Norwegian UN Peacekeeper reacts to news that The Verge thinks $25 million dollar advance for streaming rights to 25% of music market is a lot of money. Photo by Русский: Фото: Михаил Евстафьев English: Photo: Mikhail Evstafiev (Mikhail Evstafiev).

 

The UN announced today that it is airlifting calculators, music industry textbooks and clues to Silicon Valley tabloid tech blog The Verge.   This was prompted by an article published by The Verge that seemed to completely misunderstand the scale of revenues generated by the recorded music business (even with widespread piracy). As a result The Verge missed the real story contained in the leaked Spotify-Sony contract: Sony gave away streaming rights to our music for (pardon the pun) a song!

Sony represents about 25% of worldwide recorded music revenue. In 2011 (the date of contract) recorded music revenue was around 16 billion dollars.   Sony’s share was actually higher then but we can safely assume they were responsible for approximately $4 billion dollars.   So the $25 million over 2 years (or $43 million if you optimistically interpret the contract like The Verge) is a pittance for these rights.   The Verge then made a big fuss about whether this advance was likely to be properly credited to artist accounts.   But that’s missing the point because everyone knows the real payout was probably in the Spotify stock that Sony, key managers, artists and executives received. Now, that’s the story. How is the equity to be credited to artists? Not the $25 million. That’s chump change.

Now I understand how The Verge may have missed this.   They consulted the MySpace of music industry experts, Rich Bengloff for comment.  Bengloff who is highly unlikely to look kindly on his former employer Sony Music,  piled on saying that Sony artists were unlikely to receive any of this advance. What Bengloff didn’t note was that the “indie” labels that he represents are also unlikely to share these advances with artists either.

Pot,kettle,black.

Finally here is another clue for The Verge: Does Sony Entertainment CEO Michael Lynton (not Sony Music chief Doug Morris) have some sort of special (investor?) relationship with Spotify’s Daniel Ek? Might this have something to do with what looks like a remarkably good Sony catalogue deal for Spotify?

I mean I’m just guessing here but has anyone bothered to search the Wikileaks archive for some keywords?  I dunno… different combinations of  “Spotify, Lynton, Daniel, wife, manuscript?”

Just think about this.

This document was scanned 13 days ago?!  If The Verge scanned this document why did they wait so long to “break” the story?

So it seems likely The Verge did not scan this contract and this is the original leak.

Only two parties had access to this agreement before The Verge got a copy:   Spotify and Sony.

Sony clearly does not benefit from the leak. This is a disaster for Sony. Now it could be a disgruntled employee.  But it would have to be quite a high level employee to have access to this contract.  My understanding is that contracts like this are stored in highly secure locations.

My bet is on Spotify.  Why? Because they benefit from this leak in two ways:

1) It helps Spotify with their complaint to EU against Apple and major record labels over the new Apple streaming service. Especially the disclosures about “Most Favored Nations” clauses, which UMG is forbidden to use.

2) The leak happened a day before Spotify’s big press event announcing new partnerships.   This event was coincidentally live streamed by The Verge.  (hmm….was The Verge in on it?)

But my speculation doesn’t really matter.  Both Spotify and Sony could review their internal network traffic.  They probably already have.  It’s a simple question who was using a Canon imageRUNNER ADVANCE C5051 at 10:41:36 Am on May 7th 2015? Who was using the Cannon iR-ADV C5051 App on a relatively new Mac?   Does Sony even use Macs?

Sony already knows whether this was an internal leak or if Spotify leaked it.

Things are about to get very, very interesting.

 

More on this later, but The Verge leaked the 2011 license between Spotify and Sony Music.  Considering the source, we have to assume that the Verge intended to make Sony look bad, but here’s the reality:  The total advances for 3 years that Spotify committed to pay to Sony was $42.5 million.  Given Sony’s huge market share and strong artist roster, this isn’t exactly chump change, but it’s pretty low.  Reasonable, in fact.

Given all the braying that’s come from Spotify about how many millions they have paid to the “music industry”, we have to imagine that these advances actually recouped.  Here’s a hot tip for the Verge–an “advance” is a prepayment of royalties.  The fact that you got an advance on your catalog doesn’t excuse the label getting the advance from paying royalties on streams or sales.

The label may “keep” the advance, but they turn around and pay it out as they get royalty statements from Spotify.  An advance only becomes “breakage” (i.e., an overpayment) if the advance is greater than the sales at the end of the contract, not at the beginning.  Given the relatively low advances in the Sony deal, it doesn’t reek of the contrived breakage where the label gets an advance that is clearly going to result in a grotesque overpayment.  (We think all the goodies should be shared, but what you would want shared in this case is the overpayment at the end of the contract term, not the total advance paid at the beginning of the term before it’s reduced by royalty payments.)

Granted there were some other goodies thrown in like discounted advertising inventory available to Sony, but in a sourceless article (very Googlely) the Verge has no evidence that Sony ever used any of that inventory.  Or if they did, whether they “sold” it to a third party rather than advertising their own records.  Since Sony’s not in the advertising business–unlike Spotify–it seems unlikely that Sony would be selling that inventory to a third party.  The Verge really needs to come up with some better facts–probably from the same person who was in a position to leak the Sony contract.

We would imagine that thanks to the Verge, Sony artists are hoping that their label isn’t quite so generous to Spotify in their renegotiation.

But here’s the other thing.  Now that we know that Spotify was making deals with major labels with significant advances and all kinds of goodies thrown in presumably to justify a lower royalty rate, how did Spotify stand there with a straight face and ask independent artists to take an even lower royalty with no goodies?  Why should we get the hillbilly deal?

Who are these people?

Spotify’s A Dominant Player in the Relevant Market

There’s all kinds of rumors going around about the European Commission investigating whether major labels have somehow conspired with Apple to hurt Spotify and YouTube (owned by Spotify board member Google).  How?  By offering a music service without a free service based on the crack model.  This theory has to do with Apple and the major labels having dominant market positions, and the EC’s alleged desire to protect Sweden-based Spotify.

Or so the narrative goes.  There’s scant documentation of any such “probe” aside from a couple unattributed news reports based on “people familiar with the case“.

But if the European Commission is looking into Apple to protect Spotify, maybe they should be looking at Spotify itself.  According to a Billboard report, a Spotify executive told the Google-dominated Music Biz Association (formerly NARM) that Spotify has 50% of the global music subscription market:

[Spotify executive Will] Page also pointed out that Spotify is half of the $1.5 billion global subscription streaming market. In the U.S. market, Spotify made up approximately 90 percent of last year’s growth in subscription revenue, according to Page.

Isn’t that special?  So Spotify is at least a dominant company if not a monopolist in a very relevant market to the EC’s rumored investigations.  Maybe while the EC is looking into the major label deals with Apple they could also look at Spotify’s behavior toward independent artists and control over the trickle of royalties from subscription?

And before Spotify tries to change the subject–we’re not talking about royalties paid by labels, we’re talking about royalties paid by Spotify to independent artists with no label.  And if the royalties suck for independent artists, they must really bite for signed artists who have to share the revenue with their labels.

Why Do We Want Out of the Ad Supported Tier?

Here’s an alternative and non-conspiratorial explanation of why people want out of the free streaming tier–maybe it just sucks.  How about that?  And who is hurt by cutting out an ad supported tier?  Advertising networks serving ads to Spotify, like, oh say Google Adsense.  You know–Google, the Spotify board member.

The Google connection is actually very interesting.  For all the bitching and moaning that Spotify does about YouTube, why would they put Google on their board of directors?  A “freemium frenemy” perhaps?  Maybe because Google has a strong interest in seeing that Spotify stays an ad supported business for a long time?

The reaction against the free tier is not just a reaction to Spotify, it’s also a reaction to YouTube and it’s mainly a reaction against ad supported streaming, a business model that is supposed to be a defense to ad supported piracy.  You know, the ad supported sites that Google drives traffic to.  Remember 350 million take down notices to Google search last year?

Frenemies Creating Another Compulsory “License”

Maybe the Spotify narrative is wrong.  Maybe the real story is that the fight is between those who profit from the advertising model through a bunch of crappy deals with Spotify and YouTube that should never have gotten done in the first place.  Maybe everyone is realizing that now and want out.  Maybe Apple is taking advantage of that realization and is innovating and competing.  Maybe Spotify is trying to use its dominant position in music subscription to throw its weight around in its “freemium” business and its “frenemy” and board member Google is in the background doing what Google does best:  jacking artists around.

What is troubling about Spotify’s antics is that they don’t get a compulsory license for recordings, so they can’t quite screw us as hard as Pandora or SiriusXM do with the power of the federal government behind them.

But if Spotify can force the major labels to license to them for the free tier by manipulating the antitrust law, that means that Taylor Swift will not be able to withdraw from either Spotify or YouTube.  And we suspect that’s the object of the exercise.

Don’t regulate the Internet except for the artists and the songwriters.

We’ve now heard this rumor from multiple sources and we believe it to be accurate:

There is an idea going around in Washington DC (and LA) that somehow “the music industry” (whoever that is) needs to find a project to work on with Google to show congress that we can all get along.

Huh?

This is an idea that manages to be both hysterically funny (as a joke) and highly offensive (wait, you’re serious!?) at the same time.  It’s not like we performers and songwriters  are remotely capable of doing anything to a company with a market cap of $360 billion.  Especially Google which  seems to enjoy the complete political protection of the executive branch. Nor have we performers ever done anything to Google. Quite the opposite, any rational and sensible person would look at this situation and reasonably conclude that it is the performers and songwriters that are abused by Google. There are no two sides to this situation.   Perhaps the most accurate way to view the situation is to imagine Google as the schoolyard bully, sitting on the chest of the skinniest kid on the playground (performers and songwriters), slapping them silly with their own fists and DC and LA insiders are chanting:

“Stop hitting yourself, stop hitting yourself, stop hitting yourself!”

Is everybody now smoking weed up there in DC? On what planet are songwriters and performers required to demonstrate that we can work together with our serial abuser?  Who’s insane idea is this?

However to demonstrate we have a sense of humor and are willing to play along,we’ve come up with some specific ideas for how Google and “the music industry” could work together.  Google could demonstrate it will “stop hitting us”  by doing the following:

 

1.  Fix the Defects in Google’s Search Algorithm to get DMCA Notices below 100 million a Year:  Google gets over 350 million take down notices a year now.  This is mostly due to ad supported pirate sites that Google not only drives traffic to but for which Google may also be serving advertising or using Google Wallet to fulfill transferring revenue to publishers.  How much longer must this charade go on?  Did any sitting Member of Congress who drafted the DMCA really think that their handiwork would produce hundreds of millions of notices to one search service?  Does anyone really believe that Google is not running their search algorithm exactly the way they want it to perform?

2.  Fix ContentID Rights Registration:  Every rights holder who’s both honest and can afford it will tell you that they spend extraordinary amounts of time fixing the broken ContentID system on YouTube.  Before trusting Google to do anything like creating a rights database, they really need to fix the absurd ContentID system.

3.  Provide Independent Artists the Same Tools that Taylor Swift Has:  Taylor Swift showed everyone what happens to sales when you can control your rights on YouTube and bless her for showing everyone it can be done.  But it also must be said that it takes an expensive effort to use those tools the way she did.  YouTube needs to make these same tools available to everyone.

4.  Stop Threatening Independent Labels and Artists:  As we saw with Zoë Keating and the indie labels, Google will use whatever leverage they have as a monopolist and strong arm goon to try to force their will on anyone who can’t push back hard–which is essentially everyone.  Before doing anything that gives Google even more leverage, they need to demonstrate that they can be trusted.

And no one trusts them.

5.  Audit Rights for Songwriters:  Google routinely denies independent songwriters (and we hear independent publishers as well) the right to audit royalty payments.  This is something they could change overnight but they haven’t and have given no indication that they ever intend to do so.

So like the man said, trust but verify.  If the Congress wants to see us work with Google, then the Congress needs to level the playing field because they’re the only ones who might–might–be able to stand up to Google.

We see little indication that the Congress has the stomach to do so.

These are the people that are demanding the government bail out their bad business model by lowering performer and songwriter royalties.

These are the people that refuse to pay royalties on pre-1972 recordings.

How ’bout y’all try making money the old fashioned way?   You know, by working for it.

(Just in case the video has been deleted, below is a static screenshot)

As we were told last week by a whistleblower, National Public Radio’s in-house lobby shop decided that it was in NPRs best interests to align themselves with the so-called “Mic Coalition” (or as some call it, the “McCoalition”).

The McCoalition is not only National Public Radio, but also includes the National Association of Broadcasters–an extraordinarily powerful special interest group long devoted to protecting crony capitalism and the Clear Channel no-royalty loophole.  Yes, in a move worthy of Pandora’s Chris Harrison (aka “Mr. $50 Handshake”), the McCoalition also includes a couple other trillion-dollar babies: Google, Amazon, Pandora, the Digital Media Association (of which Google/YouTube, Amazon and Pandora are members), the Computer & Communications Industry Association (of which Google, Amazon, Pandora are members) Cox Media Group, iHeartMedia (formerly Clear Channel), Salem Media Group, the National Association of Broadcasters (of which Cox, iHeart, Salem and Pandora are members), the Music Licensing Committee (of which Cox and Clear Channel are members), the Consumer Electronics Association (of which Amazon, Google and Pandora are members), the National Restaurant Association (which fought the performance royalty for songwriters whose music is performed in restaurants), the American Hotel and Lodging Association (which also fought the performance royalty for songwriters).

As the leaked email told NPR stations:

NPR is participating in the Music, Innovation & Consumers (MIC) Coalition to ensure that public radio’s voice is heard in future policy decisions involving copyright law. Changes to copyright law may have a direct impact on public radio stations’ abilities to bring music to listeners nationwide.

Our participation in this coalition is not an endorsement of the business plans or activities of other members.

Really?  What is it then?  Pandora has spent millions trying to screw legacy artists who recorded prior to 1972.  The NAB has spent millions lobbying against artists to continue getting a free ride on the music they broadcast, something they’ve fought for decades.  The rest of the world accepts artist pay for radio play–just not the National Association of Broadcasters, North Korea and Iran.

And NPR.

Google, the CCIA and the CEA routinely try to screw artists for a host of reasons and are some of the principal sources of propaganda and lobbying hustle to hurt all of us.  If you include songwriters–all of the above, plus the National Restaurant Association.  The National Restaurant Association is so greedy they managed to get the U.S. taxpayer to subsidize their last play at crony capitalism called the Fairness in Music Licensing Act.   That special interest legislation violated international law and wound up in an international trade arbitration that cost the U.S. taxpayer $3.8 million in fines and potentially more to come.  Maybe the restaurateurs would like to cut the taxpayer a check?

Yes, that’s right.  The U.S. taxpayer is subsidizing music in U.S. restaurants–not for American songwriters, because we don’t have a right to that money.  The restaurants outsourced their royalty payments to the World Trade Organization.

And there is NPR.  And the suits in the NPR lobby shop think this is all OK because NPR doesn’t “endorse the business plans or activities of other members.”

This is pretty pricey company for NPR–poor old public radio that always seems to be strapped for cash.  These “coalitions” usually charge membership fees–big ones.  Here’s the problem:  Is the McCoalition being sponsored by “listeners like you”?  Or by “taxpayers like you”?  Or is it just plain old corporate sponsorship?  Or is it a “free membership”?  Because to paraphrase John Perry Barlow, just like information, loyalty wants to be free, too.

The problem is that when NPR lies down with these dogs, those fleas don’t come off.

If you call in for WNYC’s current pledge drive, you might ask them how that mange treatment is coming along.