Great reporting on the frozen mechanicals debacle at the Copyright Royalty Board by Tim Ingham in Music Business Worldwide. It’s in-depth and really covers all the issue in this must-read explainer!
It was a big week for songwriters last week! The Copyright Royalty Judges rejected the frozen mechanicals settlement put forward by the majors in the current rate-setting proceeding at the Copyright Royalty Board thanks in part to the best audience in the world–that would be you! All that hammering on the issue paid off.
We also acknowledge the hard work of all the commenters who spoke straight from the heart and of course songwriter George Johnson who has been fighting the good fight in the Copyright Royalty Board all by himself for years now. We’re also very grateful to the Judges for a well-thought out ruling and a thorough vetting of the issues, George’s many filings and the songwriter public comments.
The question we’ve heard a lot in recent days is where do we go from here? Clearly the answer is “Up” but how far up is the question. We need to be mindful of the economic impact that increased rates will have on independent labels in particular, but at the same time acknowledge that all record companies have gotten the benefit of frozen rates for 16 years and that songwriters have taken it in the shorts for a long, long time.
The Judges seem to be hinting at a deal in their ruling (remembering this is the rate for physical and downloads only (called “Subpart B rates”) and not for Spotify-type streaming which is not affected by these rate changes). Here’s the relevant quote from the ruling:
Commenters advocated application of an inflation adjustment beginning, at a minimum, in 2006. See, e.g. [Songwriters Guild of America] Comments at 4; [Monica] Corton Comments at 4; [Kevin] Casini Comments at 4. According to the proponents of a cost of living adjustment (COLA) applied to the 2006 rates, that adjustment would yield a 2021 royalty rate of $ 0.12 (an upward 31.9% inflation adjustment over the sixteen-year period). See, e.g., SGA Comments at 4. SGA conceded that the COLA extrapolation cannot be considered dispositive on the issue of new rate-setting, but they contended that it does “starkly demonstrate the outrageous unfairness that has been imposed on the music creator community over a period of more than an entire century.”
Step one, then, could be to increase the minimum statutory rate to 12¢ (or 13¢ depending on how you do the math) with customary adjustments for the “long song” formula for songs over 5 minutes.
That increase in the rate would be significant and probably the biggest rate increase ever on a percentage basis for the statutory rate. Will that satisfy everyone? Probably not, but it’s a step forward.
But–and this is a big but–that’s not the end of the story. We do not want to be right back in the same position in a few years time. One way to avoid this is to increase the new rate for inflation every 12 months (called “indexing”) the same way that the webcasting rates are indexed for sound recordings.
The Judges also hint at indexing as a potential solution to avoid just another rate freeze:
[George Johnson] has long advocated inclusion of an inflation index in royalty rates set by the Judges, including the…rates at issue here. In support of his advocacy, GEO has filed 27 pleadings, including motions seeking imposition of an inflation index on section 115 rates and periodic notices of U.S. inflation rates. His plea is bolstered by the many commenters who, almost unanimously, included this suggestion.
So the way this would work is that starting in 2023, the current 9.1¢ rate would be increased to 12¢. After 12 months, the rate would be increased by the Consumer Price Index (the CPI-U rate) for each 12 month period until 2027 when new rates would get decided by the CRB in the next rate proceeding (Phonorecords V). Example: If the CPI is 10%, then the minimum statutory rate would increase to 13.2¢ for the next 12 months. If the CPI in the second year was also 10%, then the 13.2¢ rate would be increased to 14.52¢ and so on until the last year of the period (2027). (Of course we can’t tell today what the CPI will be in 2023.)
Given the Judge’s rejection of the frozen rates, it is very doubtful that there will ever be another freeze, but we have to stay alert and vocal. When the new rates come up, we all have to pay attention.
It’s important to remember that “indexing” to inflation just preserves buying power. Meaning that 12¢ today is what 9.1¢ was worth in 2006. Would it be the fair thing to index all the way back to 1909? Sure, but while the Judges hint at going back further (the “at a minimum” reference), the Judges may not be inclined to go further back than 2006 when the current freeze started, but we’ll see what happens.
We’d be very interested in hearing from you with any questions you have or other ideas for solutions. Obviously, this post is just sharing ideas with our audience and isn’t a formal statement by any particular person or group. There may be a number of proposals coming out and we’ll of course post them on Trichordist.
It must also be said that George Johnson has yet to weigh in on the situation and may very well have a different idea. There’s also some twists and turns to sort out, such as the black box “MOU” (the fourth of its name) but especially the controlled compositions rates that the Judges discussed in some detail (as Judge Barnett said, “The disparity between the static rate and the dynamic market is even more stark when considering the “controlled composition clause.””).
In any event, feel free to comment and we welcome the discussion.
By Chris Castle
We’ve all heard the talking points from Big Radio’s shillery the National Association of Broadcasters about how it’s perfectly fine for American radio stations to deny recording artists and session musicians fair compensation–because exposure, don’t you know. Big radio delivers huge audiences for music and we should all be grateful and work for free for the ever-more-consolidated broadcasting industry.
The other talking point we don’t hear so much from these characters is that media ownership rules are bad and that greater and greater concentration of influence and wealth to control the public airwaves is good. That’s right, it’s not the corporate airwaves, it’s the public’s airwaves. But you wouldn’t know that by looking, right?
So the latest version of this “bigger is better” guff is happening right now at the Federal Communications Commission that licenses radio stations. The NAB is poormouthing to the FCC about how radio and TV stations have trouble competing with Google and Facebook (in particular) for advertising. Oh, no. Google is grinding them into bits? Say it ain’t so!
We know a little bit about what it’s like to have soulless Silicon Valley oligarchs using their political and financial muscle to get a free pass to jack with your livelihood without repercussions from the guys with badges. If Big Tech is really the problem for Big Radio, I’m sure there would be some support for going after them together. But playing nice with others would require the soulless media oligarchs to stop acting like wankers and make a fair deal for artists and musicians. That is not happening. No, no, the solution to the broadcasters’ Google problem is to relax media ownership rules for even MORE concentrated radio ownership, you see. Plus these monopolists want an antitrust exemption for which they have presented no evidence other than even more shillery.
But see what they did there? MusicFirst certainly did and wrote to the FCC to make sure the FCC did, too (letter is here):
The National Association of Broadcasters, in seeking relaxed broadcast radio ownership rules, is asking the FCC to accept arguments directly contrary to those it makes in opposing the American Music Fairness Act.
In fighting the AMFA, the NAB continues to claim airplay has “promotional value” that eliminates the need for radio broadcasters to pay recording artists for the music the stations use to derive millions of advertising dollars. The promotion argument has never been a valid justification for refusing to pay musicians. Such a rationale could swallow all of copyright, as any use of content can be called “promotional.” But even the NAB’s own arguments before the FCC are showing the flaws with its promotion claim.
For example, the NAB argues in this proceeding that radio broadcasters need increased economies of scale to compensate for the significant audience share broadcast radio has lost. Yet, if radio broadcasters have lost so much audience share that they need government intervention, the promotional value they claim to provide recording artists cannot be adequate compensation.
The NAB also applies the promotion claim inconsistently. In addition to its argument about loss of broadcast radio audience, the NAB alleges here that broadcasters need increased economies of scale because online platforms refuse to fairly compensate broadcasters for content the platforms use to derive advertising revenue. The NAB is similarly arguing that platforms’ inadequate compensation warrants passage of the Journalism Competition and Preservation Act [the antitrust exemption for monopolists].
The musicFIRST Coalition agrees with the NAB that distributors should adequately compensate content providers. But what is good for the goose must be good for the gander. Online distribution of broadcaster content can also be claimed to be promotional. If the NAB finds inadequate the combination of online promotion and the money online platforms do pay broadcasters, the alleged value of broadcast radio promotion combined with the lack of any money the radio broadcasters pay recording artists cannot possibly be adequate.
The shills at the NAB should try being reasonable just once instead of doing their usual blunt force trauma. Here’s the reality: Nobody is buying what they’re selling because it’s just more snake oil.
This is the third of a three part post on Spotify’s failure to qualify as an “ESG” stock.
[This is an extension of Spotify’s ESG Fail: Environment and Spotify’s ESG Fail: Social. “ESG” is a Wall Street acronym often attributed to Larry Finkat Blackrock that designates a company as suitable for socially conscious investing based on its “Environmental, Social and Governance” business practices. See the Upright Net Impact data model on Spotify’s sustainability score. As of this writing, the last update of Spotify’s Net Impact score was before the Neil Young scandal.]
Spotify has one big governance problem that permeates its governance like a putrid miasma in the abattoir: “Dual-class stock” sometimes referred to as “supervoting” stock. If you’ve never heard the term, buckle up. I wrote an extensive post on this subject for the New York Daily News that you may find interesting.
Dual class stock allows the holders of those shares–invariably the founders of the public company when it was a private company–to control all votes and control all board seats. Frequently this is accomplished by giving the founders a special class of stock that provides 10 votes for every share or something along those lines. The intention is to give the founders dead hand control over their startup in a kind of corporate reproductive right so that no one can interfere with their vision as envoys of innovation sent by the Gods of the Transhuman Singularity. You know, because technology.
Google was one of the first Silicon Valley startups to adopt this capitalization structure and it is consistent with the Silicon Valley venture capital investor belief in infitilism and the Peter Pan syndrome so that the little children may guide us. The problem is that supervoting stock is forever, well after the founders are bald and porky despite their at-home beach volleyball courts and warmed bidets.
Spotify, Facebook and Google each have a problem with “dual class” stock capitalizations. Because regulators allow these companies to operate with this structure favoring insiders, the already concentrated streaming music industry is largely controlled by Daniel Ek, Sergey Brin, Larry Page and Mark Zuckerberg. (While Amazon and Apple lack the dual class stock structure, Jeff Bezos has an outsized influence over both streaming and physical carriers. Apple’s influence is far more muted given their refusal to implement payola-driven algorithmic enterprise playlist placement for selection and rotation of music and their concentration on music playback hardware.)
The voting power of Ek, Brin, Page and Zuckerberg in their respective companies makes shareholder votes candidates for the least suspenseful events in commercial history. However, based on market share, Spotify essentially controls the music streaming business. Let’s consider some of the implications for competition of this disfavored capitalization technique.
Commissioner Robert Jackson, formerly of the U.S. Securities and Exchange Commission, summed up the problem:
“[D]ual class” voting typically involves capitalization structures that contain two or more classes of shares—one of which has significantly more voting power than the other. That’s distinct from the more common single-class structure, which gives shareholders equal equity and voting power. In a dual-class structure, public shareholders receive shares with one vote per share, while insiders receive shares that empower them with multiple votes. And some firms [Snap, Inc. and Google Class B shares] have recently issued shares that give ordinary public investors no vote at all.
For most of the modern history of American equity markets, the New York Stock Exchange did not list companies with dual-class voting. That’s because the Exchange’s commitment to corporate democracy and accountability dates back to before the Great Depression. But in the midst of the takeover battles of the 1980s, corporate insiders “who saw their firms as being vulnerable to takeovers began lobbying [the exchanges] to liberalize their rules on shareholder voting rights.” Facing pressure from corporate management and fellow exchanges, the NYSE reversed course, and today permits firms to go public with structures that were once prohibited.
Spotify is the dominant streaming firm and the voting power of Spotify stockholders is concentrated in two men: Daniel Ek and Martin Lorentzon. Transitively, those two men literally control the music streaming sector through their voting shares, are extending their horizontal reach into the rapidly consolidating podcasting business and aspire soon to enter the audiobooks vertical. Where do they get the money is a question on every artists lips after hearing the Spotify poormouthing and seeing their royalty statements.
The effects of that control may be subtle; for example, Spotify engages in multi-billion dollar stock buybacks and debt offerings, but has yet makes ever more spectacular losses while refusing to exercise pricing power.
So yes, Spotify is starting to look like the kind of Potemkin Village that investment bankers love because they see oodles of the one thing that matters: Fees.
On the political side, let’s see what the company’s campaign contributions tell us:
Spotify has also made a habit out of hiring away government regulators like Regan Smith, the former General Counsel and Associate Register of the US Copyright Office who joined Spotify as head of US public policy (a euphemism for bag person) after drafting all of the regulations for the Mechanical Licensing Collective;
Whether this is enough to trip Spotify up on the abuse of political contributions I don’t know, but the revolving door part certainly does call into question Spotify’s ethics.
It does seem that these are the kinds of facts that should be taken into account when determining Spotify’s ESG score. At this point, it looks like Spotify is an ESG fail–which may require divesting by some of the over 600 mutual funds that hold shares.
By Chris Castle
[This post first appeared on MusicTechSolutions.]
[This post is Part 2 of a three part post on Spotify’s ESG Fail, and is an extension of Spotify’s ESG Fail: Environment. “ESG” is a Wall Street acronym often attributed to Larry Fink at Blackrock that designates a company as suitable for socially conscious investing based on its “Environmental, Social and Governance” business practices. See the Upright Net Impact data model on Spotify’s sustainability score. As of this writing, the last update of Spotify’s Net Impact score was before the Neil Young scandal.]
I started to write this post in the pre-Neil Young era and I almost feel like I could stop with the title. But there’s a lot more to it, so let’s look at the many ways Spotify is a fail on the Social part of ESG.
Before Spotify’s Joe Rogan problem, Spotify had both an ethical supply chain problem and a “fair wage” problem on the music side of its business, which for this post we will limit to fair compensation to its ultimate vendors being artists and songwriters. In fact, Spotify is an example to music-tech entrepreneurs of how not to conduct their business.
Treatment of Songwriters
On the songwriter side of the house, let’s not fall into the mudslinging that is going on over the appeal by Spotify (among others) of the Copyright Royalty Board’s ruling in the mechanical royalty rate setting proceeding known as Phonorecords III. Yes, it’s true that streaming screws songwriters even worse that artists, but not only because Spotify exercised its right of appeal of the Phonorecords III case that was pending during the extensive negotiations of Title I of the Music Modernization Act. (Title I is the whole debacle of the Mechanical Licensing Collective scam and the retroactive copyright infringement safe harbor currently being litigated on Constitutional grounds.)
The main reason that Spotify had the right to appeal available to it after passing the MMA was because the negotiators of Title I didn’t get all of the services to give up their appeal right (called a “waiver”) as a condition of getting the substantial giveaways in the MMA. A waiver would have been entirely appropriate given all the goodies that songwriters gave away in the MMA. When did Noah build the Ark? Before the rain. The negotiators might have gotten that message if they had opened the negotiations to a broader group, but they didn’t so now they’ve got the hot potato no matter how much whinging they do.
Having said that, you will notice that Apple took pity on this egregious oversight and did not appeal the Phonorecords III ruling. You don’t always have to take advantage of your vendor’s negotiating failures, particularly when you are printing money and when being generous would help your vendor keep providing songs. And Mom always told me not to mock the afflicted. Plus it’s good business–take Walmart as an example. Walmart drives a hard bargain, but they leave the vendor enough margin to keep making goods, otherwise the vendor will go under soon or run a business solely to service debt only to go under later. And realize that the decision to be generous is pretty much entirely up to Walmart. Spotify could do the same.
Is being cheap unethical? Is leveraging stupidity unethical? Is trying to recover the costs of the MLC by heavily litigating streaming mechanicals unethical (or unexpected)? Maybe. A great man once said failing to be generous is the most expensive mistake you’ll ever make. So yes, I do think it is unethical although that’s a debatable point. Spotify has not made themselves many friends by taking that course. But what is not debatable is Spotify’s unethical treatment of artists.
Treatment of Artists
The entire streaming royalty model confirms what I call “Ek’s Law” which is related to “Moore’s Law”. Instead of chip speed doubling every 18 months in Moore’s Law, royalties are cut in half every 18 months with Ek’s Law. This reduction over time is an inherent part of the algebra of the streaming business model as I’ve discussed in detail in Arithmetic on the Internet as well as the study I co-authored with Dr. Claudio Feijoo for the World Intellectual Property Organization. These writings have caused a good deal of discussion along with the work of Sharky Laguana about the “Big Pool” or what’s come to be called the “market centric” royalty model.
Dissatisfaction with the market centric model has led to a discussion of the “user-centric” model as an alternative so that fans don’t pay for music they don’t listen to. But it’s also possible that there is no solution to the streaming model because everybody whose getting rich (essentially all Spotify employees and owners of big catalogs) has no intention of changing anything voluntarily.
It would be easy to say “fair is where we end up” and write off Ek’s Law as just a function of the free market. But the market centric model was designed to reward a small number of artists and big catalog owners without letting consumers know what was happening to the money they thought they spent to support the music they loved. As Glenn Peoples wrote last year (Fare Play: Could SoundCloud’s User-Centric Streaming Payouts Catch On?,
When Spotify first negotiated its initial licensing deals with labels in the late 2000s, both sides focused more on how much money the service would take in than the best way to divide it. The idea they settled on, which divides artist payouts based on the overall popularity of recordings, regardless of how they map to individuals’ listening habits, was ‘the simplest system to put together at the time,’ recalls Thomas Hesse, a former Sony Music executive who was involved in those conversations.
In other words, the market centric model was designed behind closed doors and then presented to the world’s artists and musicians as a take it or leave it with an overhyped helping of FOMO.
As we wrote in the WIPO study, the market centric model excludes nonfeatured musicians altogether. These studio musicians and vocalists are cut out of the Spotify streaming riches made off their backs except in two countries and then only because their unions fought like dogs to enforce national laws that require streaming platforms to pay nonfeatured performers.
The other Spotify problem is its global dominance and imposition of largely Anglo-American repertoire in other countries. The company does this for one big reason–they tell a growth story to Wall Street to juice their stock price. In fact, Daniel Ek just did this last week on his Groundhog Day earnings call with stock analysts. For example he said:
The number one thing that we’re stretched for at the moment is more inventory. And that’s why you see us introducing things such as fan and other things. And then long-term with a little bit more horizon, it’s obviously international.
Both user-centric and market-centric are focused on allocating a theoretical revenue “pie” which is so tiny for any one artist (or songwriter) who is not in the top 1 or 5 percent this week that it’s obvious the entire model is bankrupt until it includes the value that makes Daniel Ek into a digital munitions investor–the stock.
Debt and Stock Buybacks
Spotify has taken on substantial levels of debt for a company that makes a profit so infrequently you can say Spotify is unprofitable–which it is on a fully diluted basis in any event. According to its most recent balance sheet, Spotify owes approximately $1.3 billion in long term–secured–debt.
You might ask how a company that has never made a profit qualifies to borrow $1.3 billion and you’d have a point there. But understand this: If Spotify should ever go bankrupt, which in their case would probably be a reorganization bankruptcy, those lenders are going to stand in the secured creditors line and they will get paid in full or nearly in full well before Spotify meets any of its obligations to artists, songwriters, labels and music publishers, aka unsecured creditors.
Did Title I of the Music Modernization Act take care of this exposure for songwriters who are forced to license but have virtually no recourse if the licensee fails to pay and goes bankrupt? Apparently not–but then the lobbyists would say if they’d insisted on actual protection and reform there would have been no bill (pka no bonus).
Right. Because “modernization” (whatever that means).
But to our question here–is it ethical for a company that is totally dependent on creator output to be able to take on debt that pushes the royalties owed to those creators to the back of the bankruptcy lines? I think the answer is no.
Spotify has also engaged in a practice that has become increasingly popular in the era of zero interest rates (or lower bound rates anyway) and quantitative easing: stock buy backs.
Stock buy backs were illegal until the Securities and Exchange Commission changed the law in 1982 with the safe harbor Rule 10b-18. (A prime example of unelected bureaucrats creating major changes in the economy, but that’s a story for another day.)
Stock buy backs are when a company uses the shareholders money to buy outstanding shares of their company and reduce the number of shares trading (aka “the float”). Stock buy backs can be accomplished a few ways such as through a tender offer (a public announcement that the company will buy back x shares at $y for z period of time); open market purchases on the exchange; or buying the shares through direct negotiations, usually with holders of larger blocks of stock.
Vox’s Matt Yglesias sums it up nicely:
A stock buyback is basically a secondary offering in reverse — instead of selling new shares of stock to the public to put more cash on the corporate balance sheet, a cash-rich company expends some of its own funds on buying shares of stock from the public.
Why do companies buy back their own stock? To juice their financials by artificially increasing earnings per share.
Spotify has announced two different repurchase programs since going public according to their annual report for 12/31/21:
Share Repurchase Program On August 20, 2021, [Spotify] announced that the board of directors [controlled by Daniel Ek] had approved a program to repurchase up to $1.0 billion of the Company’s ordinary shares. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized at the Company’s general meeting of shareholders on April 21, 2021. The repurchase program will expire on April 21, 2026. The timing and actual number of shares repurchased depends on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program is executed consistent with the Company’s capital allocation strategy of prioritizing investment to grow the business over the long term. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The Company uses current cash and cash equivalents and the cash flow it generates from operations to fund the share repurchase program.
The authorization of the previous share repurchase program, announced on November 5, 2018, expired on April 21, 2021. The total aggregate amount of repurchased shares under that program was 4,366,427 for a total of approximately $572 million.
Is it ethical to take a billion dollars and buy back shares to juice the stock price while fighting over royalties every chance they get and crying poor? I think not.
[Editor Charlie sez: When you read this cautionary tale for artists, remember that like so many other artists we look up to, Astrud never got a penny from radio performances of her records in the US which would have given her a direct payment outside of her recording agreement through SoundExchange.]
“The Girl from Ipanema” was one of the seminal songs of the 1960s. It sold more than five million copies worldwide, popularised bossa nova music around the world and made a superstar of the Brazilian singer Astrud Gilberto, who was only 22 when she recorded the track on 18 March 1963.
Yet what should be an uplifting story – celebrating a singer making an extraordinary mark in her first professional engagement – became a sorry tale of how a shy young woman was exploited, manipulated and left broken by a male-dominated music industry full, as she put it, of “wolves posing as sheep”.
By Alan Graham and Chris Castle
If you’ve followed any of the drama surrounding the NFT music infringement marketplace Hitpiece, you know it has deservedly received a lot of grief—and at least one pretty potent cease and desist letter–for its blatant attempt at profiting from allegedly scraped IP it didn’t own. But the interesting thing is that it actually gives us an opportunity to discuss some of the greater potential challenges surrounding NFTs, and how it may in fact be impossible to live up to their promise. Let’s start by picking apart Hitpiece, and see where we get with this teachable moment.
Blockchains or databases that represent ownership, must have one trait in common to provide value, and that is a consensus mechanic whereby each party that is allowed to write data is known to the system, therefore the data that is written is trusted, and then all copies (or nodes) can commit these changes. Ta-da. There is an inherent logic to the consenus mechanic. It’s what Shawn Fanning’s SNOCAP accomplished with its registry in sharp contrast to the Wild West of p2p and essentially lies at the heart of Hernando de Soto’s extensive work in macroeconomics. Good things can happen when people trust the system.
It’s also the starting point of what went wrong at Hitpiece. Instead of using a blockchain solution like Ethereum, we’re told Hitpiece operates some kind of a “private blockchain.”
So what does that actually mean? It should suggest a distributed ledger, hosted by multiple separate parties to keep everyone honest, with a method of cryptographic consensus (who can write data, how are they known to the system, how is it trusted). Remember, the definition of “good faith” is “honesty in fact” and it is an essential condition of contracts, all contracts be they smart or just human.
The novel bit Hitpiece was doing, from what we can read, is that they were using regular credit card payments, not crypto, to allow collectors to mint/purchase the NFTs, which is actually very clever. Seriously, there’s no reason you have to use a cryptocurrency to pay for something, if you are in fact also hosting the blockchain/database. A private blockchain doesn’t need a cryptocurrency, it just needs trusted parties, and there’s the rub. Cryptocurrency is a sufficient condition of a successful NFT platform, but a trusted consensus mechanic is a necessary condition.
Now while we could go on and on picking apart many of the flaws in the Hitpiece model, it opens up a broader discussion that we’d like to have as to how NFTs plan to offer their grand promised future of benefits and entitlements (buy my NFT and get xyz). Whenever you challenge someone in the crypto space about how they plan to handle this, they simply say “smart contracts”, when what they really mean is, “I have no idea how/if this is going to work”.
Terms of Service
First, in order to have a product or service that you sell or provide online, there has to be a series of terms as to what is being purchased, who is paid each successive purchase price, what is being provided to the purchaser, and for how long. That means, in the case of a platform that allows creators to mint/sell/auction NFTs, the party that is minting/selling the NFT has to provide a Terms of Service as to what can be expected, not the platform. The platform is simply a service provider. It’s buyer beware, because the seller doesn’t necessarily have any technical solutions for supporting future benefits. It’s also seller beware because if the initial seller specifies terms for the sale (and subsequent sales), there ought to be a believable and efficient way to enforce those future rights and post-sale conditions.
So if you are a creator promising this, you need to spell out what those might be, the term of that relationship, and be damn sure you can deliver on it. Likewise, if you are a creator being promised something will happen after the initial sale, you have to believe that your rights can be enforced in an efficient way (like the future sale can’t close without X being the case or $Y being paid to you). This is a concern for both featured and nonfeatured recording artists (as well as union signatory record companies with collective bargaining obligations), plus co-writers of songs and their publishers.
To pluck two examples from the headlines on The Trichordist, Neil Young might want to place conditions on future NFT sales that have nothing to do with money; elderly songwriters might want to be assured of a stream of future income from NFT sales that they can ill-afford to sue over. This is not hard—it happens with real estate every day of the week in practically every country of the world (and was at the heart of Hernando de Soto’s “Peruvian miracle” that started with land reform). If you don’t meet the sale conditions, you don’t close on the property and the title company won’t take money from the buyer or pay it to the seller.
Perhaps this is especially true of collectibles where resales may be part of the buying motivation. (See for example, the pending lawsuit over the Quantum NFT against Kevin McCoy and Sotheby’s regarding the Namecoin blockchain that is for “slander of title” among other things—a real estate concept.) The expectation most buyers will have is that the thing in question will live in perpetuity. For example, If you purchase a physical painting, you have the expectation of enjoying that painting as long as you possess it.
But what are your expectations regarding the NFT? This entire subject seems to be heavy on promises of future benefits and entitlements, but lacks any hard explanations of how that’s possible and for how long. That puts creators and collectors at great risk, because there’s no guarantee of being able to deliver on that promise—until there is. Technology practically assures us that whatever you buy today, will not necessarily work 10 years from now. How’s that WordPerfect program working out for you?
The second issue we never see talked about derives from the first. It seems common for promoters to promise benefits/entitlements in the future from owning NFTs, but how? Where’s the mechanic that makes this possible? Simply saying “smart contracts” is just procrastinating and hoping something will exist later. In order to provide a series of benefits, like exclusives, you have to also provide a structure to interpret these, and we’re dealing with potentially thousands of intermediaries, and millions/billions of NFTs. We don’t have any idea how anyone expects this to work with the existing NFT model.
Say you want to provide exclusive first access to concert tickets to anyone who has a particular NFT. The ticketing site or agency has to be able to recognize this NFT and be able to trust it. One way to do this is they can run native code that runs independently on the site that can say, “I know this collectible” by being able to recognize who cryptographically signed something with a known set of keys. Or they could run an embed from a third party that did the same thing. The most secure way to do any of this is likely having more than one party sign the NFT to prove it is real, but not really something trustless blockchain folks like.
The ability to trust the NFT sale and automatically enforce the terms of each sale is vital for creator-driven NFTs. If a creator places marketing restrictions on how the NFT can be used downstream, there ought to be a way to enforce those restrictions. Recording artists and songwriters commonly have such restrictions in their artist or songwriter agreements with record companies or music publishers. They have approval rights over how their works are used and they have blanket prohibitions. Approval rights means they are asked before a license is granted by their label or publisher and they can sue if that fails to happen. A blanket prohibition could, for example, prohibit the use of the work in a commercial promoting a product, say firearms, that the artist or songwriter doesn’t agree with, or a country whose laws the creator rejects, say Beastie Boys with China over Tibet, or a platform that distributes a podcaster the creator doesn’t want to be associated with.
The punchline there is why would a creator take, or allow their label or publisher to grant, lesser rights in an NFT than the creator has for the same work outside the NFT?
You Can Check Out Any Time You Like
Then we get into talking about serious security implications, as NFTs might have both a monetary value, and a potential “smart contract” that remunerates/rewards the purchaser, and has an ancillary connection to the collector’s wallet. Any compromise in this chain and you could not only put one creator or collector at risk, they could all be at risk including the seller (All apes, everywhere, stolen). A single errant smart contract or malicious developer, could put creators or downstream sellers at serious legal risk because they exposed the collector’s wallet to compromise. That means you’ll want to see that every NFT marketplace has serious security experience and precautions, but also as a collector, you’ll want to know that everything you purchase has an audit trail whereby you can verify the NFT is authentic and each link in the chain can be trusted.
That’s a whole lot of magical hand waving. And title insurance or the equivalent.
In any case, not only does someone need to build, service, and maintain this, but also has to maintain it forever, and it can never fail.
And forever is a long time.
By now you’ve probably heard of the website HitPiece.com and their outrageous scheme to mint “NFTs” of virtually every song and album in existence. If you have not I suggest you read a pair of excellent articles by Kristin Robinson at Billboard Pro. Here and here.
“Founded by serial entrepreneur Rory Felton and investor Jeff Burningham, Hitpiece’s intent was to create NFTs of “every song,” according to the company’s pitch deck. Using Spotify’s API to gather information on artists of all sizes – from developing acts to Beatles members – HitPiece uploaded listings of NFTs from musicians it had never spoken to or partnered with, stating these non-fungible tokens were “available for auction” or “live” auctions. According to HitPiece’s FAQ section, the NFTs were said to operate on HitChain, a private Ethereum side chain which does not provide proof of work.”
If you are not even sure what an NFT is think of it as a sort of cryptocurrency like Bitcoin. But there is only one unique token. And this token can be associated with another digital asset, like a digital drawing, photograph, song or tweet. The issue is anyone can do this. Whether they have the rights to the associated file or piece of intellectual property. And that’s exactly where the problem starts.
On Feb 1st my twitter feed began to fill with outraged artists reporting that a website HitPiece.com was offering “NFTs” of their songs. I went and checked and sure enough the website was offering NFTs of virtually every one of my songs and recordings. Now I hadn’t authorized anyone to make NFTs of my songs and recordings and offer them to the public. Nor had I licensed anyone to use my album artwork, trademark, name, likeness or image to use on any products and especially not NFTs. I checked with my former labels on the outside chance they had licensed something but as I suspected they had not. And indeed even recordings which I exclusively hold the rights were on HitPiece.com.
I dug around on the site to see if I could figure out what was going on. Here I found the above paragraph. “Each HitPiece NFT is a One for One NFT for each unique song sound recording.” That sounds like they had minted or intended to mint a NFT of each one of my songs/sound recordings. Without any sort of authorization.
I even found a live auction of one of our tracks. Curiously it is an unreleased/unlicensed live radio broadcast that recently showed up on Spotify. From this I could confirm what I suspected: HitPiece was “scraping” Spotify to auto generate NFTs for every song on the platform. In addition they were sucking in promo photos and album art.
It appeared as if there were hundreds if not thousands of similarly situated artists, as when I went back on social media every artist I follow was posting screenshots of HitPiece NFTs. All of the artists noted (often in profane terms) that they had not authorized HitPiece to offer NFTs to the public. It became a true twitter shitstorm. By the end even civilians on LinkedIn were getting into the act (see above.)
Late that evening the operators of the website, took the website down, or it crashed under the crush of traffic. They later put the website back up with the above note (minus the NFT offerings).
By Friday numerous artists had sent “cease and desist” letters, others were promising lawsuits and even the RIAA announced they were taking action on behalf of their artists. The RIAA letter asks HitPiece to preserve all relevant emails and documents, which is usually a prelude to legal action. And indeed the letter makes reference to a number of violations.
“…copyright infringement (17 U.S.C. § 101), trademark infringement (15 U.S.C. § 1114), federal unfair competition and false representation of affiliation (15 U.S.C. § 1125(a)), violations of state and common law rights of publicity, and unfair competition under applicable state law…”
The RIAA also asked HitPiece to permanently close their website and business.
So case closed let’s move on ,right? The big companies with the big lawyers are on the case. No one will ever try this again. Right?
I wouldn’t be so sure. Remember YouTube started out as (and still is) a massive infringer of copyrights. Sure they pay some royalties on some tracks, but at a rate 1/8 to 1/20th that of Apple Music. And now It’s just too big to do anything about it. Do we want the same thing to happen with something like NFTs? The audacity of HitPiece scam is that by promising to mint an NFT of every song they intended to corner the entire market for song NFTs. What if it had worked? We’d have no leverage. We’d be coming hat in hand to them begging for a few pennies like we do with YouTube.
No, the best thing to do is to make an example out of these folks. Bankrupt them. These are not poor hackers living in their parents’ basements. Two are former major label record executives and the other two are wealthy private equity executives (here and here). These folks have A LOT to lose. We should make it so no one ever does business with these folks again. And the best way to do this is not by banding together through the usual copyright class action (although we can do that too), the best way to make their lives miserable is to bury them under a blizzard of individual complaints. Who knows maybe you’ll find a state prosecutor that wants to charge them with a crime. (doesn’t this seem like a criminal fraud?).
Although there is likely a copyright claim if you have registered your artwork, copyright infringement must be adjudicated in federal court. Similarly with Trademark infringement. And over the last two decades congress and the courts have made life pretty easy for anyone infringing copyright and trademark via the internet. The deck is stacked against us. What we really want to do is rely on laws that we can pursue easily in our own states. The RIAA letter helpfully suggests a number of tactics at the state level.
I’m not an attorney and I certainly don’t know the laws in all 50 states, this is just one musician talking about the tactics I intend to investigate and pursue:
Fraud. By any common definition of the term, what HitPiece did was conduct a fraud. The website clearly misleads the public. I didn’t offer my songs up as an NFT for sale. Yet my picture and name is right there. They “palmed off” something as a genuine product that was not. Legally is this fraud? It sure feels like it but I’m not an expert. I intend to complain in person at the local state district attorney’s office.
Rights of publicity. Many states either have a law that recognizes a kind of property right in my own persona. Companies can’t make products or provide a service with my name, likeness or image. If your state doesn’t explicitly provide a statute, it’s likely a state court has recognized a “common law” right. I intend to mention this at the local state district attorney’s office cause it’s a key element of how HitPiece executed their apparent fraud. I may file a separate civil claim against them.
Implied Endorsement. My state may also have a specific law that doesn’t allow others to imply that I endorse their product. Again this is something I will mention at the local state attorney’s office as it’s key to their scheme. I may also file a separate civil claim against them.
Unfair Competition/Deceptive Practices: Most states have these laws. What’s more deceptive and unfair than using my own copyrights,trademarks, name image and likeness to sell a product I didn’t endorse. The principals at HitPiece knew they didn’t have licenses with me. Two had deep experience in the music business managing intellectual property rights They knew what they were doing. Talk to your local state district attorney about this as well.
If hundreds of artists did something similar in dozens of states, we could really make these folks lmiserable.
Now that ‘s just my take as an artist.
Here are some similar suggestions from real attorneys…
More on this later. This is still developing.
SECOND REOPENING PERIOD COMMENTS OF HELIENNE LINDVALL, DAVID LOWERY AND BLAKE MORGAN
Helienne Lindvall, David Lowery and Blake Morgan (collectively, the “Writers”) thank the Judges for the opportunity and respectfully submit the following comments responding to the Copyright Royalty Judges’ notice (“Second Notice”) soliciting comments on additional materials (“Reply”) received by the Judges from the National Music Publishers Association, Nashville Songwriters Association International, Sony Music Entertainment, UMG Recordings, Inc. and Warner Music Group Corp. (collectively, the “Majors”) regarding the so-called [frozen] “Subpart B” statutory rates and terms relating to the making and distribution of physical or digital phonorecords of nondramatic musical works in the docket referenced above (“Proceeding”).
The Writers previously submitted comments (“Prior Comment”) responding to the Judges’ notice (“First Notice”) soliciting comments on the Major’s proposed purported settlement (the “Proposed Settlement”) of the Subpart B rates. The Writers along with attorney Gwendolyn Seale attempted to submit additional comments in response to the Majors’ filing but were not able to timely file that response. The Writers appreciate the Judges’ decision to reopen the comment period in order to afford the public, and those that would be bound by the rates and terms set by the Proposed Settlement, an opportunity to comment on those additional materials filed by the Majors and to further participate in the rulemaking.
As a general comment on the record to date in Phonorecords IV, the Writers are mystified by the histrionics that have become associated with this Proceeding both on the record and in the press. A voluntary negotiation is just a deal, often made by people who are paid to always be closing. The Writers believe that Congress intended that voluntary negotiation produce a fair result on a reasonable timetable.
While not directly at issue in the reopened comment period, what is clearly the case is that the settlement of the Subpart B rates has unnecessarily become a major gating item for the streaming side of this Proceeding, geese and ganders being what they are. Despite the extensive voluntary negotiation period for the Subpart B rates by the Majors, the Judges—and, frankly, songwriters around the world–are presented instead with a cornucopia of chaos across the board; the cherry on top is the frozen mechanicals crisis. However, in this season of hope the Writers are confident that the Judges will lead us all out of this daunting situation.
The Writers are not interested in the personalities, the arm-waving or the finger-pointing. They are interested in the results, particularly because neither they nor anyone they authorized had input into the negotiation that produced either the Proposed Settlement or the impasse.
There is at least one easy way to fix this and recognize the intrinsic value of songs: Raise the statutory rate proposal for Subpart B configurations in at least some relation to the streaming rate increase. A song is no less valuable because of the medium in which it is exploited.
As the Writers will argue, just like the voluntary agreement on Subpart B that led to this impasse was reached by the Majors, those same parties can go back to the drawing board to reach an appropriate conclusion with a higher Subpart B rate.
Neither the public nor the songwriters are well served (and frankly neither are the Judges) by thrashing about and waiving arms. This may serve well the people who are paid by the hour but it hasn’t served people who are paid by the song. At all. “Victory” without winning may pass for success in Washington, but it does not in the writer room or at a songwriter’s kitchen table.
The Proposed Settlement is a crystallization of everything that is wrong with the licensing and payment practices that have arisen under the compulsory license regime where no is yes, more is less and the Kool-Aid whispers “Drink Me.”
While the Writers will focus in this comment on the frozen mechanicals issue that has become emblematic of the current crisis, it must be said that the decade-plus MOU [black box] agreements are a backward looking and inequitable insider arrangement that permits a mindset of sloppiness and a “kick the can down the road” mentality that debilitates the entire music publishing business. It’s no accident that the Mechanical Licensing Collective—run by largely the same cast of characters under a jaw-dropping Congressional governance mandate—has been sitting on $424,000,000 of other peoples’ money for nine months during a pandemic with no visible compliance with another Congressional mandate of paying songwriters correctly in Title I of the Music Modernization Act.
The MLC and the sequence of MOUs are both descended from the same ancestors a generation ago. Each have essentially the same business model and each are somehow inexplicably viewed as a “win” for the songwriters. The irony of splicing the genetic code of the ancien régime MOU [black box insider settlements] to the future is not lost on anyone. If the failure to match money and songs in the MOU process is still a problem after fifteen years as well as the much-trumpeted Title I of the Music Modernization Act, it’s not the horse’s fault. It’s the rider’s.
It would be a real pity for the CRB to perpetuate this unfairness by adopting the Proposed Settlement. With respect, it is bad law, bad policy, and a failure to even try to bend the arc of the moral universe. Conversely, rejecting the Proposed Settlement would provide the kind of steely oversight tragically lacking in the current regime. Please let the future have a vote, just once.
The Writers object to the Proposed Settlement for the following reasons and respectfully suggest constructive alternatives. The gravamen of our objection is that (1) the Subpart B rates have already been frozen since 2006 and extending the freeze another five years is unjust; (2) no evidence has been publicly produced in the Proceeding that justifies or even explains extending the proposed freeze aside from the connection to the memorandum of understanding in the MOU4 late fee waiver (“MOU”), a document that the Majors only recently disclosed in their Reply; (3) very large numbers of songwriters and copyright owners of various domiciles around the world and national origins are unlikely to even know this Proceeding is happening and there still is no evidence that the unrepresented have appointed any of the participants to act on their behalf or were asked to consent to the purported settlement before the fact even if they were members of these organizations aside from the respective board of directors; (4) physical sales are still a vital part of songwriter revenue (which the Writers documented in the Prior Comment); and (5) there are many just alternatives available to the Judges without applying an unjust settlement to the world’s songwriters who are strangers to the Proposed Settlement and in particular the MOU component (as the MOU will likely require membership in the NMPA to benefit consistent with prior MOUs).
 86 FR 58626.
 NMPA, NSAI, Sony Music Entertainment, UMG Recordings, Inc. and Warner Music Group Comments in Further Support of the Settlement of Statutory Royalty Rates and Terms for Subpart B Configurations, Determination of Royalty Rates and Terms for Making and Distributing Phonorecords (Phonorecords IV), Copyright Royalty Board (Aug. 10, 2021).
 Comments of Helienne Lindvall, David Lowery and Blake Morgan, Determination of Rates and Terms for Making and Distributing Phonorecords (Phonorecords IV) (July 26, 2021) available at https://app.crb.gov/document/download/25533.
 86 FR 33601.
 Ms. Seale does not otherwise join in this comment. We understand she is filing a separate comment regarding the additional materials.
 The Writers’ reply was posted on The Trichordist website available at https://thetrichordist.com/2021/08/16/frozenmechanicals-crisis-unfiled-supplemental-comments-of-helienne-lindvall-davidclowery-theblakemorgan-and-sealeinthedeal/. Parts of that unfiled comment are included in this comment.
 See 17 USC 801(b)(7)(a)(i).
 As with the Writers prior submission in response to the First Notice, the Writers focus in this comment almost entirely on the Subpart B rates applicable to physical carriers under 37 C.F.R. §385.11(a).
 The Judges no doubt will be told many stories about how Subpart B configurations are not meaningful sales compared to streaming so rates deserve to be frozen. This is a novel copyright argument without a statutory basis. The theory is also not based on accurate facts as the Writers discuss extensively in the Prior Comment at paragraph 5 and will not repeat here.
 There is a growing backlash to decades of delaying definitive action on song metadata and songwriter payments such as Credits Due campaign of the Ivors Academy and Abba’s Björn Ulvaeus. See generally Chris Cooke, PPL Backs Björn Ulvaeus’s Credits Due Campaign, Complete Music Update (Oct. 4, 2021) available at https://completemusicupdate.com/article/ppl-backs-bjorn-ulvaeuss-credits-due-campaign/
 See, e.g., H. Rep. 115-651 (115th Cong. 2nd Sess. April 25, 2018) at 5; S. Rep. 115-339 (115th Cong. 2nd Sess. Sept. 17, 2018) at 5 (“The Committee welcomes the creation of a new musical works database that is mandated by the legislation….Music metadata has more often been seen as a competitive advantage for the party that controls the database, rather than as a resource for building an industry on.” (emphasis added)).
Only drug dealers and Big Tech refer to their “customers” as “users.”
We really appreciate how Trichordist readers have stuck with the story we have been telling about the treachery afoot at the Copyright Royalty Board in the current review of statutory mechanical royalty rates. This is kind of dry stuff but it sure has resulted in a lot of passion from the songwriting community.
That passion is directed at the frozen mechanical–the collaboration between the big publishers and big record companies to “freeze” the statutory mechanical royalty for physical goods at 2006 levels despite the current inflationary crises and debasement of the value of even the frozen rate itself. We will have more to publish on that subject to call your attention to the voices of songwriters and publishers opposing the freeze.
Ask yourself this question: Is there any reason that a songwriter who opposes a freeze on mechanicals–the only question they were asked to respond to by the Copyright Royalty Board–would ever support a reduction in the streaming mechanical? Would anyone say, oh, well if Spotify is asking for a reduction, then by all means? If you thought the passion against frozen mechanicals ran high, you ain’t seen nothing yet.
But in one of the great acts of self-sabatoge that they are so good at, that passion is currently being hijacked by some of the biggest companies in commercial history to somehow convince us that less is more. Remember–these are the same people who benefit from the sick mass manipulation and addiction practiced and normalized by the Stanford Persuasive Technology Lab.
And now they are trying to use that trickery and psychology on songwriters to gaslight them into ignoring reality and supporting the chaos at the Copyright Royalty Board.
We will be posting a series of excerpts from public filings in coming days. If you want to skip ahead, you can read this letter from Chris Castle to the Copyright Royalty Board roasting the services for twisting the words of Helienne Lindvall, David Lowery and Blake Morgan.