC’s file system to examine other files residing in the same directory as the file you attach to a Gmail message, even though the patents explicitly describe this possibility.

Are you willing to bet that Google doesn’t scrape the same kind of behavioral data about your fans on YouTube?  And what is stopping Google from scraping the same data from children attracted to YouTube?

As Mr. Gould reports, the data mining is what makes the real money for Google:

When Gmail was finally released to the public in April 2004, its ad serving system used a sophisticated data mining algorithm known as PHIL, the subject of another Google patent filed by Georges Harik and a colleague. Already implemented the previous year in Google’s AdSense program that serves ads to web sites operated by third party publishers, PHIL stands for Probabilistic Hierarchical Inferential Learner. Despite the forbidding name, the basic idea is straightforward.

Words in documents such as emails [or lyrics] occur not randomly but in certain clusters. When allowed to crunch through a vast number of such documents, simple software algorithms can identify clusters that are more or less likely to occur and group them together as “concepts”. For example, PHIL can learn to distinguish the entirely different meanings of two concepts such as “ski resort” and “lender of last resort” without being tripped up by the fact that the term “resort” occurs in both.  [But Google can’t distinguish between “Fragile” and “Fragile (Live)” for address unknown NOIs].

In AdSense, PHIL matched concepts derived from sets of keywords provided by advertisers with concepts extracted from the web pages where publishers wanted Google to place ads. The idea was that the better the match, the more likely a visitor to the publisher’s site would be to click on the ad, which was the revenue generating event for Google.

MEP Ehler has put his finger right on one of the implied issues in the value gap and it’s a value that isn’t usually measured in these discussions.  The fact is the gap is so wide that it’s hard to know the value of the income transfer.

 

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@ConsumerWD Calls Out Eric Schmidt On Google Support for Human Trafficking Site Backpage at Alphabet Shareholder Meeting

Consumer Watchdog’s John Simson grills Eric Schmidt to a stutter while Google CFO Ruth Porat twiddles her thumbs and counts her shares.

Consumer Watchdog report referenced in the video: “How Google’s Backing of Backpage Protects Child Sex Trafficking.”

Trailer for “I Am Jane Doe”

And here is YouTube’s channel partner Seeking Arrangement for advice to young women about how to pay off student loans through “sugar baby” relationship at “Sugar Baby University”:

 

Just Say No: Will Spotify Still Be Seeking Forgiveness During Its IPO?     

June 5, 2017 Comments off

[A version of this post appeared in last month’s MusicTechPolicy Monthly.]

While Spotify’s technocrats may be breathing a sigh of relief after the company’s most recent multimillion dollar settlement with songwriters, it is well to remember that the company is probably not anywhere close to out of the woods.  As others have learned the hard way, once you replace the rights of songwriters and artists with your own lust for IPO riches, the lawsuits can go on for a very long time indeed.  You would think that after nearly 20 years of massive infringement online, the obvious answer would suggest itself to the “get big fast” group:  Don’t use music you don’t have rights to use.

Yes, that’s right.  Just say no.

The typical reason given by interactive services about why their need to offer unlicensed music exceeds their desire to offer only licensed music is because of competitive pressure from YouTube.  Why do they feel this competitive pressure?  Because their investors tell them at every board meeting that they should feel it.  But let’s be clear–I doubt that Tim Cook gets Eddie Cue in a headlock over the issue over at the Infinite Loop.  If you agree, then that kind of narrows it down.

But entertain that idea for a moment, however ill founded.  Why is YouTube able to sustain this competitive position that supposedly makes otherwise licensed services soil themselves with fear of being undercut and overrun by YouTube?

That’s right–the “DMCA license”, or YouTube’s absurd use of the “safe harbors” granted to them under the U.S. Copyright Act which YouTube likes to think makes them bullet proof.  (Which is also what Cox Communications thought until they weren’t and is probably what Facebook thinks, too.)

So get that straight–some would say that The Golden Child (aka Spotify) is to be allowed to limp their way to the increasingly inexplicable goal of some kind of big financial reward (or “exit”) in an IPO of whatever stripe while we are all asked to look the other way and allow them the same shite arrangements that YouTube enforces through lobbying, litigation and unprecedented monopoly position (aka crony capitalism).

And you thought it was all about the “Value Gap”?  Apparently not.

We are being told that the licensing practices of interactive services should be allowed to look more like YouTube’s widely loathed safe harbor and YouTube tries to make us believe that they are really pro-artist.  We are asked to hold the proposition “A” and the proposition “not A” in our heads simultaneously.  It can be done, but it is rather uncomfortable and it is uncomfortable because in this case it is unnatural.  Not to mention, it is, of course, all bull.  Irving Azoff crystalizes the view no doubt held by everyone who has ever dealt with any of these people:

“The truth is that, despite having to compete with services like YouTube who hide behind outdated, safe harbor protections, legitimate services like Spotify and Apple Music are attracting more subscribers than ever,” he continued. “If YouTube had the same level of commitment, their subscription service would be more than a head fake—and they’d be working hard, like Spotify does, to convert users to the paid tier for unlimited music. Maybe Google should do a study on that.”

The difference is that Irving is actually looking out for the best interests of his clients and is not afraid to tell the truth.  The one clarification I have to his assessment is that Apple doesn’t seem particularly worried about their competitive position–it is Spotify that runs to the Nanny State at every turn and files mass “address unknown” NOIs all the livelong day.

And then, of course, the whole “Value Gap” concept is only half right–it should really be called the Pinto Gap, because it’s not just that Google decided to make money off the backs of artists and songwriters through a distorted loophole.  Google also made that choice to be a knowing mass infringer the same way Ford decided to knowingly sell consumers its Pinto model with an exploding gas tank.  It profited them to do so, just like it profits them to trade in terror recruiting videos.

So the Pinto Gap is not much of an excuse for either a competitor service, the DMCA safe harbor, or as a policy the industry should support.  (And that goes for Facebook, too.)

Spotify CO May 12

As it stands now, it would at least potentially be a big mistake to assume that Spotify has done sufficient ameliorative work to be prepared for the big bucks to roll in (for everyone except the songwriters and artists).  All that these songwriter settlements have done is allow songwriters the chance to earn a royalty from Spotify that starts two or maybe three or maybe four decimal places to the right, depending on the month and which of Spotify’s two main services are serving the song or recording.  This is not particularly exciting news for songwriters once the bloom is off the class action rose.

It’s entirely possible that a lawsuit could be brought by any songwriters who are not part of the latest class action or a private settlement.   That certainly would explain why Spotify showed a sudden interest in serving hundreds of thousands of notices on the Copyright Office using the “address unknown” NOI loophole.  The company has probably been advised this tactic would fend off future infringement lawsuits and allow Spotify to use songs under the compulsory license.  It might, but there is a telling section of the settlement document (at p.4) that echoes my own criticism of the mass NOIs (so naturally it caught my eye):

Spotify will invest time and resources to initiate and support an industry-wide
effort (to include representatives of composers, publishers, streaming services,
labels, and others) with the goal of obtaining and digitizing all U.S. Copyright
Office registration records for musical works registered before January 1, 1978,
 and making that information far more accessible to the Class. (my emphasis)

Why is that language intriguing?  Because it is likely there for a reason the language dances around–the public records of the Copyright Office are only searchable online for registrations or recordations after January 1, 1978 and are paper records before that date.  We have long believed that digital services are not going to search the paper records of pre-78 works but are going to file mass NOIs based on “address unknown” status on pre-78 works without actually checking to see if the address is in the Copyright Office records.  Why?  Because when you’re born digital you don’t stoop to looking through paper.  And because it is consistent with their “seek forgiveness not permission” approach that is proving so costly.  Even if they get sued faster than a three finger swipe.

That’s also not going to help them with any stream rips of live shows that have found their way into the extremely porous aggregators that distribute to these services or any other illegal distributions of sound recordings for which a compulsory license isn’t available in the first place.

In other words, if Spotify (or any other service) relies on the mass “address unknown” NOI loophole for pre-78 works without doing the proper research, they are potentially right back where they started–if not worse, because they potentially have misfiled their mass NOIs on a grand scale.  And you know who is good at looking into things done on a grand scale is a grand jury.

So it comes down to the same issue–if the service really is all that valuable, then wouldn’t the fastest way of identifying song owners be by refusing to post their songs until there’s a license in place?  Particularly if you don’t buy into the Pinto Gap excuse?  Isn’t the market much more likely to produce that information in an efficient way through the exercise of leverage and rules?  You know, like the Copyright Act?

 

@tessamakeslove: Would everybody just f*ck off about the beauty of begging? — Artist Rights Watch

June 5, 2017 Comments off

Another brilliant post by Tessa Leena puts Patreon in its place!

Beauty of begging, sold to us as something romantic and newly brilliant: We are back to the Middle Ages where creative professionals–um, troubadours–were whores and marginalized individuals. Except now, between the troubadour and the generous peasants, there is a clever middleman like Patreon who makes money on bulk.

via @tessamakeslove: Would everybody just f*ck off about the beauty of begging? — Artist Rights Watch

Must Watch Talk By Artist @MiraMulholland on Redefining Success in the Digital Marketplace — Artist Rights Watch

May 31, 2017 Comments off

Canadian artist Miranda Mulholland articulated the common reality that we hear every day from artists around the world. Thankfully she gave her clear-eyed assessment of reality at the Economic Club of Canada–it would be great if we could get a comparable audience for artists around the world. Here’s an excerpt:

via Must Watch Talk By Artist @MirandaMulholland on Redefining Success in the Digital Marketplace — Artist Rights Watch

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