UN prepares to airlift badly needed calculators and math textbooks to Sony digital executives.  Above a A Norwegian UN peacekeeping soldier reacts to leaked details of Sony digital executives confusing per capita revenue  with ARPU (annual revenue per user.)  Photo by Русский: Фото: Михаил Евстафьев English: Photo: Mikhail Evstafiev (Mikhail Evstafiev).

Are we really doing this again?   Seriously, is there a single digital music executive at a record label that can do basic math?  Reliable reports on the leaked Sony emails seem to suggest otherwise.

Did every single one of these folks fail the 6th grade word problems?

Let me explain this one more time. ARPU≠Per Capita Revenue

For instance in the year 2000 US recorded music purchases per capita were $71.  Now remember that per capita figure includes a lot of people who probably don’t buy music.  For instance infants, little old ladies and even (sorry but  it helps illustrate the point) the hearing impaired. Per capita means everyone in the country. It means…well per capita!!  

So when sony digital music executives start talking about ARPU (Annual Revenue Per User) on certain services  they are talking about a much much smaller subset of the population.  You  can not honestly talk about $120 Spotify APRU and  $71 dollar per capita annual revenue in the same sentence.  Yet it looks like they do.  I don’t know if this is sheer stupidity or if it’s part of some sort of digital snake oil scam.

To illustrate, look what would happen if you did it the other way and equated streaming services ARPU with per capita recorded revenue consumption.    If all streaming services combined somehow miraculously manage to get to 40 million paying subscribers (about level of adoption of streaming video) on the high side you get to $15 per capita.   (40 million x $120 a year/ 320 million us population).

You’re all fired.

Former EMI Music CEO Roger Faxon has joined the Board of Pandora.  I don’t know why but for some reason this reminds me of a scene out of Arrested Development:

 

In the last 3 years Pandora has done just about everything it could to lower payments to songwriters and performers.  First there was the  Orwellian named “Internet Radio Fairness Act.”  They followed that up with multiple suits against songwriters’ organizations and now they are playing fast and loose with the Copyright Royalty Board apparently cutting direct deals to simply “create evidence.”

But sometimes you got to wonder if Pandora is a little too smart for its own good.  Because Pandora considers itself to be non-interactive it can avail itself of the compulsory licenses for sound recordings and go before the Copyright Royalty Board to seek lower rates. That is what is happening right now.  But is Pandora really a “non-interactive” service?   And shouldn’t that be the first question answered before proceeding to rates?   Has this question ever really been carefully examined? I don’t really know how the Copyright Royalty Board proceedings work but shouldn’t they be able to asks this question?

Pandora has never seemed to fit the definition of a non-interactive service to me.   But I’m not a legal expert.  Generally the answer from folks who are legal experts goes something like this:

“Because the Second Circuit Court of Appeals ruled that LAUNCHcast was non-interactive Pandora has proceeded as if they were non-interactive and the music business let them get away with it.”

Okay.  The weird thing is that very few people have really read the LAUNCHcast decision.  Most experts don’t really know what the decision says and are loathe to go on record speculating whether it applies to Pandora    So I spent the last week reading up on the ruling myself.  Again I’m not a legal expert but I don’t think that Pandora can use the LAUNCHcast decision because the court does not address a key clause in the DMCA conference report that gives a clear example of an interactive service:

The court quotes everything else in the paragraph. But not this.  In fact this omission is really quite stunning. They seem to steer around this particular sentence like it’s a pothole and they are driving a low rider Cadillac.    Look at my highlighted screenshots if you don’t believe me.  The significance is that Pandora lets you “build a program based on certain artists” and this example would seem to qualify Pandora as interactive. IMHO since the LAUNCHcast ruling seems to specifically avoid this clause it can’t be used by Pandora to justify non-interactivity.

Bye Bye compulsory license.

 

 

The House Conference Report.

 The relevant sections of the Launch Media decision. 

 

Personalized Program: Don Henley Radio Station immediately plays a Don Henley track. 

 

Yesterday I built Pandora “stations” based on each of the following artists:

Prince, Don Henley, Eagles, Joe Walsh, Pharrell, John Lennon, Steely Dan and Fleetwood Mac.   With one exception  I was immediately played a song by that artist.   The exceptional case  was Fleetwood Mac, but after 2 seconds I hit the skip button and then got a Fleetwood Mac song.  I repeated this experiment today with a different set of artists.   How is this not an interactive service?

Here is the relevant paragraph in the DMCA.   It specifically identifies as interactive  services that offer playlists based on an artist (highlighted bold):

 

Created station for Don Henley

Pandora immediately played:

 

 

 

Created station for Eagles.

Pandora immediately played:

 

 

Created station for Joe Walsh

Pandora immediately played:

 

 

Created station for Pharrell

Pandora immediately played:

 

 

Created station for Steely Dan

Pandora immediately played:

 

Created station for Fleetwood Mac

Pandora started to play  Creedence Clearwater Revival

 

Hit “skip” after two seconds and Pandora played:

 

 

 

 

What Is interactive radio?  And why isn’t Pandora considered interactive radio?

Although Pandora has always regarded themselves as a “non-interactive” Internet radio service  from what I can tell this assumption has never really been properly tested. The question is important because if Pandora is  “interactive” -not non-interactive -it could no longer rely on compulsory licenses.  Instead it would have to negotiate with rights holders to use sound recordings.  Further it would no longer be able to engage in its patented direct licensing shenanigans and “create evidence” for the copyright royalty board.  All of this would be a net plus for rights holders as Pandora has been relentless in trying to lower royalties paid to songwriters and performers.  And besides a little good faith negotiation never hurt anyone.

I will say that I have always felt that Pandora oversteps the bounds of what should be considered a non-interactive webcasting service.  Mostly because it’s… well it’s interactive!  It allows me to build my very own personal radio station based on a particular artist, even a particular song.  I can skip tracks, I can give a track a thumbs up, or give a track a thumbs down and I won’t ever hear that track again!  It’s very interactive.

But more importantly, if I build my personal station using just the artist (and not specific song) the first song played is almost always a song by the artist I requested.  If I specify a particular song and artist, I always get a track by that artist within the first five songs.  If I don’t want to wait for the first few songs to play,  I can “skip” the first four tracks to get to a song by the specified artist.  So for all practical purposes I can almost immediately make the service play a track by the artist I want to hear.

This intuitively seems to make Pandora an interactive internet radio service.

What does the law say?

I realize  using my own intuition for what is interactive and non-interactive is not law. So what does the law say?   I dug out the relevant paragraph that currently applies (H.R. Rep. No. 105-796 at 88):

This seems very clear.   Indisputable even.  Further the fact the cited paragraph is a clarification of the definition of interactive service it would seem to carry extra weight.  The previous definition had been criticized for being too vague, so this paragraph is intended to be more precise, more literal, and less open to interpretation than the previous language. Congress really meant it when they modified the  description.

From this we can objectively conclude that congress  clearly intended to include this specific kind of “personalization” as interactive. To argue otherwise is absurd. Otherwise why give it as an example?

Again let’s look at that last line:

“the  recipient might identify certain artists that become the basis of the personal program.”

If I can start my own personal radio station based on an artist and it immediately plays a song by the artist it is clearly giving me the artist “on demand.”  Clearly Pandora is interactive.  I think most reasonable people would come to the same conclusion.  But here is the problem.   Pandora (and other “non-interactive” services) take the position that they are no different than the now-defunct LAUNCHcast  And because  the Second Circuit Court of Appeals ruled that LAUNCHcast was non-interactive it follows that Pandora is also non-interactive.

Does this truly follow?  I don’t think it does.

The Second Circuit and Launch Media. 

Once upon a time there was a internet music service called LAUNCHcast.  And if you or I examined this service we might reasonably conclude that the service was “interactive” and hence could not avail itself of the compulsory licenses.   This is in fact what BMG/Arista argued in 2001 and subsequently took LAUNCHcast to court.  But the Second Circuit disagreed and allowed LAUNCHcast to be classified as non-interactive.   This decision was upheld by the Second Circuit Court of Appeals in 2009.

Many broadcast attorneys were surprised by the original decision and the result of the appeal. Even those that generally welcomed the expanded flexibility it granted internet broadcasters seemed to think it was maybe a little too good to be true.   As one IP litigator noted at the time:

In my opinion, the LAUNCHcast decision is quite persuasive. The court’s research into the legislative history is exhaustive, and its understanding of the relevant technology is impressive. But, if you read just the text of the definition of interactive service, it’s a pretty counter-intuitive result. – See more at: http://ipbreakdown.com/blog/pandora-almost-wasnt-the-definition-of-interactive-part-11-of-our-online-music-services-series/#sthash.pAxwQ8Gn.dpuf

There was even a sort of “fix” proposed, gradations of interactivity to create a sort of  “pseudo interactive streaming” service, since in the view of many the court should have kept LAUNCHcast in the interactive service but simply applied different rates.

Now I’m not trying to re-litigate the Launch media decision,  the real question is whether Pandora is interactive not LAUNCHcast.   However let me at least outline my  general criticism of the LAUNCHcast decision.  For if my reasoning is legally sound (due diligence if you are not aware I have no legal training) I believe it is very significant.

While the decision on LAUNCHcast is admirable in its craftsmanship (some would say admirable in a Rube Goldberg sort of way) it ultimately rests on some assumptions that I don’t think one can necessarily assume.  Further if I diagram the argument (I won’t do that here as it is a beast), it seems to rely on some false inductive reasoning at key points.  ( I will admit it’s possible that I don’t really understand the argument).   But these criticisms are ultimately unimportant, for IMHO there is a much bigger flaw.

The real problem with the decision requires one to  “zoom out” and look at the decision as a forest and not trees. From that “zoomed out” perspective you can see an enormous and troubling contradiction.

Specifically the Second Circuit’s interpretation of the law eliminates the need for an entire class of interactive services set up by the very same law.   How is the Second Circuit’s interpretation of the law possibly consistent with what congress intended?  Clearly congress didn’t intend to set up a class of interactive services that were unnecessary because they were actually non-interactive services.  But that is the consequence of the decision.

Two Classes of Interactive Services

 The DMCA not only distinguishes between non-interactive and interactive services, it further subdivides the interactive services in to two categories:

An “interactive service” is one that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient.  (17 U.S.C. § 114(j)(7))

or as described by Mary Ann Lane in the Alabama Law Review:

As many commentators have observed the court explicitly accepted this distinction and only attempted to clarify whether LAUNCHcast was interactive under the first model.  Again quoting Lane in the Alabama Law Review:

 

 

 

 

 

The Wall Street Journal is reporting that Spotify is close to finishing a new round of funding that values the money losing streaming service at approximately $8.4 Billion dollars.

Spotify nears deal to raise $400 million in a funding round valuing the company at $8.4 billion 

Now many of you that work for normal companies outside of Silicon Valley’s bubble-and-bullshit based economy are a little confused by the financial reporting on Spotify.   You see in the music tech industry they use a special kind of financial analysis generally referred to as Magic Unicorn Math (MUM).  It works very differently than the kind of financial analysis (non-MUM) used by businesses that are non-exploitative, make profits, and actually add value to our nation’s GDP.   Here let me give you an example:

Since Spotify is a a music tech company the Wall Street Journal correctly  uses MUM financial standards to report on it’s finances:

The money-losing company needs the cash to support its costly business model of paying nearly 70% of its revenue to rights holders as royalties. Spotify said in January that it had about 45 million free users and 15 million who pay $9.99 a month for an ad-free version.

If you break down this statement you can clearly see the differences between a “Magical Unicorn Math” financial analysis and Non-MUM financial analysis.  For instance if you were doing a financial analysis of a grocery store chain, you would use NON-MUM analysis and would never report as remarkable that a grocery store pays out 70% of it’s revenues for groceries. After all groceries are it’s primary product. Of course they pay a substantial portion of their revenues for this product!

However when you use MUM financial analysis,  paying for your primary product is not just unusual, it’s outside the pseudo-scientific quasi-religious postulates of Magic Unicorn Math financial analysis.  In MUM financial analysis your product or  “content” is expected to magically appear on your platform or network. Without ever having to pay for it!

Well I shouldn’t say “magically” because there is a real honest to goodness religious theory behind the magic.  The theory relies on something called “unicorn drag.”   Unicorn drag was first postulated by Dr. Blake Morgan.  As described by Dr Morgan “unicorn drag is a kind of ‘dark matter’ that is shed by unicorns as they invisibly zip about the board rooms of venture capital firms.”

In MUM financial analysis simply by building a platform or network, “unicorn drag” invisibly compels rights holders to freely give up their works at below market rates (or even for free!) so that venture capitalists can profit handsomely through an IPO or  “liquidity event”.   Liquidity events are sometimes more informally referred to as “bilking pension funds and little old ladies out of their life savings.”   Now this is a little confusing because our normal “civilized” ethics would discourage people from profiting in this manner and those that did profit in this manner would normally be shunned or even imprisoned.

However the Old Norse/Silicon Valley/Venture Capital religion on which MUM is based celebrates the “liquidity event.”   According to this particular mythology, the greater the abject immorality of your liquidity event the greater your reward in the afterlife.  Legend has it that those who profit the most shamelessly get to sit and drink from the skulls of their victims at the table of the great crypto-fascist-liBRATarian God Peter Thiel.   Skol!!

++++++++++++++++++++++++++

I think I’ve made my point.  Let’s look at that WSJ statement again:

The money-losing company needs the cash to support its costly business model of paying nearly 70% of its revenue to rights holders as royalties. Spotify said in January that it had about 45 million free users and 15 million who pay $9.99 a month for an ad-free version.

For all of you that live in the real world, here’s how that WSJ paragraph should have been written using Non-MUM financial analysis:

The money-losing company needs the cash to buttress meager revenues from the advertising supported free tier of their service.   Spotify said in January that it had about 45 million free users and 15 million who pay $9.99 a month for an ad-free version.

(ED NOTE: We believe that the 15 million paying $9.99 a month is probably not correct, from our reading it looks like WSJ is counting users paying $4.99 a month in that $9.99 a month tier.)