Trichordist readers will recall our many posts about how Google uses search to drive traffic to unlicensed sites where Google Adsense or Doubleclick serves the advertising that keeps the illegal site operating.  And turns a nice profit for Google.  This is the principal way Google profits from piracy as far as we can tell.

Today there’s a story in the BBC about Google’s latest charm offensive to try to demonstrate to the world–or at least to the European Commission antitrust regulators–that far from profiting from piracy, Google actually fights piracy.

This is, of course, utter bullshit.  We’re not going to go through the whole song and dance again, but take a look at this screen shot showing Google’s Doubleclick serving an ad to Grooveshark.  That would be the adjudicated infringer Grooveshark:

Here’s what Google told the BBC:

Google has announced changes to its search engine in an attempt to curb online piracy.

The company has long been criticised for enabling people to find sites to download entertainment illegally.

The entertainment industry has argued that illegal sites should be “demoted” in search results.

The new measures, mostly welcomed by music trade group the BPI, will instead point users towards legal alternatives such as Spotify [Google is on the Spotify board so presumably owns shares in Spotify] and Google Play [aka the Genco Pura Olive Oil Company 2.0].

Google will now list these legal services in a box at the top of the search results, as well as in a box on the right-hand side of the page.

Crucially, however, these will be adverts – meaning if legal sites want to appear there, they will need to pay Google for the placement.

The BPI said that while it was “broadly” pleased with Google’s changes, it did not think sites should have to pay.

“There should be no cost when it comes to serving consumers with results for legal services,” a spokesman told the BBC.

Well, allow us to retort:

This is a motherfucking shakedown.

We suspect that’s a more accurate assessment of what the BPI was probably thinking but felt constrained to say.

Combine this with thursdays Digital Music News story and we can only conclude:

Google drives traffic to illegal sites while forcing legitimate sites to pay!  How is this good news?

 

Pandora executives are still prancing around cashing out stock options while telling their stockholders that they are intentionally stiffing American artists on recordings released after 1972–well…sort of telling their stockholders.  If their stockholders are also copyright experts.  Because what Pandora doesn’t tell their stockholders is that not only is Pandora not paying royalties, Pandora’s position actually acknowledges that Pandora is still exploiting these pre-72 recordings without any rights.  This is exceptionally bizarre because if Pandora just paid the statutory webcasting royalties under the U.S. Copyright Act, they would at least have a fig leaf that they actually had some kind of license.  

By saying that the recordings are not subject to the compulsory license like all the other recordings Pandora exploits, they essentially have no license for the pre-72 recordings (but do have the compulsory license for the post-72 recordings).  So then they have to prove that when the Congress created the statutory license for webcasting and the royalty system for royalty payments, the Congress actually intended to exclude all sound recordings before 1972.  (The magic of 1972 is that is the year that the Congress first included sound recordings in the federal Copyright Act–sound recordings previously were covered by “common law copyright” not no copyright.)

According to Pandora’s latest Form 10-Q:

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.

The outcome of any litigation is inherently uncertain. Based on our current knowledge we believe that the final outcome of the matters discussed above will not likely, individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations or cash flows; however, in light of the uncertainties involved in such matters, there can be no assurance that the outcome of each case or the costs of litigation, regardless of outcome, will not have a material adverse effect on our business. In particular, rate court proceedings could take years to complete, could be very costly and may result in royalty rates that are materially less favorable than rates we currently pay.

This risk factor is actually misleading–not only is Pandora being sued for money, the lawsuit also asks for the court to order Pandora to stop exploiting the pre-72 recordings altogether:

A preliminary and permanent injunction preventing, enjoining, and restraining Pandora and its respective agents, servants, directors, officers, principals, employees, representatives, subsidiaries and affiliated companies, successors, assigns, and those acting in concert with them or at their direction, from directly or indirectly infringing in any manner any right in any and all Pre-72 Recordings in which any Plaintiff owns or controls an exclusive right under statutory or common law, including without limitation by directly or indirectly reproducing and digitally publicly performing any of Plaintiffs’ Pre-72 Recordings….

Don’t you think that Pandora should have told their stockholders that they might actually lose the right to use pre-72 recordings altogether?

Now what is interesting about this is that Pandora chooses to take a position that hurts artists (and union players and singers) whose performances are on pre-72 recordings based on this arbitrary cut off date.  Somehow they seem to think that a recent Copyright Office study supports Pandora’s decision to screw artists.  Here’s what the Copyright Office actually said (on p. 129-130):

In reviewing the potential application of section 114 [Pandora’s compulsory license] to pre-1972 sound recordings, the [Copyright] Office believes that section 114’s statutory royalty requirements should apply to nonexempt, noninteractive digital transmissions of those recordings [meaning Pandora], thereby providing an additional revenue stream for older artists and works….The [Copyright] Office thinks it is unreasonable for the age of a sound recording to dictate whether royalties are paid on public performances by means of digital audio transmissions, so long as copyright subsists in that sound recording. Bringing pre-1972 sound recordings within the scope of federal protection would subject them to the statutory license and provide online music services with an easy means to offer lawful public performances of those recordings while offering copyright owners and performers a reliable new source of income.

What Pandora’s Chris Harrison (or “Artist Enemy Number 1” as he is known around the Trichordist) says about the lawsuit is that Pandora favors something called “full federalization” of the pre-72 sound recordings (or “the entire history of recorded music” as it is known around the Trichordist).

Harrison says that Congress made the decision not to include pre-72 recordings when it created the digital performance right for sound recordings in 1995.  We think this is actually false–many of the members of Congress who were on the House Judiciary Committee in 1995 are still on the committee, and none of them have acknowledged that it was a conscious decision of the Congress to exclude pre-72 recordings.  However, we’re looking forward to the conga line of congressmen linking up to take ownership of the decision to stiff old guys and dead cats and their heirs from webcasting royalties like Harrison wants to do.

Because…think about it.  Even if you were the man who fell to freaking Earth, would anyone in their right mind think that American elected officials would create a legal goodie in the form of a statutory royalty–which is actually fair compensation for rights the law takes away from artists and copyright owners in the compulsory license that is necessary to avoid a “taking” under the 5th Amendment–but these American officials would say but not for thee?  You American artists who gave the world the rich history of blues, jazz, rock, R&B before 1972, nothing for you, sorry.  That’s not only insane, it explains why there’s no legislative history evidence supporting Pandora’s position.

Harrison also equivocates when it comes to acknowledging this thievery:  “We’ll still pay the songwriter”.  Not the question being asked.  But Harrison tells us that the loophole is Congress’s fault.  No, it’s actually Pandora’s fault–they were paying until Harrison arrived on the scene.  We wonder what the confluence of these two events have to do with each other.  The reason that the RESPECT Act was introduced–which Pandora opposes–was to clarify this loophole, or the “Pandora loophole” as it’s known.  The RESPECT Act is really just a technical amendment and shouldn’t be opposed by anyone.

Yet Pandora rejects the RESPECT Act in favor of “full federalization” of sound recordings.  Why is this?  We think that this is one of those ice in winter situations where somebody dreams up a problem that they try to convince you that you somehow have, then wants you to give up something real in order to get them to relent.  Bullies are exceptionally good at this when they are holding on to your lunch money.  All you have to do is lick their boots and they promise to give your lunch money right back to you because they’re really only thinking of your nutritional well being.

The reasons Harrison gives for Pandora’s position start with the RESPECT Act unfairly targeting Internet radio, because Internet radio is the only one who would pay more.  If the RESPECT Act just included terrestrial radio, then that would be all better.  (That’s using the term “reason” rather loosely.)

This, of course, is the usual fallacious crap we hear from Harrison and Pandora.  The point of the RESPECT Act as told by the bill’s author Rep. Holding is a “rifle shot” solution to fix the the problem with the digital performance royalty that Pandora has created–to fix the Pandora loophole.  It has nothing to do with terrestrial radio–just like the 1995 change that created the digital performance right had nothing to do with terrestrial radio.

That’s the point.  So for Harrison to say that the problem is that the RESPECT Act only deals with Internet radio is like saying the antibiotic your doctor prescribed only dealt with the infection you have today, not the limp from the broken leg you got 10 years ago.

Harrison says that Pandora wants this full-federalization thingy for the protections built into the Copyright Act for copyright users like fair use, the ability of libraries to keep archival copies, rights of termination of transfers for artists–and of course the DMCA safe harbors.

The only problem with this list of supposedly high minded and pure souled desires of Pandora is that none of the issues Harrison identifies have anything to do with Pandora.  Pandora doesn’t rely on fair use because they get a statutory license, they’re not a library, they have proven quite unequivocally that they don’t give a rats ass about artists and songwriters, and they don’t rely on the DMCA.

Which is the revealing part–because you know who does care about most of that list?

Google cares.  This is why Pandora’s position on “full federalization” makes more sense as the position of the Digital Media Association.  Pandora’s “full federalization” position requires Pandora to take on considerable risk that is not in the interest of Pandora’s stockholders, especially compared to the ill-will, lawsuits and infringement exposure for Pandora stockholders from the decision by Harrison to stiff the old guys and the dead cats and their heirs–like Duke Ellington, The Beatles, Louis Armstrong, Roy Orbison, Johnny Winter and The McCoys.  The dominant member of the DiMA is–Google.  And Google robs artists every day with ad-sponsored piracy alone.  Not to mention the incompetent CMS and Content ID.  This smells like inside Washington back scratching to us.

And Google controls all the advertising on Pandora through DoubleClick thanks to the Antitrust Division of the Department of Justice that permitted the Google’s acquisition of DoubleClick–which gives Google such leverage over Pandora that Doubleclick has its own risk factor in Pandora’s SEC filings:

 We rely upon an agreement with DoubleClick, which is owned by Google, for delivering and monitoring our ads. Failure to renew the agreement on favorable terms, or termination of the agreement, could adversely affect our business.

We use DoubleClick’s ad-serving platform to deliver and monitor ads for our service. There can be no assurance that our agreement with DoubleClick, which is owned by Google, will be extended or renewed upon expiration, that we will be able to extend or renew our agreement with DoubleClick on terms and conditions favorable to us or that we could identify another alternative vendor to take its place. Our agreement with DoubleClick also allows DoubleClick to terminate our relationship before the expiration of the agreement on the occurrence of certain events, including material breach of the agreement by us, and to suspend provision of the services if DoubleClick determines that our use of its service violates certain security, technology or content standards.

If we’re wrong about this, we are looking forward to Chris Harrison’s explanation of exactly why all these “full federalization” issues are in the best interests of Pandora stockholders, particularly when compared to the potential downside of being found an intentional infringer under common law copyright, unfair competition and possibly some state criminal statutes.

But he can leave out his hearts and roses serenade about how much he cares about artists and songwriters getting the termination right for common law copyrights.  We can take care of ourselves without his “help” thank you very much.

“All animals are equal, but some animals are more equal than others.”

Napoleon in Animal Farm by George Orwell

The U.S. Copyright Office has raised a relevant question in its request for comments on music licensing:

Please address possible methods for enhancing transparency in the reporting of usage, payment, and distribution data by licensees, record labels, music publishers, and collective licensing entities, including disclosure of non-usage-based forms of compensation (e.g., [1] advances against future royalty payments and [2] equity shares).

Many artists and indie labels are probably not even aware that some deals they are being asked to opt-in for have some hidden economics that make the deal better, and often much better, for some artists or labels than others.  We first noticed this underhanded approach in the DMX-type deals where companies like DMX paid early adopters to take a low royalty in return for a big advance that may have been non recoupable.  Then they hold out that low royalty as an MFN type rate to others without disclosing the advance paid to the early adopters.  We’ve seen it perpetuated in the Spotify deals and maybe some other recently announced licensing deals.

Why is this a problem?  Because it’s not formally disclosed to the less equal animals, and sometimes it hides behind the NDA culture that Google has introduced into the music business.  It’s also a problem because those who need the money most are paid the least.

This is different than the “I’ll give you some stock if you say something nice about me to your friends” deals that we see all the time.  Those are corrupt for a different reason, the same reason that payola is against the law on radio and TV (and we all know how much Pandora wants to be treated like a radio station and YouTube thinks they’ve replaced TV).  Be careful what you wish for.

Thankfully, the U.S. Copyright Office is now focused on these under the table payments as a matter of public policy and we commend them for that stance.

Digital Music News has done a great job of surfacing this issue of the inequity of equity.  As Paul Resnikoff reported (How Streaming Services are Screwing Lady Gaga (and Every Other Artist), there are clauses in artist agreements, even highly negotiated ones, that deny artists a share of advances that are made for a label’s entire catalog in a clause like this one that Paul posted:

Focus closely on what this clause actually says:  If the label gets “payments…pursuant to any blanket licenses” for the label’s catalog, the artist–the one whose contract it is–doesn’t get any of those “payments.”  Paul uses this clause to attack the equity that labels got in streaming services.  He’s kind of right, but not for the reason you might think.

This clause is a very old concept in record deals and it has a legitimate above the table rationale and also a below the table one.  If a label makes a distribution deal for a blanket license of their entire catalog they typically negotiate a minimum guarantee, sometimes called an “advance”, against revenues that come in for their catalog during the life of that distribution deal.  The minimum guarantee is paid up front by the distributor, so it is a kind of bet by the distributor that the catalog will produce enough money to recover (or “recoup”) the minimum guarantee from royalties otherwise payable to the licensing label.  (Leave aside for the moment whether this is a “license” or a distribution deal for sales–see the Eminem litigation.)

That advance earns out over time depending on how the label’s catalog sells.  Advances are typically “recoupable but nonreturnable.”  The advance is recoupable, i.e., applied against the label’s share of the catalog’s sales during the distribution term.  The advance is “nonreturnable” meaning it doesn’t have to be paid back if the label’s share of revenues during the deal don’t equal or exceed the amount of the advance.  If the label is “unrecouped” at the end of the deal, the label keeps that delta.

Example:  Label X gets an advance of $100 from Distributor Y for the country of Airstrip One.  The deal lasts 5 years.  At the end of 5 years, Label X’s catalog has earned $90.  Distributor Y just sends royalty statements to Label X showing an unrecouped balance and doesn’t have to pay the $90-because Label X has already had it in the form of the advance.  If the deal is still unrecouped when it ends–meaning Label X got a bigger advance than it earned–then Label X keeps the extra $10.

From Label X’s point of view, Label X still has to pay its artists their royalties for the $90 of sales.  Say Label X has three artists, Hear, See and Speak.  Assume that artist Hear earns $85, See earns $5 and Speak has no sales.  (It’s actually more complicated because the artists will get less than 100% of the money, but leave that aside.)

The advance, then, is a kind of bet that Distributor Y makes on the Label X catalog.  It’s paid in cash and it’s paid up front, like ante.  Because that advance is a payment against actual future sales, there’s really no fair way to divide it up among the artists on the day that the deal is done, that is, before there are any sales.

This is the reason that you get for why this clause is in there.  That’s the “above the table” reason.

Here’s the “below the table” reason.  What if Label X was very valuable to Distributor Y, either because it was a huge catalog without which Distributor Y wouldn’t really have much of a business, or it was just a very hit-rich catalog and was likely to continue to be valuable to Distributor Y in Airstrip One.  Label X could very easily say to Distributor Y, you know that $100?  I have to share that with my artists.  How about you pay me $20 of that flat and just give me an $80 advance?  Meaning–Distributor Y pays Label X $20 on a nonrecoupable basis (“flat”) and Label X puts that money in its pocket.  And because it’s a “payment” for the blanket license, the label doesn’t have to share it with any artist.

Is it fair?  Is a nonrecoupable payment just a way to get a higher royalty or revenue share for the label?  That depends on how you look at it, but one thing that is certain is that the reason that the label is able to get this nonrecoupable payment is because of the value of the catalog.  That value is a mix of the work product of the label’s investment in the artist, but it’s also partly the value of the present and future work product of the artists.  And you won’t be surprised to know that we think it’s largely the work product of the artists.

Consider another aspect of the same example.  If the deal with Distributor Y is a true license, most of the time the revenue is split 50/50 with the artist (this is what the Eminem case was all about.)  However that advance earns out, you can see that if there is a portion of the money that is nonrecoupable, the nonrecoupable part is not shared with the artist.  Distributor Y will still have to pay Label X for sales occurring after the advance part is recouped, so it’s not like the artists are not getting paid for their sales.  (Assuming that Label X is accounting properly.)  There’s just a chunk of cash that never hits the artist royalty statement because it is paid directly to Label X as what some might call a vig.

The practice has been that when the label leverages the work product of their artists to get a payment for the label that they don’t share, they trot out this clause that Paul has found as the justification.  It’s still often kind of revenue neutral for the individual artists, it’s not like the label said give me this money and underreport sales, or give me this money and I won’t audit you.  Well…maybe they did say I won’t audit you.  But from the artist perspective the deal should be revenue neutral.

Now consider the same facts, but in addition to the nonrecoupable payment, Label X also demands shares of stock in Distributor Y.  Distributor Y says hold on there–I already gave you the nonrecoupable payment and you want stock, too?  What are you giving me for the stock?  Hmmm….who is not at the table here?  Let’s take their money.  So the label says sure, if you give me stock and a nonrecoupable payment, I will let you [increase your distribution fee/decrease the royalty base price/decrease the net sales on which the artist royalty is calculated/increase the reserves that are never liquidated] that determines the royalty I have to pay to the artist.  But only by a believable amount.  Say 10-20%.  This works particularly well in places like say Venezuela, China or Cambodia.  Or on the Internet.  Any place no one expects to get a decent accounting.  Or feels lucky to get any payment at all due to rampant piracy.  (Remember the three legged stool from Old Boss, New Boss.)

Why does this happen?  Because if you are not at the table, you are on the menu.

Back to Lady Gaga’s contract.  Do you think that this clause also covers stock that was extracted in return for a lower royalty rate?  In other words, what if the clause that Paul quotes ended with “in return for lowering your royalty rate to an abysmal and unsustainable level while your label gets rich beyond their wildest dreams”?  Or even if it said “payments in cash, shares of stock or other securities or other things of value”?  How do you think that would go down with the artist’s representative?

Another part of the vig is what happens at the end of Distributor Y’s contract if Label X is unrecouped.  Frequently, Distributor Y is allowed to extend the term under some conditions to try to recoup the unrecouped balance.  This doesn’t go on forever but it might be another 6 months or a year.  In the land of Internet where the living is easy, the fish are jumpin’ and the cotton is high, when the deal is over, the unrecouped balance often is not rolled into additional time on the contract.  Instead, the term is renegotiated and a new advance is paid for a new deal.  This pocketing of the unrecouped balance is sometimes called “breakage.”  Does Label X share the breakage with their artists?

What do you think?

If this is just a miscalculation by Distributor Y, that’s one thing.  If, on the other hand, Distributor Y for the Land of the Internet overpays the advance by what anyone would find to be an amount that is highly unlikely to recoup, and also has a crappy accounting system so that the accountings that Label X will use to account to their artists underreports sales–like reducing the percentage of net sales in the physical world–who benefits?  If Label X gets a big enough nonrecoupable payment, high enough breakage and enough shares of stock in a company that is likely to go public or have a big exit–while still making most of its current revenue from sources other than the Land of the Internet–do they really care that much?  Particularly if they distribute some of those shares of stock to Label X executives to hold personally?  Who’s going to complain?

If you’re not at the table, you are on the menu.

Of course if Label X lacks market power, it is unlikely that Label X will be able to extract any of these vigs.  And this leads us to the indie labels’ claims against YouTube.

To Be Continued.

You’ve all been following YouTube’s absolutely tone deaf “take it or leave it” brinksmanship strategy with indie labels represented by Merlin and WIN.  This one sided “negotiation” appears to still be grinding on.  Why would it take so long?  Why wouldn’t YouTube simply say, we’ll treat you like everyone else and close up the problem.

So what is Google’s next move to calm the waters?  Google buys its way onto the Spotify board and the Spotify board allowed them to do it.

If we ever needed proof that Spotify intends to keep screwing artists and songwriters, we just got that confirmation.  Without so much as blinking an eye, Spotify embraces Google like a long lost brother returning to the family.  Whether this is just the first step toward Google buying Spotify or a step toward a “powered by Spotify” Google music service will be told in the future.

But what we definitely know is that two companies have joined together to pursue their common goal of paying minuscule royalties to songwriters and artists.

By welcoming Google onto its board, Spotify has lost the last shred of a fig leaf for screwing artists and songwriters.  With Spotify, you just get reamed because the deals are awful and you’ll never participate in any of the stock that Spotify gave to major labels and their senior executives (and probably some select superstars).   These under the table advances and equity shares in exchange for lower royalties are so bad that even the U.S. Copyright Office has raised it as a concern!

But with Google you get reamed because the royalty rates are absurdly miniscule when paid by Google’s legitimate front businesses like YouTube and are actually negative when you take into account the pirate sites Google profits from through its unscrupulous AdSense business.

Doesn’t Spotify have enough artist relations problems without adding Google to the list?

Not if Google writes a big enough check!  There’s a couple ways that Google could invest in Spotify.  They could buy newly issued shares (probably in a new series of preferred stock) OR…Google could buy existing shares from existing stockholders.  For example, if you were an executive of a major label who had gotten Spotify stock and you were thinking of “pulling a Jimmy” and getting some island money, one way you could do it would be to sell your shares to Google (sometimes called a “selling stockholder”).

But whatever happened, Spotify has now embraced the pariah of the music business.  Google is on their board, votes on everything the board votes on, including royalty rates, under the table money, the works.

Not only that, but why would Google allow Spotify to renew their deals through the Harry Fox Agency when Google owns Rightsflow?

If Spotify had artist and writer relations problems before, that’s nothing compared to what they’re going to have.