Are Pandora’s Disclosures Deficient Regarding pre-72 Exposure to a Music Genome Shut Off?

Some readers noticed that we spotted an interesting defect in Pandora’s most recent quarterly filing with the Securities and Exchange Commission and asked how big a deal is this defect.  Our understanding is that Pandora has been paying royalties on pre-72 recordings since its inception, but recently stopped, following which they were sued in NY state court by a group of record companies.  (Remember The Turtles are suing Sirius for much the same reasons.)

The pre-72 lawsuit challenges Pandora’s use of pre-72 recordings without compensation or a license.  (If you are unfamiliar with the “pre-72″ issue, it is essentially that federal copyright protection only covers sound recordings released after 1972.  Based on Pandora’s use of these recordings in its service without a license or compensation, you might get the impression that the pre-72 recordings had fallen into the pubic domain.  Nothing is further from the truth as the recordings are protected by common law copyright and a variety of state unfair competition statutes.)

Not only is Pandora using these recordings as part of its service in violation of the copyright owners’ exclusive reproduction right and public performance right, there is a question as to whether the music genome itself misappropriates each featured artist’s right of publicity by marketing the Pandora service based on channels created using the artist’s name, an issue that recently came up in the lawsuit brought by Goldieblox against the Beastie Boys and by the Ministry of Sound against Spotify in the UK.  Not unlike a fingerprint, the music genome is a copy of the underlying sound recording in a mathematical expression as we understand it, and to our knowledge no aspect of the music genome has ever been licensed.  It certainly is not covered by the compulsory license in 17 USC Sec. 114 (the webcasting compulsory license).

So the pre-72 litigation against Pandora is important not only because of the alleged violations of state law, common law copyright and unfair competition statutes, but also because it could draw attention to potential artist-related violations may go to the heart of Pandora’s business for both pre 72 and post 72 recordings.

What Are Pandora’s Disclosure Obligations under SEC Regulations?

A public company such as Pandora is required to make a variety of filings with the Securities and Exchange Commission so that the Commission, the company’s stockholders and the public (including the financial press) can have an idea of how the company is doing and how to assess the risk of owning the company’s shares.  The way that this assessment is communicated to the company, at least in part, is in the company’s share price.  If stockholders rely on the company to properly disclose risk, especially downside risk, then they may not look beyond these disclosures such as finding a copy of the copyright owners’ complaint.

Relying solely on these disclosures instead of doing your own research is not something we would recommend for reasons that will become apparent.  Pandora is a good example of why it’s good to drill down on the company’s disclosures (and in the case of the SEC, we’re a bit surprised that the examiners at the Commission didn’t catch this).

One of the risk factors that the SEC requires public companies to disclose is pending litigation brought against the company.  This should come as no surprise, as litigation can be an existential threat to a company and to the value of stockholder’s investment.  The SEC has very specific requirements about what is to be disclosed about litigation, and those requirements can be found in Regulation S-K (17 CFR Sec. 229.103):

§ 229.103 (Item 103) Legal proceedings.

Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.

The “Instructions” for Item 103 provide guidance for materiality regarding legal disclosures:

2. No information need be given with respect to any proceeding that involves primarily a claim for damages if the amount involved, exclusive of interest and costs, does not exceed 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis. However, if any proceeding presents in large degree the same legal and factual issues as other proceedings pending or known to be contemplated, the amount involved in such other proceedings shall be included in computing such percentage.

Given the scope of the pre-72 litigation, it is easy to understand why Pandora would have an obligation to disclose the claim based on materiality alone.  Then the question is did they?

Did Pandora’s Disclosure Comply With Its SEC Disclosure Obligations?

Here’s Pandora’s disclosure in its 10Q:

On April 17, 2014, UMG Recordings, Inc., Sony Music Entertainment, Capitol Records, LLC, Warner Music Group Corp., and ABKCO Music and Records, Inc. filed suit against Pandora Media Inc. in the Supreme Court of the State of New York. The complaint claims common law copyright infringement and unfair competition arising from allegations that Pandora owes royalties for the performance of sound recordings recorded prior to February 15, 1972.

Pandora’s disclosure does not seem to comply with the requirements of Regulation S-K because the company does not disclose, or does not disclose fully, “the relief sought” in the lawsuit.  There is a claim for money–“allegations that Pandora owes royalties”–and also a request for injunctive relief–not addressed in Pandora’s disclosure at all.  The injunction would order Pandora to stop using the pre-72 recordings.  The claim for money relates to both the public performance of sound recordings–“for the public performance of sound recordings recorded prior to February 15, 1972″–and also to the reproduction of those sound recordings as part of Pandora’s operations–not addressed in Pandora’s disclosure at all.

Pandora makes only a minimal disclosure of “the factual basis alleged to underlie the proceeding,” some might say a flimsy and self consciously limited disclosure.  Given the historic nature of this litigation, one would think that Pandora would spend time getting a little closer to the requirements of Regulation S-K and erring on the side of more disclosure than less.

So–Pandora seems to be treading in the grey area of its disclosure requirements at a minimum.  One can be ambivalent about whether Pandora met its obligations for discussion of the facts.  But what is clear is that Pandora did not disclose the copyright owners’ request for injunctive relief and a court order blocking Pandora’s use of the recordings.  One could read the disclosure and come away thinking that it’s just a dispute about money.  It certainly is that, but it’s not only that.

Maybe Pandora’s senior management team (including their CFO as CFOs are very involved with SEC filings) didn’t think there was anything material about the injunctive relief.  If successful, an injunction could have some obvious and not so obvious effects on Pandora’s business.  We view the injunction as the relief that is most likely to succeed because of Pandora’s untenable position that it does not have to pay royalties but gets to keep reproducing and performing the pre-72 recordings.  Even if you believe that there’s no performance right in pre-72 sound recordings, there’s a serious question of whether Pandora is reselling unauthorized reproductions.

Shutting off pre-72 recordings would have the obvious result of blocking Pandora’s use of the recordings. Given that Pandora’s music genome relies on looking up music that sounds like other music to build their barely compliant channels, if Pandora suddenly lost the ability to use all music genomes for pre-72 recordings that might seriously affect its business.  No mention of that, either.

Why Didn’t Pandora Fully Disclose?

You can attribute any manner of motives to Pandora for treating their filing obligations like a press release that they can shade and spin the way they do so many other communications.  You can also wonder about what the senior management team was thinking when they approved the risk factor.  One thing seems clear though–they wrote it they way they wrote because they thought they would get away with it.

Van Dyke Parks on How Songwriters Are Getting Screwed in the Digital Age | The Daily Beast

Forty years ago, co-writing a song with Ringo Starr would have provided me a house and a pool. Now, estimating 100,000 plays on Spotify, we guessed we’d split about $80. When I got home, on closer study, I found out we were way too optimistic. Spotify (on par with other streamers) pays only .00065 cents per play.

There’s less support for all the arts today, and the blade gets duller with every cut in arts funding. It degrades dance, opera, even academia and, significantly, the art of journalism. As a result, in the U.S., public opinion suffers from what we call “infotainment.” That’s a genre of media news that is not informing, entertaining, or remedial. And it’s a direct result of a vacuum of patronage (and by patronage, I don’t mean just Medici-style sponsorship but the willingness of all arts consumers to pay for what they listen to, read, and watch, and for the industry to fairly recompense creators).

READ THE FULL STORY AT THE DAILY BEAST:
http://www.thedailybeast.com/articles/2014/06/04/van-dyke-parks-on-how-songwriters-are-getting-screwed-in-the-digital-age.html

T Bone Burnett’s plea: The piper must be paid| LA Times

Fans can still hear the work of America’s musical pioneers, thanks to online and mobile services. Through downloads and streams and services such as Pandora and Sirius XM Radio, these giants’ recordings continue to captivate and influence young musicians, singers, songwriters and producers.

Yet some of these same companies have made the decision to devalue the music of these artists for their own profit by not paying for it. In doing this, they devalue the substance of their own medium. For the last 20 years we’ve witnessed an assault on the arts by the technology community — especially when it comes to music.

This devaluation is troubling because music is not only the creation of people who make this art for us; it is how they earn a living. Music is how they feed their kids and provide for their futures.

READ THE FULL STORY AT THE LA TIMES:
http://touch.latimes.com/#section/-1/article/p2p-80409552/

@bettemidler : @Spotify and @Pandora have made it impossible for songwriters to earn a living: three months streaming on Pandora, 4,175,149 plays=$114.11.

The truth is self evident.

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https://twitter.com/BetteMidler/status/452200886970769408

London Police Attempt to cut off illegal websites’ advertising revenue | BBC

What we find so interesting about this is that the digital music services that report to be friends of musicians are not taking a strong public position against Ad funded Piracy and supporting these measures.

Spotify, Pandora and the like are affected by the downward economic pressure created by Ad Funded Piracy that diminishes both the amount consumers are willing to spend on subscription fees and the amount that can be charged for legitimate advertising on legitimate services.

Why aren’t Spotify and Pandora more publicly engaged in the fight against Ad Funded Piracy as it certainly is a large contributing factor as to why these businesses remain unprofitable.

Websites offering illegal copyrighted material could see their advertising revenue cut under a new initiative.

Police have created an online database of websites “verified” as being illegal.

It is hoped that firms that handle advertising will use the resource to make sure they do not serve advertising on those sites, cutting off revenue.

Top piracy sites generate millions of pounds thanks to advertising.

One estimate, from the Digital Citizens Alliance – a group backed by rights holders – suggested that piracy websites worldwide generated $227m (£137m) from advertising revenue each year.

Even smaller sites commanded revenues into the hundreds of thousands, the group said.

READ THE FULL STORY AT THE BBC:
http://www.bbc.com/news/technology-26788800

The Tyranny of Legality | The Cynical Musician

Music piracy is a subject that has been talked to death over the past decade. So much, in fact, that it seems scarce conceivable that we could say anything more of interest on the subject.

The fundamental point I’d like you to take away from this is: it’s a lot more important to keep a watchful eye on ostensibly legal services – recall that both Pandora and (perhaps to a lesser extent) YouTube are legit – than to agonize over overt piracy.

That pirate services should be hunted to as close to extinction as is feasible goes without saying, but we mustn’t lose sight of the fact that nobody deserves a medal for going legit. It’s what you’re f-ing supposed to do.

READ THE FULL POST AT THE CYNICAL MUSICIAN:
http://thecynicalmusician.com/2014/01/the-tyranny-of-legality/

How You’re Murdering the Music Industry. | unEARTH Music Hub

Oddly, few people are talking about how much money they are actually making through Spotify, but it’s estimated that the average play is worth an abysmal $0.005. That’s half a cent…if you’re getting anything at all. An artist needs to rack up 200 plays to make $1. How are we letting this happen?! Is the general population truly oblivious to the tremendous effort and cost involved in making music?

Surprise! Songs don’t just pop out of artists like perfectly polished Easter eggs. These creative humans have dedicated a large amount of their time, money and soul to create a tangible piece of art for your listening pleasure. Studio time is expensive! Rehearsal space is expensive! Gas is expensive! Instruments are expensive! Craft beer is expensive!!! Strike that last one.

But seriously guys, when you buy music, you’re not just paying for a song, you’re supporting the artist and the process.

READ THE FULL STORY AT unEARTH MUSIC Hub:
http://unearthmusichub.com/articles/streaming-music/

Pandora Suit May Upend Century-Old Royalty Plan | NY Times

After federal antitrust investigations, both groups agreed to government supervision in 1941.

This system has hummed along for decades. But with the rise of Internet radio, publishers have complained that the rules are antiquated and unfair. They point to the disparity in the way Pandora compensates the two sides of the music business: Last year, Pandora paid 49 percent of its revenue, or about $313 million, to record companies, but only 4 percent, or about $26 million, to publishers.

“It’s a godawful system that just doesn’t work,” said Martin N. Bandier, the chairman of Sony/ATV, the world’s largest music publisher.

The wider music world has been galvanized by the issue of low royalties from fast-growing streaming companies.

For songwriters, Ascap and BMI have also been among the most reliable institutions in the music industry, and few want to see them go. But Rick Carnes, a Nashville songwriter and president of the Songwriters Guild of America, said that while these organizations had served him and his colleagues well, the Justice Department agreements that govern them were outdated and must be changed.

“This is a horse-and-buggy consent decree in a digital environment,” Mr. Carnes said. “There’s no way that works now.”

READ THE FULL STORY AT THE NEW YORK TIMES:
http://www.nytimes.com/2014/02/14/business/media/pandora-suit-may-upend-century-old-royalty-plan.html?

7 royalty cheques that’ll make you lose your faith in the music industry | AUX

How little does the music industry pay artists? Shockingly little. Spotify, the dominant streaming music source in the U.S., is leaking money. They reportedly dole out 70 per cent of their revenue to royalties, and while that number seems high, consider this: each song stream pays an artist between one-sixth and one-eight of a cent. One source claimed that, on streaming music services, an artist requires nearly 50,000 plays to receive the revenue earned from one album sale. Ouch.

Indeed, things are getting dire. And here are seven examples of how bad things can get.

READ THE FULL STORY AT AUX:
http://m.aux.tv/news/100455-7-royalty-cheques-that-ll-make-you-lose-your-faith-in-the-music-industry

Blake Morgan Launches irespectmusic.org and #irespectmusic hashtag

Musician and artists rights advocate Blake Morgan has launched a new website, http://irespectmusic.org/ and the hashtag #irespectmusic

Blake is known not only for his music as a solo artist, and for the label he runs, ECR Music Group but also for his inspiring editorials on HuffPo:

Art and Music Are Professions Worth Fighting for

Pandora Needs to Do Right By Artists

We’re looking forward to seeing what he’s been up too…

BlakeIRespectMusic

RELATED:

Tim Westergren Emails Underscore Tension Between Pandora, Artists

Google, Advertising, Money and Piracy. A History of Wrongdoing Exposed.

Over 50 Major Brands Supporting Music Piracy, It’s Big Business!