A must read Hypebot guest post by Keith Bernstein, Crunch Digital Founder that reprises the important themes he raised in his inspirational presentation at the invitation-only closed-door meetings on music-tech solutions held last fall.

The best solution is a direct licensing service that connects digital music services with music publishers, which would allow streaming services to effectively and efficiently obtain the licenses they need and make sure they have all the data they need to report royalties –  this will help shield them from future problems. Such a licensing service would act as an administrator to the digital streaming service and as an agent to the music publishers and songwriters  – and be able to update song ownership information, essentially functioning as a back office to make sure everything was running smoothly. Currently, Crunch Digital has built a database of a majority of US music publishing copyrights that are in use among digital services and they keep their data fresh with updates coming from the music publishers they work with.  As an independent company that is not tied to a trade organization or a PRO, Crunch is in a position to provide a direct licensing solution for streaming services that will work for all parties involved.

Read it all here: “We Know Compulsory Licensing Is “Broken” – Here Is How To Fix It“

Digital Music News has a Q&A with Mona Hanna lead counsel for the proposed songwriters Spotify class action.  She compares the relative merits of the private-behind-closed-doors major publishers/HFA/Spotify settlement to the class action.   Excerpt below:

“Q: I’m a songwriter. How do I benefit from this settlement?

A: It is impossible to determine the true benefit to songwriters because the settlement negotiations between NMPA and Spotify have been conducted without Court oversight. In stark contrast, a class action settlement requires the class counsel – the attorneys representing the songwriters – to submit the settlement terms to a Court and provide the Court with evidence that the settlement was reached in an arm’s-length transaction. In other words, Courts ensure that there was no collusion in the negotiation and that the settlement is fair and reasonable to all class members. Unfortunately those safeguards are absent from the NMPA / Spotify settlement negotiations.”

Read more here:

Songwriters: Should You Sign the Spotify Settlement Agreement?

A recent Billboard article has prompted a re-examination of the controversial Pandora-Merlin direct deal that included lower rates in exchange for additional spins for MERLIN labels.  Billboard has finally admitted that the Pandora-MERLIN deal has been successfully used by webcasters to significantly lower ALL rights holders rates.   While Billboard terms the effect of the MERLIN deal as “surprising” it was not surprising to readers of this blog and our friends at MusicTechPolicy.
Over a year ago we predicted that the direct deal between independent label licensing authority Merlin and Pandora would lead to lower webcasting rates for ALL performers and labels in the US. We weren’t particularly clever, we simply looked at the DMX direct deal that Pandora’s chief negotiating counsel Chris Harrison did with Sony in 2007 for a reduced publishing rate in exchange for a 2.7 million dollar advance (without taking into account the advance).  This was then successfully used by as evidence of a “free market rate” against BMI in rate proceedings shortly thereafter.  As the Future of the Music Business reported in 2014:

“In 2007 Sony negotiated a direct deal with DMX, the digital background music service. In doing so, it received an advance payment of 2.7 million dollars. It is doubtful whether Sony’s writers received any portion of this money. And this is why: Individual music publishing contracts vary depending on the bargaining power of individual writers or the negotiating skills of their lawyers (among other reasons), but almost all agreements have a provision similar to this one.”

We simply guessed that it was highly likely that Harrison and Pandora were gonna use the Merlin deal to do exactly what they did with the DMX deal.  And we told anyone that would listen. And then Pandora did just as we predicted.

Let me back up for a moment and explain a little background on this. In 2014 Charles Caldas CEO of MERLIN negotiated a direct deal with Harrison and Pandora that effectively lowered independent labels per spin rate well below the statutory rate in exchange for increased airplay.  MERLIN termed this exchange “steering” but it should more properly have been called “digital payola.”   We correctly predicted that Harrison and Pandora would use the direct deal as evidence of a willing seller willing buyer rate in the Copyright Royalty Board Web IV rates settings.  In particular  Pandora would cite the lower effective rate that was achieved when Pandora algorithms “steered” additional Merlin recordings to users above and beyond the “natural” amount generated by user listening habits and preferences.  In short payola:

“Here’s some music that we wouldn’t normally play for you based on your preferences.  And this is because MERLIN gave us something of value (lower rates).”

The bottom range effective rate for the steered spins was reported by Pandora to be $0.001105.   Pandora argued that this lower “steered” rate should be considered by the Copyright Royalty Judge as an example of a willing seller-willing buyer rate.   The judges agreed.

The only other direct market rate cited as evidence in the CRB proceedings was a direct deal between WMG and IHeartRadio that effectively set the rate at $0.0022.   It is clear from the CRB proceedings that the judges took the two direct deals as  upper and lower bounds and essentially split the difference between the two rates and enacted a webcasting rate of $0.0017.  Without the MERLIN steering deal the only evidence of a free market rate was the WMG-IHeartRadio deal at $0.0022.

So Billboard calculates that for each $0.0001 increase this means and additional $60 Million dollars a year to rights holders.  So it’s not unreasonable to conclude that the MERLIN deal lowered the CRB rate 2017 through 2020 from $0.0022 to $0.0017.    Using Billboard’s math this would appear to be a net loss to rights holders of approximately $300 million per year or $1.2 billion over four years.  This represents almost 10% of wholesale recorded music revenues!  Wow!  For independent labels that opted into the MERLIN deal the economics may be even worse.  Why?  It appears that these independent labels and artists are now locked into the much lower MERLIN steering rate for the next few years.   Ouch!

As much as an outrage this may be, it is worth asking some further questions at this point.

1. Since the 2016 Web IV rate setting process was looming, what was the hurry?  Why didn’t Merlin just wait for the rate setting process to conclude and then negotiate a lower steering rate downward from there? Surely it couldn’t have resulted in a worse rate?
2. What did MERLIN get out of the deal?
3. Did MERLIN accurately describe the terms of the deal to its member labels?

The last question is very important.  Because in 2014 Billboard reported this:

Caldas added the partnership will financially benefit Merlin’s artists and labels. Although no financial details were made available, he suggested the terms are no worse than the statutory rates previously received. “We wouldn’t do any deal where there was any risk we were going to get paid less.”

But the CRB proceedings make it clear that this turned out to not be the case.  Merlin labels were getting a rate lower than the existing statutory rate.  I’m not a Merlin member, but if I were, and if this is what he told his label members I would lawyer up and put Merlin and Caldas on the spot for this.

Read more of our coverage on this deal here:

MERLIN “Pandola” Secret Deal Violates WIN Fair Trade Principles

@sydell Raises the Issue of Pandora and Payola Platform Parity

Return of the $50 Handshake: My FCC Comments on Proposed Payola Waiver and “Steering” Agreements PT 2

Charles Caldas of MERLIN: Independent Labels’ Minus $15 Million Dollar Man

Indie Labels Should Demand that MERLIN and Caldas Immediately Repudiate Pandora Filing or Step Down.

Did Merlin’s Caldas Lie in Billboard Article About Lower Rates?

How MERLIN’s “PANDOLA” Deal Could Give Labels Access to Your Share of SoundExchange Royalties

WIN Fair Digital Deals Declaration vs MERLIN’S “PANDOLA” Deal

https://thetrichordist.com/2015/04/08/copyright-royalty-board-filing-suggests-that-pandorachris-harrison-created-evidence-for-rate-court-proceedings/

https://thetrichordist.com/2014/10/28/set-match-and-game-to-pandora-and-chris-harrison-merlin-gives-pandora-the-rate-cut-they-wanted/

Bumps Not Dumps: Merlin’s Pandora Catastrophe Continues

 

 

 

 

Right now there is no greater dichotomy regarding the future of information technology than with that of the blockchain. Liberating yet infuriating. Beautiful yet ugly. Established yet unproven. Immensely complex yet elegantly simple. In short, blockchain is one of the more fascinatingly profound ideas I’ve seen in 15 or so years. At OCL we began working on solutions that lent themselves well to the blockchain over 2 years ago, and last year when we started combining some of our technologies with blockchain, I was quite excited at what we were able to come up with.

But I’ve been down this road before. I’ve seen more than one professed technology of the future not realize its promised potential. Hell, I’ve worked with many of those companies. And while I’m quickly getting (or hoping to get) a reputation as someone trying to temper the exuberant expectations over blockchain technology, I am very intrigued by where all of this might be headed. And terrified.

Thoroughly and completely terrified. Not terrified with the technology itself or what is possible, but our natural tendency to leap first, look second.

In this piece I’m going to begin to tackle just two ideas surrounding the technology behind solutions people are looking towards blockchain as a panacea for the music industry.

I’m not writing these pieces to take apart the idea of using the blockchain with music, but just lend a critical voice that we need to start thinking through the process before we go headfirst into it. It is, after all, important to verify there is water in the pool before diving into it.

 
Terms and Rates and Smart Contracts – Oh My
One of the most touted aspects of using blockchain technology is the idea of combining it with something called a smart contract. Essentially this is a bit of executable code, a program or software robot, if you will, that resides in or can communicate with a/the blockchain. The idea is that an artist will simply write into the blockchain their ownership information, plus terms and rates so that every other system on the planet will be able to read those terms and rates and execute the artist’s wishes. Somehow, this smart contract will be capable of interpreting everything that needs to happen and performing that task. The idea is that if we had something like this, we could just eliminate the need for PROs and labels and whatnot, because we have a super-efficient and direct connection between rights owner and rights user. This puts the artist in complete control of their destiny and helps to solve many of the issues surrounding rights and data.

Or does it?

It sounds like a brilliant idea. Fewer middlemen and a more direct relationship with their works and fans. Except there’s a few problems that perhaps make it even worse. If you’ve ever actually dealt with the music industry you know that the business of art is just as subjective as the art itself and often you don’t know how to deal with a “thing” until the “thing” arises. The complexities of these situations cannot be fully captured by an actual contract, much less a virtual one. Plus, software robots and Artificial Intelligence don’t work well with the subjective nature of humans. They don’t understand intent.

Let’s say you have the terms of use for a song written into the blockchain that spell out how you can or cannot use a musical track (and keep in mind there is no such thing as simplified rights in an age where billions of people are creating trillions of uses). For example, an artist determines that in their terms you can create user-generated content, but not on services in certain countries that have a poor record of human rights, nor can it be used to promote certain products, nor can it be used on any offensive or exploitative platform, nor can it be used for certain political reasons or parties. Also since the artist is a staunch vegetarian and animal rights supporter, the music cannot be used with any media that contains cruelty or abuse, nor appear with visuals of any meat products. You can use the music for charitable organizations, but only certain types of charities, and not to raise money, just awareness. There is no commercial use allowed, but ad-revenue sharing might be allowed, but only if your audience scope is smaller than “X” and the views are kept below “X”. You may download the music for personal listening if you pay “X,” and streaming will cost “X” for these tracks and “X” for these others. Also, those rates are different depending on the region the listener is from and how many devices they are using. You can also stream the music for “X” amount in your place of business, but these rates are different depending on the size of your business and how many locations you have. Oh, and if you serve meat, you can’t play the music.

So the KKK charitable BBQ Pork event at the Whites-Only restaurant is certainly not going to be allowed to use this music, but how will a smart contract and a system devised to interpret all of this actually work? An artist can’t possibly be expected to keep on top of this. What about use in social or encrypted networks or apps where you can’t see what’s being created or how it is being used? And all of this has to happen in real-time and be automated. The complexities of writing such a smart contract and then it interpreting use or intent in a way that grants it in milliseconds is vast, if not practically impossible. And let’s not forget, the above scenario is based on the simplified assumption that there is only one owner (performance/publisher) of the work(s) in question. Now add three more owners, each with their own terms.

Granting an artist or songwriter more minute control over their work might seem like a fucking awesome idea, but the execution of all these details could actually add vast problems that bring the whole system to a screeching halt. If you think that greater control over works will bring greater simplicity, you are kidding yourselves.

To make any of the above workable, a set standard of terms or uses would need to be devised in which to ensure all systems can communicate and understand those uses and each use is applicable under the laws of those regions, and all systems of use must also be able to interact and interpret all of this and perform it flawlessly and within milliseconds, much like how DNS ensures that when you click on a link, you get back what you are looking for. That’s a tremendous amount of complexity that must be disguised in a very simple executable form. I’ve seen no one propose nor describe how such a system would work for music on the blockchain and how you might simplify the process. Will there be a standardized smart contract for music rights? Who will define those standards? Who will govern that process? Will there be a set rate for the use of music? Who will devise how third party apps and platforms interact with these smart contracts and how do you control which platforms can and cannot have access? How will we structure the data and what’s the proposed requirements for identifying a work properly? Who is the authority that will back the validity of this data? We can’t generally get artists to sit down and fill out basic paperwork, so whose going to make sure this is done and done correctly? Which body will police it?

What happens if a system can’t properly decipher a smart contract? Do we essentially designate a new type of 404 error? How and who resolves that issue? What will that experience be like for the listener and are we asking an awful lot from them to join this bold experiment, when for them the current model is working well? Today I pay a streaming service and I click on a song and it plays. What truly incentivizes anyone to want to switch over to this model? How do you incentivize music platforms who are locked into current streaming contracts to switch over?

And now let me expand the complexity by a massive factor. How do you perform an automated UGC sync? Across disparate assets? Multiple owners and industries? Automatically? It took me three years to solve that problem, and I can’t find anyone who is talking about how to solve that.

Seriously people…think about this stuff. I’m seeing article after article that talks about the simplification of music by just using the blockchain with wild promises that have no possibility of being solved anytime soon…if ever, and I don’t think we have the luxury of playing around with this while Rome burns.

Transparency is Clearly the Answer
If there’s a “Word of the Year” for the music industry, it certainly has to be the word “transparency”. There is an awful lot of talk about transparency that revolves around the idea that there are all these black box deals over rates and use that also involve advances paid by tech companies to rights owners with no understanding of where that money goes or if artists and songwriters actually see any of it. The other pressing aspect has to do with the accuracy of streaming plays and pay. Both are issues that need to urgently be addressed.

The idea put forward in partially solving this with blockchain is to create a universal rights database by transferring all the details of what the work is, plus use and rates over to a transparent system that not only covers the what/how/when/cost of something, but also to create a transparent transactional record of each use that can be audited by anyone. Expanding on this has also been the idea that you could also use the same type of system to create transparency as to who may have worked on a project, how much they “own”, what they get paid as a percentage, even automating that payment process, etc. Buy a song and everyone who should be paid is instantly paid.

That’s not necessarily a bad idea, in fact many aspects of this are brilliant. But when it comes to execution, yet again, there are a lot of questions I’ve yet to hear answered, and some rabbit holes I’m not sure we’re prepared to go down.

So let’s ask some questions, starting with how much transparency is too much transparency? I’ve seen it proposed that we should just open everything up and have a completely transparent music industry.

Imagine you went into Starbucks one day and on the menu board was a breakdown of the costs and sources of everything that went into your $4 latte, and you knew exactly what the margin was on any given item in the store? Would you still be inclined to pay $4?

Should we be breaking down and removing all obfuscation of the costs associated with making music? Should someone know who you paid, how much, your studio time, etc? Hell, should artists know what each other are being paid? What then would be the point of negotiations? How would you get the best sync or sponsorship deal? Does a session musician want the money he was paid on one gig transparent to other session musicians on that gig or other gigs?

Let’s suppose we find ourselves in a blockchain future where by using the blockchain and cryptocurrency, instead of the music platform (Spotify/Apple/Deezer/YouTube) paying the rights owner, the listener pays the artist direct through a micropayment system each time a song is played.

Who sets the rates? If the rates fluctuate, how do you inform or ensure that the listener is willing to pay a fluctuating rate? How do you get them to agree to terms for each artist across the blockchain? Assuming this is an automated process, what mechanism on the listener side ensures this is agreed upon? What about ensuring you are compliant with the consumer protections in each region? What about age validation or explicit material?

If you were to charge the listener on a direct micropayment system, how do you calculate that? Based on length of time? What if they don’t complete the track? What if by accident they forget to turn off their player? What if there is a network interruption? Will you pro-rate? Will you refund their money automatically? What if they accidentally play the wrong song or fast forward/rewind? Do you charge them for the first 20 seconds? What if it is the recommendation of a friend through a shared link? Who pays for that? Say they buy a track and realize they made an incorrect purchase? Can they get a refund? If your system of payments is automated and the money already has been distributed to those who contributed on your track (musicians, producers, songwriters, etc.), will you pull money automatically from them if you have a refund? What if you have a band and there are 5 members and 3 of them already spent their money? Who performs the refund? What if the payment system is compromised or the individual with the charges didn’t authorize that use? Who eats those charges?

How will the artist or their smart contract handle CRM? I mean once you are in direct 100% control of your data, assets, and business and no longer have the services of a PRO or label, you are now also in charge of the entire workload including customer service, so that tech is going to need CRM tools. How will you issue promotional tracks that are free to some but paid to others? How will you handle that some systems have free models and others have paid models?

You are going to say, but Alan, what about the fact that with such a system, we can deal with a bit of hassle because as artists, we now make more for each sale or stream? With the reduced overhead of all these middlemen, we can cover these things.

Okay true, the costs for the artist to transact have dropped, and they now make a higher percentage of income “per stream” because it is a direct connection to the fan who pays, but now you aren’t working as a collective body so you may have also driven the “transactional royalty rates” lower as the market is now even more highly saturated and competitive, plus there is no set rate for music since each artist wanted to be independent and set their own pricing via blockchain/cryptocurrency.

So now in the future, instead of the “music industry” as a collective having the leverage to negotiate/justify the costs/price of something, it will now be the individual artist in the position of justifying what their work is worth to people who have no understanding at all of the value.

Welcome to the completely transparent music industry. This. Will. Be. Brutal.

Closing Thoughts
I’ve said before, we need a better methodology for how we manage data, and clearly there are efficiencies and obvious improvements in transparency we could do in the near term. However, depending on how we execute these solutions we could in fact make the problems worse and all the money saved will simply be spent in other areas, thus wiping out any benefits. Add to that in order to answer many of the questions above, we need new technologies, standards, organizations, and companies to exist (that currently do not) before any of this will work. That won’t happen overnight, and it makes me wonder if there isn’t a better manner of going about solving these issues that still includes the blockchain, but doesn’t waste time reinventing the wheel.

More to come…

It’s important to remember that David Lowery could have just sued Spotify over his own catalog.  He didn’t do that.  He brought a class action for the good of all songwriters who get overlooked and disrespected by Spotify and that’s a lot of people.  I don’t know Melissa Ferrick, but I would bet the same could be said of her.

The plaintiff who can’t be bought off is a defendant’s worst nightmare.  This is particularly true in David’s case because in addition to whatever money damages the class may be awarded, David is also asking for an injunction to require Spotify to bring in an independent third party compliance examiner to fix Spotify’s massive failure to identify copyright owners.

That injunction is probably more fear-inducing than whatever the payment might be, because that will once and for all fix the problem and eliminate the slush fund–or force Spotify to stop exploiting uncleared tracks.  Make no mistake–unpaid royalties are a source of interest-free loans.

Why do I think that Spotify is most afraid of someone they don’t control getting inside the company and looking under the hood?

Read the rest David Lowery is Spotify’s Worst Nightmare from Music Tech Policy

The major publishers are on the verge of a major settlement with Spotify.  Details have emerged that make it clear that everyone gets something except indie songwriters.  Well, indie songwriters may get  a few dollar IF they help build Spotify’s spiffy new database by dutifully submitting publishing information. But unlike the major publishers they won’t receive penalties or the statutory damages that may be legally due to them.  Statutory damages  can be in the thousands of dollars per unlicensed song

And why exactly are indies helping build a Spotify publishing database?  I mean Spotify built a streaming service and raised billions of dollars and they forgot to build a song royalty and licensing payment system? It’s not songwriter’s fault the company is apparently run by incompetents.  Further there were also plenty of third party vendors that could have done a halfway decent job licensing and paying royalties.  Which reminds me why does HFA get in on the deal?  They were in charge of licensing the songs that didn’t get licensed.   This literally punishes the victim while rewarding the apparent mass infringer and its enabler in chief.  This is a complete outrage.

Judging from preliminary data it appears  that the unlicensed songs (and resulting unpaid royalties) were largely indie publishers not represented by the major label publishers or the Harry Fox Agency.    So why is it that any remaining royalties will be paid out according to publisher market share?  That will only guarantee that the major publishers are paid royalties that should belong to indie songwriters.

So here we go again.  In a shortsighted cash grab the major publishers will take what most average-hardworking-play-by-the-rules Americans would call a $5 million bribe, in exchange for giving Spotify an out on the ongoing HFA audit and provide a smokescreen that misleads independent songwriters and Spotify investors into thinking that the unlicensed song problem has been fixed.  It has not.  In fact it’s worse than fixed.  It’s a $5 million dollar whitewash.

 

 

 

 

1.  It’s not a real settlement, it’s more like a bail out.   It doesn’t get rid of the real problem: infringement liabilities.   Spotify will still be loaded with an unknown number of songs (hundreds of thousands?  millions?) that were never licensed and thus Spotify will still be infringing copyrights on a mass scale.  Why?  It would require tens if not hundreds of thousands of independent songwriters who have no relationship with NMPA to opt into the NMPA’s publisher payout settlement.  How likely is that to happen?  (Not to mention songwriters who live outside the U.S.)
2. The NMPA publisher payout settlement supposes there is a royalty rate with which to calculate unpaid royalties.  But there is no royalty rate!   Why?  It is highly likely that Spotify failed in many cases to obtain compulsory licenses BEFORE they made available the songs (hence the settlement).   As a result by law Spotify is forbidden to use the compulsory licenses on a recording-by-recording basis (and song-by-song) and the associated statutory royalty rate.  This means Spotify must negotiate a direct deal with each songwriter.  Until that is done there is no way to calculate unpaid royalties.  Spotify is trying to unilaterally impose some theoretical royalty rate on all the world’s songwriters.
3. The settlement essentially forces publishers and songwriters to build Spotify’s licensing and royalty database.  Can you imagine the outrage if a record label demanded that performers and managers build the back office royalty systems before they were paid?  Why?
4. It looks like the $5 million “penalty” would be divided up among publishers by market share.  So this means the major publishers would capture most of this revenue.  Now think about it.  Who IS getting paid by Spotify?  The major publishers! So now they get paid again?  What’s the penalty for if the majors were already getting paid? The unpaid and unclaimed royalties are more likely to belong to the independents who weren’t licensed.
5.  I have a fundamental objection to the premise that Spotify and HFA have somehow learned their lesson and reformed their practices and are thus deserving of a settlement.  It appears that they continue to engage in practices that violate a host of laws (not just copyright). Allow me to demonstrate.  HFA just sent to me on behalf of Spotify (via USPS) what appears to be backdated NOIs (“notice of intent to obtain a compulsory license”).  Here’s one postmarked Feb 16 2016  that we received for a use starting in 2011–FIVE YEARS LATE!  And it’s “signed” by Ken Parks, a Spotify executive who left the company nearly a year ago.  Not only that, but it lists an address for HFA that they didn’t have until they moved in 2012!  I have to believe I’m not the only one who is getting backdated NOIs trying to trick me into accepting them.