On The Other Hand #1: Spotify Premium Must Compete With YouTube Free and SoundCloud

Why do we expect mobile consumers to adopt Spotify premium when they can steam any song they want on YouTube mobile already? Without a subscription to Music Key?  They can do the same on SoundCloud for that matter.  Further these services pay a pittance to artists compared to Spotify.  Why aren’t artists outraged?

A survey of music consumption habits by students at a public university indicates just how tough it is for Spotify.  When asked which services they use to listen to music, clearly YouTube dominates. The not-fully-licensed SoundCloud is a respectable 4th. (Ed Note: And what’s the deal with 8tracks.com? This was not really on our radar until now.  It was a write in but had it been included in survey it would have polled at nearly 10%.)

We can also objectively conclude that Beats Music Service is DEAD. Monty Python might phrase it this way:

“This streaming service is no more. It has ceased to be. It’s expired and gone to meet its maker. This is a late streaming service. It’s a stiff. Bereft of life, it rests in peace. If it had not been purchased by Apple it would be pushing up the daisies. It’s rung down the curtain and joined the choir invisible. This is an ex-streaming service.”

 

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Liar Liar Streams On Fire #1: Survey Suggests Spotify Has Peaked Among Key Demo

We’ve got data.  Lots of data.  We have two different consumption surveys of college students and one of the broader population.  We’ve also got the details of 2014 digital revenues from a moderately sized independent catalogue.

While everyone else wildly speculates we’re gonna show you our data.  All this week.

This is not pie in the sky projections from the VPs of “digital” at your record label or distributor.   This is what is really happening.  And you know you can’t trust these digital executives, right? They have been objectively and demonstrably wrong on so many things.  We suspect they are now  just making shit up to try to cover their asses (or looking for jobs at the streaming services.) See: Who will be the first executive to lose their job over the streaming fiasco?

Here’s todays installment:

An informal semi-longitudinal survey of students at a large public university shows that overall use of the Spotify is already falling among a key demo. Further revenue from paid subscriptions for the service appears to have already peaked for this important group.   This appears to be the result of students switching from the $9.99 service to the $4.99 service.  Or put another way Spotify is cannibalizing it’s own paying subscribers resulting in lower revenues even as it loses overall popularity with these students.   Genius.

 

Spotify subcribers and revenue down

Smells Like Teen Enron: Pandora Sues Songwriters Again. Why?

Pandora is currently suing BMI songwriters over the rate it will pay for the next 4 or 5 years.

Pandora wants to pay 1.75%.  BMI songwriters would like them to pay 2.5%. In 2014 Pandora paid BMI $16.1 million dollars.   So basically Pandora is using the entire apparatus of the federal courts to get a reduction of less than $7 million dollars in 2015.  If it’s a 4 year deal that means Pandora saves $28 million dollars (Pandora growth has virtually stopped).  Court cases like this have typically cost the parties tens of millions of dollars.  This does not include the millions it costs taxpayers.

But let’s look at these numbers  in context to see just how ridiculous this case is.

(source for all of these charts are SEC filings and court testimony)

Pandora revenues in 2014 vs amount paid to BMI songwriter revenues  

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BMI represents about 48% of all songwriters

 

Pandora executive “stock compensation”  vs royalties to BMI songwriters 2014

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In 2014 Pandora paid $87.1 million dollars to executives in “stock compensation.”  In 2015 they plan to pay executives another $122 million.  By the end of the year will they have paid out over 1/2 a billion dollars to executives and investors in stock compensation.

Pandora 2014 net loss compared to executive stock compensation and royalties paid to BMI Songwriters.

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So if you were running a company that lost 30.41 million last year and you were seeking savings what would you do?

1) spend tens of millions of dollars suing BMI songwriters to “save” $7 million

or

2) would you maybe cut some of the $122 million in 2015 executive stock compensation?

Smells Like Teen Enron

This is totally batshit crazy right?  I mean this is more like something a petulant teenager would do ( I have a couple).   “I’m so mad at those songwriters I’m gonna sue them even though it doesn’t save me any money.”

So is Pandora behaving like a petulant teenager or is there something more sinister afoot?

When something doesn’t make sense one should always entertain alternative hypotheses to try to figure out what’s going on, right?  So why might Pandora management being pursuing and publicizing this high profile scorched earth strategy with songwriters and the music business?

One possibility is that they don’t want anyone noticing that the company would be profitable without the wildly excessive executive stock compensation.   By my rough reckoning Pandora would have made a profit of $56.7 million dollars last year without the executive stock compensation.   The BMI and  ASCAP songwriter lawsuits provide a false narrative as to why the company is unprofitable:  “Those damn greedy songwriters”.  And it has worked! With most of the financial press and even the major music industry press uncritically regurgitating this false narrative.

It also distracts from the fact that the executives and investors are sucking the life out of the company. By the end of 2015  they will have extracted over 1/2 a billion dollars from the company!

So let’s have a little fun here.  if you were forced to bet on this:

 

 

Pandora Execs Will Have Received Nearly 1/2 Billion Dollar in “Stock Compensation” By End of 2015

While Pandora is busy in court suing BMI songwriters for lower rates we thought you’d like to read this guest comment from George Johnson.

“The past 3 years, according to the SEC, Pandora executives and investors extracted over $360 million dollars in “stock compensation”. This new $122 million dollar gravy train for 2015 will put Pandora executives at almost $500 million dollars for themselves in 4 short years while they plead poverty to Congress, Judge Stanton, Judge Cote, and the Copyright Royalty Board. (Ed note: New information suggests it’s closer to $550 million.)

Not bad for a guy who thought of the entire idea for Pandora while “tripping on psychedelic mushrooms”. — see Washington Post in 2013.

It’s time for the SEC, DOJ, or Congress to shut down Pandora with a temporary injunction and have these executives PAYBACK these hundreds of millions of stolen royalty money to songwriters, music publishers, recording artists and independent labels and all their investors.”

Pandora Sues Songwriters For Lower Rates While it Pays Execs $122 Million in Stock This Year

There they go again!

Pandora is currently suing BMI songwriters for lower rates.  Last year it was ASCAP.  They’ve also been been  sued by  The Turtles for refusing to pay royalties to artists who recorded before 1972.    Pandora’s entire business model seems to be either suing songwriters or artists and trying to set us against each other.

And taking money off investors.

Pandora plans to pay its top executives $122 million in “Stock Compensation” for this year alone.  That’s right, the money-losing Pandora plans on paying executives $122 million in stock this year. Unbelievable.  This is on top of their already inflated Silicon Valley size salaries. No wonder their stock is collapsing. It sure looks like the executives are vampires sucking the company dry.  While pleading poverty to the BMI rate court judge and public.  I don’t understand how these people stay out of jail.

“The Specialist” at Seeking Alpha has carefully detailed how virtually all the losses at the company can be attributed to overcompensation of executives through this “Stock Compensation”.   Read it here:

http://seekingalpha.com/article/2896676-pandora-is-even-more-overvalued-than-you-think

 

 

Tale of Two Trophies: While the Grammys Endorse Fair Pay for Artists On Streaming CMA Research Division Headed in Other Direction

Much of the post Grammy talk today concerned the surprise announcement from Grammy chief Neil Portnow that NARAS had formed a new advocacy group to press for better royalties from digital services.   As Billboard reports: 

“Music has tremendous value in our lives,” Portnow added. “While ways of listening to music evolve, we must remember that music matters in our lives, and that new technology must pay artists fairly.”

Holy shit! A plea for fair pay for artists on primetime tv in the middle of the 57th Grammy Awards?  I’ve seen it all now.

None of my artist colleagues had any idea anything like this was coming. We were just as surprised as the rest of you!

Now compare and contrast this to the Country Music Association.   Sadly this institution appears headed in the other direction.   Well at least their “research” department appears to be headed in the wrong direction.

Under the research director Karen Stump  the CMA “released” a study that as billboard reports “Streaming Drives Sales New Study Shows”  I say “released” because the study was presented in a closed door session and CMA refused to provide any details to anyone not in the room.

Okay that’s weird enough… but what was that headline again?

Streaming increases sales? What? Music sales are down streaming is up that’s pretty much what everyone is talking about.   I thought everyone had agreed on this?  I mean most people take it as a given that streaming is a replacement for owning music. Ask any college kid.  They don’t buy music anymore they stream it.  The mainstream and seemingly sensible debate has been about just how much streaming decreases sales and if streaming revenues will be enough to offset the decline in revenue from sales. But well we could all be wrong.  As Billboard reports on the study:

“YouTube might be “the devil” to Garth Brooks, but in another’s eyes, it’s a great source of music discovery. In fact, a new study being released by the Country Music Association suggests that adults 18-plus are far more likely to buy music after being exposed to it on YouTube, Spotify and other streaming services than listeners who hear a song for the first time on AM/FM radio.”

Well okay. I sort of see what they are doing here. Maybe their headline is overselling it. The actual body of the article hedges the claim a bit.  Still I didn’t see any statement from the CMA correcting the Billboard headline.

More troubling are the obvious flaws in this study.   As a part time academic researcher  I immediately saw four possible fatal biases/covariance problems with this study.  Let me simplify it for those whose eyes glaze over at the mention of statistics.

1) If you are streaming you have a device in your hand or in front of you that allows you to immediately buy the song.   Compare that to radio.  Most radio listening is done passively, say in the car or while working. Generally you don’t have a smartphone, tablet or computer at the ready. You are more likely to buy the song when you’re streaming because  you have buying device in hand! If you are listening to the radio especially while driving, it could be hours before you have a chance to buy the song. That likely accounts for the difference right there!

2) If you are using YouTube or Spotify, you already know the name of the song or the artist.  YouTube or Spotify generally don’t randomly play an unknown song for you!  So you are already engaged with the artist or song on some level if you are streaming it.  You are more likely to buy the song NOT because you are using YouTube or Spotify but because you are already engaged with the song or artist.

3) Users of YouTube and Spotify are much younger and are likely in the prime music buying age demo.

4)  Those who only listen to radio and don’t stream are likely to be older and poorer.   They are less likely to buy music because of their age and socioeconomic variables.  Not because they only listen to the radio.

It’s also likely that the “study” is making the most rookie of all moves: equating correlation with causation!

Now you can still adjust for these biases using a complex  but common statistical methodology and make the kind of claims that the CMA research department has claimed. You can also sometimes tease out causality using pseudo-experimental techniques.  So I wanted to see if they had controlled for these biases by using this statistical methodology.  Simple enough right?

I wrote to Ms. Stump and asked if the survey had adjusted for these biases.  And if she could share the report and data with me.  (The final report was not available at the time and the raw data and detailed methodology is still not available.)  First I wanted a copy of the report. Second I wanted to see if  those who conducted the survey adjusted for the biases above.

Her response indicated that they were not willing to share the report and the data with me since it had been conducted on their behalf by a third party vendor.

Huh?

This makes no sense. It’s their report. It’s their data. They hired the vendor. I followed up several times over the next few weeks with Ms. Stump and others at the CMA but I have been effectively stonewalled.  Not a single response.  I couldn’t even get them to send me a copy of the report.

So what is the CMA hiding?  There are no “unfriendly” facts. Data is  data. I don’t understand why the CMA would want to deny their members a second opinion by an experienced researcher? If they did the study correctly then my “peer review” will just bolster their claims.  So what are the other possibilities here?

One possibility is that the CMA misled people in the first place and are now trying to cover it up.

In this tale of two music trophies #IRespectNARAS  #NotSoMuchCMA

 

 

 

 

 

 

 

 

 

Why Pandora Stock Collapse Should Worry Artists: Google

Artists and labels need to be careful which companies they cut deals with cause one never knows who will end up owning that company tomorrow.   That dumb looking MERLIN “steering” deal with the struggling Pandora may look even dumber if Pandora is acquired by a company like Google. 

+++++++++++++++++
I  had a few inquiries Friday asking if I wanted to comment on the collapse of Pandora Media  stock  (-17.22 %).  I passed because I didn’t really think the price of the stock was very relevant to artists.  I mean Pandora is gonna continue resisting paying performers and songwriters fairly whether their stock is $35 or $12.  Right?

But then I started to think about it from purely an equity/quant perspective.   At $15 dollars Pandora Media is valued at just over $3 billion.   One of the rules of volatility and quant trading is you don’t short a stock all the way down, because as a company becomes less valuable the “tail risk” or unpredictable/unexpected events start to accumulate on the upside.  Usually because the company becomes a takeover or buyout target.

Now, let’s turn our attention to Google.  Follow me here.  You’ll be glad you did.

Now you know that Google is basically a one trick pony?  Right?  It’s a data mining firm that also sells advertising.   This accounts for 90% +of its revenue.  And let’s be honest.  Data mining and user profiling is just what fancy Wall Street types call “spying.”   Look at what Google does:

Google Search:  data mining/spying/advertising

Chrome: data mining/spying

Gmail:  data mining/spying/advertising

Google tracking device in your pocket (Android OS phones):  data mining/spying

Google Maps: data mining/spying/advertising

Google Street View cars: data mining/spying. (literally–they got caught on that one)

Google Driverless Cars:  data mining/spying

YouTube: data mining/spying/advertising

Google Glass: data mining/spying

Google for education: data mining/spying

Google Fiber: data mining/spying

Google “free” WiFi: data mining/spying  (Check the privacy policy on your Starbucks WiFi by Google next time you’re visiting.)

(proposed) Google mobile phone service: data mining/spying.

Anything to do with drones and robots: data mining/spying

Google takes all this data and monetizes it through its web and search advertising.

Now recently Google’s core business, web and search advertising  has come under pressure.  So has their stock.  The problem is that many mobile users are not searching using a Google search or even using a browser.  Many users, especially young users have discovered you can get all internet has to offer through mobile apps.  This puts millions of  consumers out of the reach of Google’s data mining/spying/advertising ecosystem.  And Google wants you to believe that apps are a threat to freedom and will break the Internet.

THIS IS AN EXISTENTIAL CRISIS FOR GOOGLE.

Aside from YouTube (and maybe Google Maps)   Google does not have a killer app in the mobile world  Pardon the pun.   So how do they monetize the mobile web? They need more apps.  Apps with lots of users.  Things like Instagram, WhatsApp and SnapChat.  But largely Facebook has beaten them to the punch.  What’s left? Well there are music services.   Spotify and Pandora?  But Spotify already competes with YouTube Music Key and Google Play.   So Google put a board member on Spotify.  Hmm but not so much Pandora. Pandora, while not the shiniest hottest new app, is at least a complement to Google’s existing business.   Google already has a lock on Pandora’s advertising through DoubleClick.  And Pandora at $3 billion (really 2.7 billion since they have $300 million plus in cash reserves) is less than the variation in Google’s market cap on day to day basis.

$3 billion for Pandora’s 80 million users?  Isn’t this a cheap way for Google to kickstart it’s transition to mobile?

And yesterday we learned that Pandora joined the Internet Association.  Which is Google Facebook and Twitter among others.  So they are already part of the club.  And Pandora’s statement on the Copyright Office Music Licensing Study sounds just like Google already which would makes sense since Google already has Pandora by the balls through DoubleClick (see Pandora risk factors).

Check it:

“(Pandora) would be open to supporting the full federalization of pre-1972 sound recordings under a technology-neutral approach that affords libraries, music services and consumers the same rights and responsibilities that are enjoyed with respect to all other sound recordings.”

Since when does Pandora care about libraries?   Libraries is a Google “tell” after all the Google Books handwringing about the “digital library of Alexandria.”  I’m sort of joking here.  But I really do find the move to the Internet Association very curious.

So before artists and rightsholders start celebrating the collapse of Pandora’s stock,  consider what a formidable foe Chris Harrison (Pandora counsel) would be if he was backed–or employed–by Google.  It would really be the job he’s been auditioning for over the last 10 years.

Yep…Chris Harrison and Fred Von Lohman.  There’s a match made in heaven…depending on your definition of heaven.

 

 

 

 

 

 

 

 

 

New YouTube Smear? When I search Twitter for @ZoeCello why do I get “YouTube Creators” account as search result? Why does it point to Business Insider Article?

Try it yourself.

 https://twitter.com/search?f=realtime&q=%40zoecello&src=typd

I don’t know.  Maybe it’s just me.  But if I search for “@zoecello” on twitter I get this YouTube account in the search results.  EVERY other search result contains “@zoecello”  except the YouTube Creators account.  Is there something funny going on here?

UPDATE:  Yes indeed there is something funny going on here.   As our good  friends at Adland.tv have quickly pointed out, The YouTube Creators twitter account has most likely targeted this search and must be using a bot cause they accidentally ran the link through 2 URL shorteners!  They tried to link to the business insider piece which is clearly part of The Great Smear Campaign Against Zoe Keating (Classic strawman argument, accuses her of being wrong about something she never said).

Here is their mangled URL:

http://zpzp.eu/shorten2.php?url=q.gs/5959472/http://www.businessinsider.com/youtube-allegedly-threatens-to-block-zoe-keating-2015-1?utm_medium=twitter

This is where they were trying to send you.

http://www.businessinsider.com/youtube-allegedly-threatens-to-block-zoe-keating-2015-1?utm_medium=twitter

This is sickening.   Fucking bullies.   New hashtag:
#HeyGoogleYouFucking370BillionDollarCorporationGoPickOnSomeoneYourOwnFuckingSize

Oh did we mention it was Zoe Keatings Birthday today?   Stay Classy YouTube!

 

 

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And here is the link to that YouTube Creator tweet.

https://twitter.com/YT_Creator/status/562770933803667458

Zoë Keating vs YouTube: The End of an Artist’s Right to Choose Where Their Music Appears on The Internet.

This is a call to action folks.

Many of you may already be aware of this blog post from  Zoë Keating detailing the new terms of the Google/YouTube “Music Key” service.  YouTube’s “communications manager” Matt McLernon has followed the Spotify approach and attacked Zoë Keating’s story as “patently false” although it looks like Google is not exactly backing up their “communications manager“.

I’m pretty sure that Google is not truthful about their conversation with Zoë–you know Google’s lying when their lips are moving–if for no other reason than I believe Zoë’s notes of her conversation with Google are accurate.  Not to mention that the description of the Music Key deal points from Zoë’s notes shows Google tying the YouTube and Music Key deals together in pretty much the same way as the Music Key deal that Google threatened indie labels with last year.

But I’m not sure if the mainstream press understands the consequences of the way Google has tied together the aggressive and anti-competitive terms of service for Music Key with YouTube.

Here’s how Zoë Keating describes these new terms for Music Key:

“1) All of my catalog must be included in both the free and premium music service. Even if I don’t deliver all my music, because I’m a music partner, anything that a 3rd party uploads with my info in the description [i.e., user generated] will be automatically included in the music service, too [i.e, Google’s Music Key streaming service]. 

2) All songs will be set to “montetize”, meaning there will be ads on them [and the artist has no choice in the matter].

3) I will be required to release new music on Youtube at the same time I release it anywhere else. So no more releasing to my core fans first on Bandcamp and then on iTunes.

4) All my catalog must be uploaded at high resolution, according to Google’s standard which is currently 320 kbps.

5) The contract lasts for 5 years.”

Why is this so terrible?

1)  YouTube allows certain artists and labels with special YouTube accounts to have access to its ContentID system.  ContentID tracks user generated content and allows artists to monetize or block that content in an automated way.  While YouTube creates a whack a mole problem by indiscriminately allowing user generated content to be posted on YouTube, ContentID provides a very imperfect solution to the problem that YouTube created.

This is important because the new terms that are being forced on artists like Zoë ties access to the Content ID system to participation in the new Music Key service.  Artists who refuse to participate in the new Music Key service would lose the ability to “monetize” (i.e. earn revenue) from the use of their songs on YouTube.  Further, artists who reject the Music Key deal would no longer be able to block unauthorized uploads of their music on YouTube–unless the artists track down each upload and send a separate DMCA notice.

What Zoe was told is pretty much exactly what the indie labels were told last year according to Rich Bengloff of A2IM:

Our members have been informed that if they do not sign up to these revised terms, YouTube has given notice to them that YouTube will remove/block our members’ and their artists’ musical repertoire from the entire YouTube service, not just the new audio music streaming service. As YouTube is one of the leading music outlets the effect on our members on the promotion and monetization of their artists will be severe as the premium videos our members create will be blocked and the User Generated Content videos created by consumers using our members artists’ music will cease to be monetized via advertising. Our members will then be forced to engage in the “whack-a-mole” process of getting these non-monetized videos off of YouTube, so as not to detract attention from services that are paying our Independent members, as was not anticipated when Congress enacted the DMCA in 1998.

In other words by saying “no” to Music Key, YouTube will still feature user generated videos on their service AND you won’t get any money.  Think about it. This is like saying “no” to a record deal but results in the label having your songs forever and paying you nothing!   YouTube is EVIL.

2) Because the new terms dictate that ALL your music must be available on YouTube as soon as you release it somewhere else,  there are no more exclusives! Your music cannot appear on the Internet anywhere unless it’s also on YouTube.   Why?  Because YouTube thinks they can use its monopoly position to enforce this tying deal against independent artists.

+++++++++++

On Cracker’s last album Berkeley to Bakersfield, we were able to do interesting cross promotions with our album precisely because we could offer exclusives to various services in different windows.   For instance, we gave Rolling Stone the exclusive rights to stream a song for one week.  In exchange, we were featured on the front page of Rolling Stone Country.  We also cut a deal with Amazon Prime to stream our entire album exclusively for one week in advance of the record release.  In exchange, our album received  favorable promotion and placement  across the entire Amazon service.  Both of these exclusives were key parts of the strategy to promote and sell our new album.   The YouTube Music Key service undermines this exclusivity to block us from exploiting these windows on our next album.

While it’s tempting to see Zoë’s experience as just another way that streaming services are screwing artists, notice that we haven’t even talked about the horrendously low royalty that YouTube pays.  That’s a complaint for another day.

Today, the issue is different.  Google is imposing dangerous anti-competitive moves on artists to screw over the artist’s fans and Google’s competitors.   This move will reduce competition and give artists and consumers less choice.

I believe that this is a dangerous precedent and should be examined by the Federal Trade Commission.  I urge you to write the FTC and ask them to look into this matter.  I understand that you can reach the chair of the FTC at this email address:  hstevenson@ftc.gov

Here’s what I’m writing:

Chairwoman Edith Ramirez and Director Bureau of Competition Deborah L. Feinstein
Federal Trade Commission
600 Pennsylvania Avenue, NW
Washington, DC 20580

Dear Chairwoman Ramirez and Director Feinstein:

I’m writing to call your attention to Google’s anticompetitive business practices described by cellist and independent artist Zoë Keating in her viral blog post What Should I Do About Youtube? that has been reported in The Guardian, Die Zeit, Online, Hypebot, Gizmodo, Forbes, Digital Music News and many other news channels.

Google is using its monopoly market power to force independent artists to grant terms to Google’s “Music Key” service by tying the Music Key to its YouTube video service.  As I’m sure you know, a substantial number of videos on YouTube are music videos and YouTube is the largest video search platform in the world.  By forcing terms onto independent artists, I believe that many artists are being duped into agreeing to terms for the Music Key service that grotesquely favor Google without understanding the implications.

I understand that Google is conducting a whisper campaign with journalists in an attempt to discredit Zoë Keating as was documented in Digital Music News, because she merely questioned the fairness of Google’s terms.

As I understand it, the key anticompetitive terms that Google is attempting to tie to its YouTube service are:

1.  Those artists who fail to submit to Google’s oppressive terms for Music Key will have their produced videos removed from YouTube;

2.  If artists agree to submit to the Music Key terms, Google requires that they give up the valuable property right to exclusively window their releases on different platforms because Google requires that all releases be made simultaneously on YouTube and Music Key with any other service;

3.  All of the artist’s catalog must be set to “monetize” which means that Google can sell advertising against all of the videos whether the artist wants it or not;

4.  If the artist does not submit to Google’s Music Key terms, then user generated videos of the artist’s work will be allowed to play on YouTube while the artist’s produced videos will be blocked from YouTube; and

5.  Artists who do not submit to Google’s terms for MusicKey will be prohibited from using YouTube’s ContentID system so will be forced to rely on the hopelessly outdated DMCA notice and takedown system rather than the automated take down available through ContentID.

Independent artists have no way to take on anticompetitive behavior by Google in the courts.  We rely on the government to force companies like Google to play fair.  I urge you to look into this matter immediately as every day more artists are being duped into signing these unfair deals with no more choice than our fans have to negotiate Google’s onerous privacy policy.

Zoë Keating’s experience is emblematic of all of us and I implore you to listen to her voice.

Thank you.

David Lowery

 

 

Label Direct Deals With Digital Broadcasters Are Dire Threat To Artists’ Sound Exchange Royalties

Unlike terrestrial radio,  since 1998 the satellite radio (now mostly SiriusXM), webcasters and other digital broadcasters pay performance royalties to performers and record labels.  “Performers” in this case are both featured artists, and session players (“non featured artists”).  Normally these royalties are paid directly to performers and labels–separately–through the non-profit entity SoundExchange.   SoundExchange pays  45% of these revenues DIRECTLY to featured artists and 5% to union trust funds for non featured artists.

For featured artists this means no recoupment.  No waiting.  No middlemen, no funky accounting and no funny business.  (Other than a big aside with pre-72, which I’ve written about regarding the Turtles landmark law suit.)

And these digital royalties to performers have been growing quite quickly.  They now represent more than 8% of all recorded music revenues. For performers there are few costs to generate these revenues so the artist’s net profit on SoundExchange payments is probably higher than most other income streams.  SoundExchange royalties truly have been a positive story in a decade of otherwise grim news for performers.

Unfortunately, the law also allows record labels to cut “direct deals”  with digital services outside of SoundExchange.   And in the last couple months that is what we’ve seen. We found out that The Orchard (now part of Sony) cut a direct deal with Sirius.  In November, the large independent label licensing consortium Merlin cut a deal with Pandora.  We’re still looking for the artist signed to any label distributed by The Orchard or a Merlin label that got a heads up about these direct deals, much less asked if they wanted to opt out.  In the case of Merlin labels, somebody–presumably Merlin–negotiated lower royalties  in exchange for Pandora “steering” listeners to Merlin artists.  Never mind that this smells like payola, here’s the real problem:

Labels doing direct deals with digital services for SoundExchange royalties could require the service to pay 100% of the revenue to the label and not pay the performer’s share through SoundExchange–that is, require the digital service to pay the artist’s share directly to the label to be applied against any unrecouped balances.  It’s unclear to me what would happen to the union trust fund payments at least for labels that are not “signatories” to the AFM and SAG-AFTRA collective bargaining agreements.  Even if the label is a signatory, it’s unclear to me which would dictate the rules, the Copyright Act or the collective bargaining agreements.

If the labels take the money, artists would probably get paid at their label royalty rates and not 45% of gross revenue.

As far as I can tell, the labels are not obligated under the Copyright Act to pay artists their share of the SoundExchange royalties without recouping.  It’s even less clear whether labels could take away their contributions to the AFM/SAG-AFTRA Intellectual Property Rights Distribution Fund, but it appears that labels are under no obligation to make those payments, either.

None.

Nada.

Zilch.

They may choose to let SoundExchange keep paying artists directly, but when the dust settles they may also choose not to.  And if the labels choose to take the artist’s share directly, the labels can apply it to any unrecouped royalty accounts regardless of whether the accounts pre-date the existence of the sound recording performance royalty.  The Orchard deal with Sirius and the Merlin deal pay the performers’ share through SoundExchange, but as far as I can tell there’s nothing stopping the labels from changing their minds later on.

So far the labels that have publicly disclosed making direct deals say that they will continue to pay the performers their share through SoundExchange.   So that’s good right?   Sort of.   SoundExchange can deduct its costs from royalties it collects (and I have no beef with SoundExchange on their costs–very low.)  The problem with direct deals is that the label’s share of royalties is outside of SoundExchange, but the performer’s share is not.  This forces the performers to bear the administrative cost when labels do not.

Another problem with direct deals is that SoundExchange are unlikely to be able to audit the digital broadcasters on behalf of performers.   And since the performers are not party to the direct deal they wouldn’t have any rights to audit either. Even if performers could audit that’s an enormous burden to transfer to individual performers.

So performers would have to rely on the record labels to do the auditing, and frankly this scares me.  The very fact that labels are cutting payola-like direct deals with digital broadcasters is a sign that they are cozying up.

SoundExchange also has reciprocal agreements with their counterparts in other countries. It’s not clear how performers will then collect their foreign royalties if their labels cut direct deals.  Would they have to collect directly?  Would SoundExchange still be able to collect. There is a good chance that performers might lose some foreign royalties as a result.

Clearly this is not gonna end well for performers.  But frankly I don’t think it’s gonna end well for labels either. Why?  these direct deals are already being used in attempts to lower ALL digital royalties at royalty board hearings.  That hurts the labels as well.

After the streaming math fiasco I’m not optimistic labels are gonna figure out that these deals are  bad for them until it’s too late.  To put it mildly labels do not appear to be engaging in much long-term thinking these days.  And the digital broadcasters have been  playing the labels like a cheap violin.

As usual it looks like it is up to the performers to do the critical thinking and to try set this straight.  We need to fight this. Now.

Perhaps we need to amend the law to prevent labels from direct licensing the performers share of digital broadcast royalties. If labels want to direct license and take a lower rate for their share let them.  But don’t let them get their hands on our royalties.

 Respect Act II? anyone?

 To summarize:

Benefits to performers from SoundExchange:

  • Performers paid directly
  • Not Recoupable
  • Independent performers get same deal as major label performers
  • SoundExchange audits on behalf of all performers
  • Payola-like deals not allowed
  • SoundExchange collects foreign royalties for performers
  • Collective bargaining increases leverage with broadcasters

Dangers to Performers under direct deal.

  • Labels under no obligation to pass through the performers digital royalties.
  • Labels could apply royalties to un-recouped balances
  • Independent performers could get lower rates than major label performers
  • Performers lose ability to audit digital broadcasters
  • Payola type deals shut out independent performers
  • Potential loss of foreign revenue
  • Performers are burdened with entire administrative overhead of compulsory license system.
  • Fragmented bargaining decreases leverage with broadcasters