THANK YOU, Justine Bateman.
The Consensus for Conditional Approval of The MLC, Inc. by the @CopyrightOffice
By Chris Castle
I am pleased to see that there is a consensus against more happy talk among commenters in The MLC, Inc.’s five year review of its operations at the Copyright Office. The consensus is an effort to actually fix the MLC’s data defects, rogue lawmaking and failure to pay “hundreds of millions of dollars” in black box royalties. But realize this is not just the songwriter groups you would expect to see raising objections (discussed in excellent Complete Music Update post). It’s also coming from some commenters who you would not expect to see criticizing The MLC who may not come right out and say it, but are essentially proposing a conditional redesignation.
When did Noah Build the Ark? The Two Arguments for Conditional Approval
There is a significant group, and sometimes from unexpected corners, who fall into two broad camps: One camp is “approve The MLC, Inc. with post-approval conditions” that may lead to being disapproved if not accomplished until the next five year review rolls around.
The other camp, which is the one I’m in if you’re interested, is to spend some time now getting very specific. The specifics are about crucial improvements The MLC, Inc. needs to put into effect and payments they need to make. This would be accomplished by bringing in advisory groups of publishing experts, especially from the independent community, roundtables, other customary tools for public consultations. But–the redesignation approval would occur only after The MLC, Inc. accomplished these goals.
Either way, the consensus is for conditions if not the timing. I’m not going to argue for one or the other today, but I have some thoughts about why delayed approval is more likely to accomplish the goals to make things better in the least disruptive way.
Remember, once The MLC, Inc. is approved, or “redsignated,” then all leverage to force change is lost. Why? Because if the last five years is any guide, exactly zero people will enforce the government’s oversight role and everyone knows it.
Putting operations-based obligations on The MLC, Inc. to be responsive to their members before they get the valuable approval preserves leverage and will force change one way or another, The reward for successfully accomplishing these goals is getting approved for another term (or the balance of their five year review). Noah built the Ark before the rain.
What if we fired them?
I’m actually pleased to see the consensus for conditional approval. Simply firing The MLC, Inc. would be disruptive (and they know it), mostly because the Copyright Office hasn’t gotten around to requiring that a succession plan be in place so that firing the MLC would not be disruptive. That’s a failure of oversight. You can’t expect the MLC to make it easy to fire themselves.
The simple solution to this pickle is for the Copyright Office to make any redesignation conditioned upon certain fixes being accomplished on an aggressive time frame. I say aggressive because they’ve had five years to think about this; it shoudln’t take long to at least implement some fixes. But if we don’t make it conditional the MLC will lack the incentive to actually fix the problems.
A conditional approval would simply say that if the MLC cleans up its act, say in the next 24 months, then they will be officially redesignated. If they don’t, it’s on to the next after that 24 month deadline.
Conditional Approval
I have to say I was encouraged by the number of commenters who said that The MLC, Inc. needs some very definite performance goals. Many commenters said that those goals needed to be met in order for The MLC, Inc. to get approved for another five years until the next review. I’m not quite sure how you approve them for another five years with performance goals unless you are really saying what some commenters came right out and said: Any approval should be conditional.
I think that means that the Copyright Office needs a plan with two broad elements: One, the plan identifies specific performance goals, and then two, establishes a performance timeline that The MLC, Inc. must meet in order for this current “redesignation” to become final.
That “conditional redesignation” would incentivize The MLC, Inc. to actually accomplish specific tasks like everyone else with a job. The timeline will likely vary based on the particular task concerned, but impliedly would be less than five years. There’s a very good reason to make the approval conditional; there’s just too much money involved. Other people’s money.
The Black Box
Every comment I read brings up the black box. Commenters raised different complaints about how The MLC, Inc. is managing or not managing the matching that is required for the black box distribution contemplated by Congress. They all were pretty freaked out about how big it is, how little we know about it, and the fact that the board of The MLC, Inc. is deeply conflicted because the lobbyists drafted an eventual market share distribution. Strangely enough, there’s every possibility that the market share distribution will happen, or could happen, right after the redesignation. Also known as losing on purpose in a fixed fight.
There’s an easy correction for that one–don’t do the market share distribution, maybe ever.
The harsh but near certain fact is if there is an announced market share distribution of the black box, the MLC (and everyone involved) will be sued before the actual distribution. It almost doesn’t matter how clean it is. So why do it at all? The MLC is supposed to set an example to the world, right? (And we know how much the world loves it when Americans say that kind of thing.) What if we said that the market share distribution was just bloodlust by the lobbyists salivating over a really big poker pot? On reflection, it should be put aside particularly because Congress may not have been told how big the black box really was if anyone knew at the time. Ahem….what did they know and when did they know it?
The Interest Penalty
This actually goes hand in hand with another interpretation of the black box provisions of Title I of the MMA which requires the payment of compound interest for black box money to be paid by The MLC, Inc. to the true copyright owner. That compound interest accrues at the “federal short term rate” in effect from time to time (that rate is adjusted monthly and is currently 5.01%). MLC’s interest obligation accrues in an account set up for the true copyright owner’s benefit, not for the recipients of the market share distribution.
Interest runs from the time the unmatched money is received by the MLC until it is matched and paid. There could easily be several different interest rates in effect if the unmatched royalties stay in the black box for months or particularly years. This concept is elaborated in a comment by the Artist Rights Institute. (And of course, why doesn’t the interest run from the time the black box is first held rather than the much later date that the unmatched is paid to the MLC?)
Title I requires this “penalty” the same way that it requires the statutory late fee which itself has been the subject of much negotiation. It is important to note that the word “penalty” does not appear in Section 115, but both the interest rate and the late fee are obviously “penalties” in plain English and in plain site. You don’t have to call it a thing a penalty in order for it to be a penalty. It doesn’t stop being a penalty just because the statute doesn’t define it as one, just like a large furry animal with big teeth, big claws, a loud roar and really bad breath who wants to eat you stops being a bear just because it doesn’t have a sign around its neck saying “BEAR”. Particularly when the furry animal has you by throat.
Align the Incentives
I have to imagine that a penalty of compound interest would incentivize both the MLC and the licensees who pay its bills to match that black box right quick. If a third party is paying the statutory interest penalty which is how it is now according to MLC CEO Kris Ahrend’s testimony to Congress (under oath), then there’s really no incentive for the MLC to pick up the pace on matching and there’s even less incentive for the licensees to make them do it.
It makes sense that the MLC is to maintain an account for each copyright owner (or maybe for each unmatched song since the copyright owner is not matched), so it only makes sense that these accounts and compound interest would be maintained on the ledger of the MLC rather than in a third party bank account, much less a mutual fund. It would be pretty dumb to just lump all the money into one account and run compound interest on the whole thing that would have to be disaggregated and paid out every time a song is matched. Assuming matching was the object of the exercise.
Plus, there’s nothing in Title I that says that black box money has to be put in a bank account that accrues interest so that the MLC doesn’t have to pay this penalty for being slow. Again, the word “bank” does not appear in Section 115. It definitely doesn’t say a federally insured bank account, a bank in the Federal Reserve system, or the like–because the statute does not require a bank. I would argue that if Congress meant for the money to be kept in a bank they would have said so.
Even so, I have to believe that if you want to an insurance company and said I will bring you the “hundreds of millions of dollars” if you write me a policy that will cover my interest expense and insure the corpus, somebody would take that business. If they can write derivatives contracts for fluctuations in natural gas futures in global energy markets, I bet they could write that policy or my name’s not Jeffrey Skilling.
William of Ockham Gets Into the Act
What makes a lot more sense and is a whole lot simpler is that Congress wanted to incentivize the MLC to match and pay black box royalties quickly. Congress established the compound interest penalty to add jet fuel to that call and response cycle following the jurisprudential theory of subsidiarity.
That penalty is part of the normal costs of operating the MLC therefore should be paid as part of the administrative assessment, i.e., by the services themselves. If the MLC sits on the money too long, the services can refuse to cover the interest costs beyond that point and the MLC can then pass the hat to the board members who allowed that to happen. Again, subsidiarity principles suggest that it is good government to create the incentive to fix a problem in the pocketbook of the one who is best positioned to actually get it fixed.
So everyone has a good incentive to clean out the black box. Brilliant lawmaking. I don’t think that’s such a bad deal for the services since they are the ones who sat on the money in the first place that produced the initial hundreds of millions of dollars for the black box. They got everything else they wanted in the MMA, why object to this little detail? Let’s try to hold down the hypocrisy, shall we?
There may be some arguments about that interpretation, but here’s what Congress definitely did not do and about which there should definitely not be an argument. Congress did not authorize the MLC to use the black box money as an investment portfolio. Nowhere in Title I is the MLC authorized to start an investment policy or to become a “control person” of mutual funds. Which they have done.
That investment policy also raises the question of who gets the upside and who bears the downside risk. If there’s a downturn, who makes the corpus whole? And, of course, when the ultimate market share distribution occurs, who gets the trading profits? Who gets the compound interest? Surely the smart people thought of this as part of their investment policy.
The Key Takeaway
You may disagree with the Institute’s analysis about what is and isn’t a penalty, and you may disagree about putting conditions on redesignation, but I think that there is broad agreement that there needs to be a discussion about forcing The MLC, Inc. to do a better job. I bet if you asked, the Congress clearly did not see the Copyright Office’s role as handing out participation trophies or pats on the head. And that should not be the community’s goal, either. This whole thing was cooked up by the lobbyists and they were not interested in any help. That obviously crashed and burned and now we need to help each other to save songwriters today and in future generations. If not us, then who; if not now, then when; if not here, then where?
[A version of this post first appeared on MusicTech.Solutions]
Black Box Rebellion: Comments of the @ArtistRights Institute To @Copyright Office on Renewal of The MLC, Inc. as MLC
The Artist Rights Institute takes on the pressing public policy issue of The MLC, Inc.’s investment of “hundreds of millions of dollars” of the black box and asks the Copyright Office to decide the legality of the MLC’s “Investment Policy.”
5/30/24: @davidclowery Panelist at @JusticeATR and @StanfordGSB Workshop on Promoting Competition in Artificial Intelligence: Updated
David will be a panelist on a day-long workshop at Stanford Graduate School of Business on competition and antitrust issues in artificial intelligence. The workshop is co-sponsored by the U.S. Department of Justice Antitrust Division and SGBS. You can live stream on YouTube.
David’s panel goes off at 3:35 pm PT, and you’ll see some old friends are also on the panel and we’re looking forward to hearing from the new friends.
David wrote a new paper for the workshop link is here, but here’s a teaser for you:
If inclusion in AI data sets becomes a lucrative new use for copyrighted music, potentially displacing other existing income streams, requiring these training uses to be licensed is critical to keep in the place the same positive incentives that encourage creation and recording of new music today. If a major future use becomes un-protected and un-monetizable, music creation itself would become destabilized and decay.
Strong copyright on the data side will also set in motion real competition for access to valuable works for datasets – putting market forces to work to set prices and terms for licensing these works that reward creators and steer rights and access to the developers and innovators who value them the most. Essentially, it puts real innovators and risk taking start-ups on equal footing with tech giants for access to valuable materials to use in creating new AI products – and while Microsoft and its ilk may assume that means the biggest firm will always win, basic economics tells us rights should end up with the bidder who has the best idea and highest value use.
@human_artistry: Scarlett Johansson calls for federal protections against generative AI
Reality is that this could happen to anyone, but like other online pirates they come for the famous people first to free ride on their brand.
Who Will Get to the Bottom of The Hundreds of Millions of Black Box Money at MLC?
By Chris Castle
One of the most common questions we get from songwriters about the MLC concerns the gigantic level of “unmatched funds” that have been sitting in the MLC’s accounts since February 2021. Are they really just waiting until The MLC, Inc. gets redesignated and then distributes hundreds of millions on a market share basis like the lobbyists drafted into the MMA?
Not My Monkey
Nobody can believe that the MLC can’t manage to pay out several hundred million dollars of streaming mechanical royalties for over three years so far. (Resulting in the MLC holding $804,555,579 in stocks as of the end of 2022 on its tax return, Part X, line 11.) The proverbial monkey with a dart board could have paid more songwriters in three years. Face it—doesn’t it just sound illegal? In my experience, when something sounds or feels illegal, it probably is.
What’s lacking here is a champion to extract the songwriters’ money. Clearly the largely unelected smart people in charge could have done something about it by now if they wanted to, but they haven’t. It’s looking more and more like nobody cares or at least nobody wants to do anything about it. There is profit in delay.
Or maybe nobody is taking responsibility because there’s nobody to complain to. Or is there? What if such a champion exists? What if there were no more waiting? What if there were someone who could bring the real heat to the situation?
Let’s explore one potentially overlooked angle—a federal agency called the Office of the Inspector General. Who can bring in the OIG? Who has jurisdiction? I think someone does and this is the primary reason why the MLC is different from HFA.
Does The Inspector General Have MLC Jurisdiction?
Who has jurisdiction over the MLC (aside from its severely conflicted board of directors which is not setting the world on fire to pump the hundreds of millions of black box money back into the songwriter economy). The Music Modernization Act says that the mechanical licensing collective operates at the pleasure of the Congress under the oversight of the U.S. Copyright Office and the OIG has oversight of the Copyright Office through its oversight of the Library of Congress.
But, hold on, you say. The MLC, Inc. is a private company and the government typically does not have direct oversight over the operations of a private company.
The key concept there is “operates” and that’s the difference between the statutory concept of a mechanical licensing collective and the actual operational collective which is a real company with real employees and real board members. Kind of like shadows on the wall of a cave for you Plato fans. Or the magic 8 ball.
The MLC, Inc. is all caught up with the government. It exists because the government allows it to, it collects money under the government’s blanket mechanical license, its operating costs are set by the government, and its board members are “inferior officers” of the United States. Even though The MLC, Inc. is technically a private organization, it is at best a quasi-governmental organization, almost like the Tennessee Valley Authority or the Corporation for Public Broadcasting. So it seems to me that The MLC, Inc. is a stand-in for the federal government.
But The MLC, Inc. is not the federal government. When Congress passed the MMA and it charged the Copyright Office with oversight of the MLC. Unfortunately, Congress does not appear to have appropriated funds for the additional oversight work it imposed on the Office.
Neither did Congress empower the Office to charge the customary reasonable fees to cover the oversight work Congress mandated. The Copyright Office has an entire fee schedule for its many services, but not MLC oversight.
Even though the MLC’s operating costs are controlled by the Copyright Royalty Board and paid by the users of the blanket license through an assessment, this assessment money does not cover the transaction cost of having the Copyright Office fulfill an oversight role.
An oversight role may be ill suited to the historical role of the Copyright Office, a pre-New Deal agency with no direct enforcement powers—and no culture of cracking heads about wasteful spending like sending a contingent to Grammy Week.
In fact, there’s an argument that The MLC, Inc. should write a check to the taxpayer to offset the additional costs of MLC oversight. If that hasn’t happened in five years, it’s probably not going to happen.
Where Does the Inspector General Fit In?
Fortunately, the Copyright Office has a deep bench to draw on at the Office of the Inspector General for the Library of Congress, currently Dr. Glenda B. Arrington. That kind of necessary detailed oversight is provided through the OIG’s subpoena power, mutual aid relationships with law enforcement partners as well as its own law enforcement powers as an independent agency of the Department of Homeland Security. Obviously, all of these functions are desirable but none of them are a cultural fit in the Copyright Office or are a realistic resource allocation.
The OIG is better suited to overseeing waste, fraud and abuse at the MLC given that the traditional role of the Copyright Office does not involve confronting the executives of quasi-governmental organizations like the MLC about their operations, nor does it involve parsing through voluminous accounting statements, tracing financial transactions, demanding answers that the MLC does not want to give, and perhaps even making referrals to the Department of Justice to open investigations into potential malfeasance.
Or demanding that the MLC set a payment schedule to pry loose the damn black box money.
One of the key roles of the OIG is to conduct audits. A baseline audit of the MLC, its closely held investment policy and open market trading in hundreds of millions in black box funds might be a good place to start.
It must be said that the first task of the OIG might be to determine whether Congress ever authorized MLC to “invest” the black box funds in the first place. Congress is usually very specific about authorizing an agency to “invest” other people’s money, particularly when the people doing the investing are also tasked with finding the proper owners and returning that money to them, with interest.
None of that customary specificity is present with the MLC.
For example, MLC CEO Kris Ahrens told Congress that the simple requirement that the MLC pay interest on “unmatched” funds in its possession (commonly called “black box”) was the basis on which the MLC was investing hundreds of millions in the open market. This because he assumed the MLC would have to earn enough from trading securities or other investment income to cover their payment obligations. That obligation is mostly to cover the federal short term interest rate that the MLC is required to pay on black box.
The Ghost of Grammy Week
The MLC has taken the requirement that the MLC pay interest on black box and bootstrapped that mandate to justify investment of the black box in the open market. That is quite a bootstrap.
An equally plausible explanation would be that the requirement to pay interest on black box is that the interest is a reasonable cost of the collective to be covered by the administrative assessment. The plain meaning of the statute reflects the intent of the drafters—the interest payment is a penalty to be paid by the MLC for failing to find the owners of the money in the first place, not an excuse to create a relatively secret $800 million hedge fund for the MLC.
I say relatively secret because The MLC, Inc. has been given the opportunity to inform Congress of how much money they made or lost in the black box quasi-hedge fund, who bears the risk of loss and who profits from trading. They have not answered these questions. Perhaps they could answer them to the OIG getting to the bottom of the coverup.
We do not really know the extent of the MLC’s black box holdings, but it presumably would include the hundreds of millions invested under its stewardship in the $1.9 billion Payton Limited Maturity Fund SI (PYLSX). Based on public SEC filings brought to my attention, The MLC, Inc.’s investment in this fund is sufficient to require disclosure by PYLSX as a “Control Person” that owns 25% or more of PYLSX’s $1.9 billion net asset value. PYLSX is required to disclose the MLC as a Control Person in its fundraising materials to the Securities and Exchange Commission (Form N-1A Registration Statement filed February 28, 2023). This might be a good place to start.
Otherwise, the MLC’s investment policy makes no sense. The interest payment is a penalty, and the black box is not a profit center.
But you don’t even have to rely on The MLC, Inc.’s quasi governmental status in order for OIG to exert jurisdiction over the MLC. It is also good to remember that the Presidential Signing Statement for the Music Modernization Act specifically addresses the role of the MLC’s board of directors as “inferior officers” of the United States:
Because the directors [likely both voting and nonvoting] are inferior officers under the Appointments Clause of the Constitution, the Librarian [of Congress] must approve each subsequent selection of a new director. I expect that the Register of Copyrights will work with the collective, once it has been designated, to ensure that the Librarian retains the ultimate authority, as required by the Constitution, to appoint and remove all directors.
The term “inferior officers” refers to those individuals who occupy positions that wield significant authority, but whose work is directed and supervised at some level by others who were appointed by presidential nomination with the advice and consent of the Senate. Therefore, the OIG could likely review the actions of the MLC’s board (voting and nonvoting members) as they would any other inferior offices of the United States in the normal course of the OIG’s activities.
Next Steps for OIG Investigation
How would the OIG at the Library of Congress actually get involved? In theory, no additional legislation is necessary and in fact the public might be able to use the OIG whistleblower hotline to persuade the IG to get involved without any other inputs. The process goes something like this:
- Receipt of Allegations: The first step in the OIG investigation process is the receipt of allegations. Allegations of fraud, waste, abuse, and other irregularities concerning LOC programs and operations like the MLC are received from hotline complaints or other communications.
- Preliminary Review: Once an allegation is received, it undergoes a preliminary review to determine if OIG investigative attention is warranted. This involves determining whether the allegation is credible and reasonably detailed (such as providing a copy of the MLC Congressional testimony including Questions for the Record). If the Office is actually bringing the OIG into the matter, this step would likely be collapsed into investigative action.
- Investigative Activity: If the preliminary review warrants further investigation, the OIG conducts the investigation through a variety of activities. These include record reviews and document analysis, witness and subject interviews, IG and grand jury subpoenas, search warrants, special techniques such as consensual monitoring and undercover operations, and coordination with other law enforcement agencies, such as the FBI, as appropriate. That monitoring might include detailed investigation into the $500,000,000 or more in black box funds, much of which is traded on open market transactions like PYLSX.
- Investigative Outputs: Upon completing an investigation, reports and other documents may be written for use by the public, senior decision makers and other stakeholders, including U.S. Attorneys and Copyright Office management. Results of OIG’s administrative investigations, such as employee and program integrity cases, are transmitted to officials for appropriate action.
- Monitoring of Results: The OIG monitors the results of those investigations conducted based on OIG referrals to ensure allegations are sufficiently addressed.
So it seems that the Office of the Inspector General is well suited to assisting the Copyright Office by investigating how the MLC is complying with its statutory financial obligations. In particular, the OIG is ideally positioned to investigate how the MLC is handling the black box and its open market investments that it so far has refused to disclose to Members of Congress at a Congressional hearing as well as in answers to Questions for the Record from Chairman Issa.
This post previously appeared on MusicTech.Solutions
Minnesota Bans Speculative Ticketing
There will be no pork bellies for StubHub in Prince Country. Minnesota Governor Tim Walz today will visit the iconic First Avenue venue in Prince Country to sign HF 1898, the state’s expansive new protection for fans, venues and artists against speculative ticketing abuse by the StubHubs of this world.
Readers will remember we have a big issue with speculative ticking (which we think is illegal securities trading like trading pork belly futures) so we are naturally quite pleased to see the Governor champion this legislation along with Minnesota Lieutenant Governor Peggy Flanagan plus State Senator Matt Klein and Representative Kelly Moller who co-authored the legislation. David and Mala Sharma testified against speculative ticketing in Georgia and Chris testified in Pennsylvania supporting that state’s proposed ban on the practice.
The key provisions of the new Minnesota law include prohibitions for:
- directly or indirectly employing another person to wait in line to purchase tickets for the purpose of reselling the tickets if the practice is prohibited or if the venue has posted a policy prohibiting the practice
- sell or offer to sell a ticket without first informing the person of the location of the venue and the ticket’s assigned seat, including but not limited to the seat number, row, and section number of the seat
- advertise, offer for sale, or contract for the sale of a ticket before the ticket has been made available to the public, including via presale, without first obtaining permission from the venue and having actual or constructive possession of the ticket, unless the ticket reseller owns the ticket pursuant to a season ticket package purchased by the ticket reseller.
- An operator, online ticket marketplace, or ticket reseller must not sell a ticket unless:
- the ticket is in the possession or constructive possession of the operator, online ticket marketplace, or ticket reseller; or
- the operator, online ticket marketplace, or ticket reseller has a written contract with the place of entertainment to obtain the ticket.
Good stuff, another step forward for the good guys.
On the Internet, “Partners” Don’t Hear You Scream: Spotify CEO Makes a $350M “Bundle” While Sticking Songwriters with an ESG “Bundle” of Crap
Here’s a quote for the ages:
MICHAEL BURRY
One of the hallmarks of mania is the rapid rise and complexity
of the rates of fraud. And did you know they’re going up?
The Big Short, screenplay by Charles Randolph and Adam McKay,
based on the book by Michael Lewis
We have often said that if screwups were Easter eggs, Spotify CEO Daniel Ek would be the Easter bunny, hop hop hopping from one to the next. That’s is not consistent with his press agent’s pagan iconography, but it sure seems true to many people.
This week was no different. Mr. Ek cashed out hundreds of millions in Spotify stock while screwing songwriters hard with a lawless interpretation of the songwriter compulsory license. That interpretation is so far off the mark that he surely must know exactly what he is doing. It’s yet another manifestation of Spotify’s sudden obsession with finding profits after a decade of “get big fast.”
The Bunny’s Bundle
Let’s look under the hood at the part they don’t tell you much about. Mr. Ek evidently has what’s called a “10b5-1 agreement” in place with Spotify allowing staggered sales of incremental tranches of the common stock. Those sales have to be announced publicly which Spotify complied with (we think). And we’ll say it again for the hundredth time, stock is where the real money is at this stage of Spotify’s evolution, not revenue.
As a founder of Spotify, Mr. Ek holds founders shares plus whatever stock awards he has been granted by the board he controls through his supervoting stock that we’ve discussed with you many times. These 10b5-1 agreements are a common technique for insiders, especially founders, who hold at least 10% of the company’s shares, to cash out and get the real money through selling their stock.
A 10b5-1 agreement establishes predetermined trading instructions for company stock (usually a sale so not trading the shares) consistent with SEC rules under Section 10b5 of the Securities and Exchange Act of 1934 covering when the insider can sell. Why does this exist? The rule was established in 2000 to protect Silicon Valley insiders from insider trading lawsuits. Yep, you caught it–it’s yet another safe harbor for the special people. Presumably Mr. Ek’s personal agreement is similar if not identical to the safe harbor terms because that’s why the terms are there.
As MusicBusinessWorldWide reported, Mr. Ek recently sold $118.8 million in shares of Spotify at roughly the same time that he likely knew Spotify was planning to change the way his company paid songwriters on streaming mechanicals, or as it’s also known “material nonpublic information”.
As Tim Ingham notes in MusicBusinessWorldwide, Mr. Ek has had a few recent sales under his 10b5-1 agreement: “Across these four transactions (today’s included), Ek has cashed out approximately $340.5 million in Spotify shares since last summer.” Rough justice, but I would place a small wager that Ek has cashed out in personal wealth all or close to all of the money that Spotify has paid to songwriters (through their publishers) for the same period. In this sense, he is no different than the usual disproportionately compensated CEOs at say Google or Raytheon.
Spotify Shoves a “Bundled” Rate on Songwriters
Spotify’s argument (that may have caused a jump in share price) claims that its recent audiobook offering made Spotify subscriptions into a “bundle” for purposes of the statutory mechanical rate. (While likely paying an undiscounted royalty to the books.)
That would be the same bundled rate that was heavily negotiated in the 2021-22 “Phonorecords IV” proceeding at the Copyright Royalty Board at great expense to all concerned, not to mention torturing the Copyright Royalty Judges. These Phonorecords IV rates are in effect for five years, but the next negotiation for new rates is coming soon (called Phonorecords V or PR V for short). We’ll get to the royalty bundle but let’s talk about the cash bundle first.
You Didn’t Build That
Don’t get it wrong, we don’t begrudge Mr. Ek the opportunity to be a billionaire. We don’t at all. But we do begrudge him the opportunity to do it when the government is his “partner” so they can together put a boot on the necks of songwriters. This is how it is with statutory mechanical royalties; he benefits from various other safe harbors, has had his lobbyists rewrite Section 115 to avoid litigation in a potentially unconstitutional reach back safe harbor, and he hired the lawyer at the Copyright Office who largely wrote the rules that he’s currently bending. Yes, we do begrudge him that stuff.
And here’s the other effrontery. When Daniel Ek pulls down $340.5 million as a routine matter, we really don’t want to hear any poor mouthing about how Spotify cannot make a profit because of the royalty payments it makes to artists and songwriters. (Or these days, doesn’t make to some artists.) This is, again, why revenue share calculations are just the wrong way to look at the value conferred by featured and nonfeatured artists and songwriters on the Spotify juggernaut. That’s also the point Chris made in some detail in the paper he co-wrote with Professor Claudio Feijoo for WIPO that came up in Spain, Hungary, France, Uruguay and other countries.
Spotify pays a percentage of revenue on what is essentially a market share basis. Market share royalties allows the population of recordings to increase faster than the artificially suppressed revenue, while excluding songwriters from participating in the increases in market value reflected in the share price. That guarantees royalties will decline over time. Nothing new here, see the economist Thomas Malthus, workhouses and Charles Dickens‘ Oliver Twist.
The market share method forces songwriters to take a share of revenue from someone who purposely suppressed (and effectively subsidized) their subscription pricing for years and years and years. (See Robert Spencer’s Get Big Fast.). It would be a safe bet that the reason they subsidized the subscription price was to boost the share price by telling a growth story to Wall Street bankers (looking at you, Goldman Sachs) and retail traders because the subsidized subscription price increased subscribers.
Just a guess.
The Royalty Bundle
Now about this bundled subscription issue. One of the fundamental points that gets missed in the statutory mechanical licensing scheme is the compulsory license itself. The fact that songwriters have a compulsory license forced on them for one of their primary sources of income is a HUGE concession. We think the music services like Spotify have lost perspective on just how good they’ve got it and how big a concession it is.
The government has forced songwriters to make this concession since 1909. That’s right–for over 100 years. A century.
A decision that seemed reasonable 100 years ago really doesn’t seem reasonable at all today in a networked world. So start there as opposed to the trope that streaming platforms are doing us a favor by paying us at all, Daniel Ek saved the music business, and all the other iconographic claptrap.
The problem with the Spotify move to bundled subscriptions is that it can happen in the middle of a rate period and at least on the surface has the look of a colorable argument to reduce royalty payments. If you asked songwriters what they thought the rule was, to the extent they had focused on it at all after being bombarded with self-congratulatory hoorah, they probably thought that the deal wasn’t “change rates without renegotiating or at least coming back and asking.”
And they wouldn’t be wrong about that, because it is reasonable to ask that any changes get run by your, you know, “partner.” Maybe that’s where it all goes wrong. Because it is probably a big mistake to think of these people as your “partner” if by “partner” you mean someone who treats you ethically and politely, reasonably and in good faith like a true fiduciary.
They are not your partner. Don’t normalize that word.
A Compulsory License is a Rent Seeker’s Presidential Suite
But let’s also point out that what is happening with the bundle pricing is a prime example of the brittleness of the compulsory licensing system which is itself like a motel in the desolate and frozen Cyber Pass with a light blinking “Vacancy: Rent Seekers Wanted” surrounded by the bones of empires lost. Unlike the physical mechanical rate which is a fixed penny rate per transaction, the streaming mechanical is a cross between a Rube Goldberg machine and a self-licking ice cream cone.
The Spotify debacle is just the kind of IED that was bound to explode eventually when you have this level of complexity camouflaging traps for the unwary written into law. And the “written into law” part is what makes the compulsory license process so insidious. When the roadside bomb goes off, it doesn’t just hit the uparmored people before the Copyright Royalty Board–it creams everyone.
David and friends tried to make this point to the Copyright Royalty Judges in Phonorecords IV. They were not confused by the royalty calculations–they understood them all too well. They were worried about fraud hiding in the calculations the same way Michael Burry was worried about fraud in The Big Short. Except there’s no default swaps for songwriters like Burry used to deal with fraud in subprime mortgage bonds.
Here’s how the Judges responded to David, you decide if they are condescending or if the songwriters were prescient knowing what we know now:
While some songwriters or copyright owners may be confused by the royalties or statements of account, the price discriminatory structure and the associated levels of rates in settlement do not appear gratuitous, but rather designed, after negotiations, to establish a structure that may expand the revenues and royalties to the benefit of copyright owners and music services alike, while also protecting copyright owners from potential revenue diminution. This approach and the resulting rate setting formula is not unreasonable. Indeed, when the market itself is complex, it is unsurprising that the regulatory provisions would resemble the complex terms in a commercial agreement negotiated in such a setting.
PR IV Final Rule at 80452 https://app.crb.gov/document/download/27410
It must be said that there never has been a “commercial agreement negotiated in such a setting” that wasn’t constrained by the compulsory license. It’s unclear what the Judges even mean. But if what the Judges mean is that the compulsory license approximates what would happen in a free market where the songwriters ran free and good men didn’t die like dogs, the compulsory license is nothing like a free market deal.
If the Judges are going to allow services to change their business model in midstream but essentially keep their music offering the same while offloading the cost of their audiobook royalties onto songwriters through a discount in the statutory rate, then there should be some downside protection. Better yet, they should have to come back and renegotiate or songwriters should get another bite at the apple.
Unfortunately, there are neither, which almost guarantees another acrimonious, scorched earth lawyer fest in PR V coming soon to a charnel house near you.
Eject, Eject!
This is really disappointing because it was so avoidable if for no other reason. It’s a great time for someone…ahem…to step forward and head off the foreseeable collision on the billable time highway. The Judges surely know that the rate calculation is a farce
But the Judges are dealing with people negotiating the statutory license who have made too much money negotiating it to ever give it up willingly although a donnybrook is brewing. This inevitable dust up means other work will suffer at the CRB. It must be said in fairness that the Judges seem to find it hard enough to get to the work they’ve committed to according to a recent SoundExchange filing in a different case (SDARS III remand from 2020).
That’s not uncharitable–I’m merely noting that when dozens of lawyers in the mechanical royalty proceedings engage in what many of us feel are absurd discovery excesses. When there are stupid lawyer tricks at the CRB, they are–frankly–distracting the Judges from doing their job by making them focus on, well, bollocks. We’ll come back to this issue in future. The dozens and hundreds of lawyers putting children through college at the CRB–need to take a breath and realize that judicial resources at the CRB are a zero sum game. This behavior isn’t fair to the Judges and it’s definitely not fair to the real parties in interest–the songwriters.
Tell the Horse to Open Wider
A compulsory license in stagflationary times is an incredibly valuable gift, and when you not only look the gift horse in the mouth but ask that it open wide so you can check the molars, don’t be surprised if one day it kicks you.
A version of this post first appeared on MusicTech.Solutions
They Deserve It: TikTok Forced Sale Legislation Advances to Senate
The most remarkable aspect of the pending legislation in Congress that would force a sale of TikTok is how much money and how many high profile lobbyists have taken the CCP’s shilling (or maybe yuan) to push the obviously corrupt company’s water. And yet…the legislation is advancing by leaps and bounds and TikTok is failing.
David was interviewed by Billboard to give a perspective. The headline here is that TikTok appears to be doing the same thing that Spotify was doing when Spotify was sued by Melissa Ferrick and David–using songs without a license.
The music industry’s view of the proceedings in Washington is mixed. The perspective of artists and songwriters is arguably best expressed by David Lowery, the artist rights activist and frontman for the bands Cracker and Camper Van Beethoven, who also was one of more than 200 creators that, in early April, signed an open letter to tech platforms urging them to stop using AI “to infringe upon and devalue the rights of human artists.”
“The rates TikTok pays artists are extremely low, and it has a history — at least with me — of using my catalog with no licenses,” Lowery says. “I just checked to make sure and there are plenty of songs that I wrote on TikTok, and I have no idea how they have a license for those songs.”
As a result, Lowery says that while “I’m kind of neutral as to whether TikTok needs to be sold to a U.S. owner, the bill pleases me in a general way because I feel that they’ve gotten away with abusing artists for so long that they deserve it. I realize the bill doesn’t punish them for doing that,” he continues, “but that’s why a lot of musicians feel they really deserve it.”
Dave Rowntree is Suing the UK Performing Rights Society Over Misallocation of Unmatched Royalties (Black Box)
According to press reports, Dave Rowntree of Blur filed the UK equivalent of a class action lawsuit against PRS (the UK version of ASCAP and BMI). The claim is a “collective proceeding” filed with the UK’s antitrust tribunal. The class action established a website to communicate about the claim with interested parties. The website says:
Collective Proceedings Against PRS for Music
If You Were a Writer Member of the Performing Right Society at Any Time Since 9 March 2017,
a Proposed Legal Claim Could Affect Your Rights
On 27 February 2024, the claim was brought against PRS that asks the Competition Appeal Tribunal for permission to go forward as an “opt-out collective action.” The claim concerns the way in which PRS distributes, or permits to be distributed, certain royalty sums that are called in the PRS Rules and Regulations (“PRS Rules and Regulations”) and the PRS Distribution Policy Guide terms such as “unmatchable” (including “copyright control”), “non-distributable”, and “unclaimed” and colloquially referred to within the music industry as “Black Box” royalties. The majority of Black Box royalties are royalties belonging to PRS writer members but when the Black Box royalties are distributed, the distribution is heavily skewed in favour of publishers who receive a large portion of the writer share. In other words, Black Box royalties are transferred from PRS writer members and given to PRS publisher members who have no right to those royalties.
David Rowntree seeks to represent the class of PRS writer members who have lost money arising from the proposed claim.
Of course, the Mechanical Licensing Collective is sitting on hundreds of millions of black box money for the US as well, and may end up being the defendant in a separate class action at some point in the future.
The Trichordist 
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