On the Internet, “Partners” Don’t Hear You Scream: Daniel Ek Makes a “Bundle” From the Value He Won’t Share

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

I have often said that if screwups were Easter eggs, Daniel Ek would be the Easter bunny, hop hop hopping from one to the next. I realize that is not consistent with his press agent’s pagan iconography, but it sure seems true to many.

The Bunny’s Bundle

This week was no different. Mr. Ek evidently has a “10b5-1 agreement” in place with Spotify, 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. The agreement establishes predetermined trading instructions for company stock (usually a sale and not a buy 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.

As MusicBusinessWorldWide reported (thank you, Tim), Mr. Ek sold $118.8 million in shares of Spotify at roughly the same time that Spotify was planning to change the way the company paid songwriters on streaming mechanicals by claiming that its recent audiobook offering made it a “bundle” for purposes of the statutory mechanical rate. That would be the same rate that was heavily negotiated in 2021-22 at great expense to all concerned, not to mention torturing the Copyright Royalty Judges. The 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.

As Tim notes in MBW, 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 that the usual disproportionately compensated CEOs at say Google or Raytheon.

Don’t get me wrong, I don’t begrudge Mr. Ek the opportunity to be a billionaire. I don’t at all. But I do begrudge him the opportunity to do it when the government is his “partner” as 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, I do begrudge him that stuff.

And here’s the other thing. When Daniel Ek pulls down $340.5 million as a routine matter, I 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 we made in some detail in the paper I co-wrote with Professor Claudio Feijoo for WIPO that came up in Spain, Hungary, France, Uruguay and other countries.

The Malthusian Algebra Strikes Again

It’s not solely Mr. Ek who is the problem child here, it’s partly the fault of industry negotiators who bought into the idea that what was important was getting a share of revenue based on a model that was almost guaranteed to cause royalties to decline over time. This would be getting 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.). If I were a betting man, I would 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.

Now about this bundled subscription issue. One of the fundamental points that I think gets missed in the statutory mechanical licensing scheme is the scheme itself. The fact that songwriters have a compulsory license forced on them for one of their primary sources of income is a HUGE concession that songwriters have been asked to agree to since 1909. That’s right–for over 100 years. 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 streaming platforms are doing us a favor by paying us at all, Daniel Ek saved the music business, and all the other iconography.

Has anyone seen them in the same room at the same time?

The problem that I have 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. I think 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 let me suggest and suggest strongly that it is 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. Stop using 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.

Helienne Lindvall, David Lowery and Blake Morgan 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.

Here’s how the Judges responded, you decide if it’s 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 so I’m not sure what that reference even means. 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 they 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 (and probably labels, too, although maybe not) through a discount in the statutory rate, then there should be some downside protection or 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. I actually think the Judges know that the rate calculation is a farce but are dealing with people who have made too much money negotiating it to ever give it up willingly. If they are looking for a way off the theme park ride run by the evil clown, grab my hand on the next pass and I’ll try to pull you out of the centrifugal force. It won’t be easy.

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) brought to my attention by Mr. George Johnson.

That’s not uncharitable–I’m merely noting that when dozens of lawyers in Phonorecords proceedings engage in what many of us feel are absurd discovery excesses, you 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, but I think all members of the CRB bar–the dozens and hundreds of those putting children through college at the CRB bar–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

The answer isn’t to get the judges more money, bigger courtroom, craft services and massages, like a financial printer. Some of that would be nice but it doesn’t solve what I think is the real problem. I’d say that the answer is that the participants remember that the main this is that the main thing has to be the main thing. Ultimately, it’s not about us in the phonorecords proceedings, it’s about the songwriters. How are they served?

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.

Grifting Under Heaven: What happens if TikTok Shuts Itself Down?

It finally happened–Congress passed the  Protecting Americans from Foreign Adversary Controlled Applications Act that prohibits the distribution, maintenance, or provision of internet hosting services for applications that are directly or indirectly operated by foreign adversaries. This legislation would include applications owned by ByteDance, Ltd. (the company that owns TikTok) or social media companies controlled by foreign adversaries that pose a significant threat to national security.

According to a Reuters exclusive, the response from Bytedance is that they would rather shut down TikTok than sell it–if the sale included the TikTok algorithm:

“The algorithms TikTok relies on for its operations are deemed core to ByteDance’s overall operations, which would make a sale of the app with algorithms highly unlikely, said the sources close to the parent….

TikTok shares the same core algorithms with ByteDance domestic apps like short video platform Douyin, three of the sources said. Its algorithms are considered better than ByteDance rivals such as Tencent and Xiaohongshu, said one of them.

It would be impossible to divest TikTok with its algorithms as their intellectual property licence is registered under ByteDance in China and thus difficult to disentangle from the parent company, said the sources.”

Well then. Of course, one of the primary national security arguments supporting any First Amendment defense on a challenge by TikTok to the content neutral, time, place and manner regulation will involve both the data privacy and foreign actor mass media manipulation evidentiary hearings. I don’t know how you make that defense without access to the algorithm. So why so secretive?

One could therefore plausibly argue that refusing to put the algorithm on the table is as good as admitting that TikTok is manipulating US users through algorithmic emotional targeting and scraping their users private data to do so. That would directly undermine their First Amendment attack on the US government and be a big step toward proving the government’s case.

And, of course, that secret algorithm uses music as the honeypot to attract users from the very young to the not so young. Remember, if this issue ever comes up in a court as a defense for the government, it will likely be because TikTok brought the underlying lawsuit that gave rise to the defense, and then refused to comply with a subpoena for the key piece of evidence. We call that “bootstrapping” in the trade.

In the interest of full disclosure, I’ve been supporting a version of the foreign adversary divestment legislation since 2020 and did so publicly that year when I moderated a great panel at the Music Biz conference on this very subject. If that panel or this topic made you uncomfortable, it may be because you felt such a strong…let’s say attraction…to TikTok as either a marketer or user that you couldn’t imagine living without it. Or maybe you bought into the “exposure” benefits of TikTok. Or maybe you’d had no reason to think about the larger implications. More about that another time.

After the legislation passed–despite a US lobbying campaign against it worthy of The Internet Association…ahem–people are asking, now what? So let’s think about that.

The Universal Connection

TikTok’s future cannot be well understood without taking into account the withdrawal of Universal’s recordings and songs from the platform for commercial reasons. That withdrawal now looks even more prescient given the foreign adversary divestiture legislation. Is it materially different to make a deal with a company that is just another piggy Big Tech company that doesn’t value music and considers it a loss leader to get to the really big bundle of cash like Spotify stock, or to do a deal with that piggy company who has also been declared a tool of a strategic foreign adversary of the United States by none other than the President of the United States?

I think it rather is. So the two events are in some ways quite connected.

First of all, in the short run I would expect TikTok to immediately expand their direct licensing campaign which evidently has already snared Taylor Swift and do it quickly before anyone noticed that what was just a crappy licensing deal the day before President Biden signed the legislation into law, now is a crappy licensing deal from a declared foreign adversary of the United States. How that twist will affect the brand of Miss Americana remains to be seen.

One solution I would expect to get floated in coming days is the need for TikTok executives to register as foreign agents under the Foreign Agents Registration Act. According to the Congressional Research Service:

In 1938, the Foreign Agents Registration Act (22 U.S.C. §§611-621; FARA) was enacted to require individuals doing political or advocacy work on behalf of foreign entities in the United States to register with the Department of Justice and to disclose their relationship, activities, receipts, and disbursements in support of their activities. The FARA does not prohibit any specific activities; rather it seeks to require registration and disclosure of them….In 1966, FARA was amended to shift the focus from political propagandists to agents representing the economic interests of foreign principals. These amendments were partially the result of an investigation by the Senate Foreign Relations Committee into foreign sugar interests and other lobbying activities. The 1966 amendments changed several definitions in the law, prohibited contingent fee contracts, broadened exemptions to ensure legitimate commercial activities were not burdened, strengthened provisions for the disclosure and labeling of propaganda, and required the Department of Justice to issue regulations on the act (28 C.F.R. §5.1 et seq.).

FARA enforcement languished for a bit over the years. However, FARA enforcement against those who fail to register as a foreign agent has had a resurgence in popularity at the Department of Justice. I think it can fairly be said that requiring TikTok executives to register would be consistent with DOJ’s actions and is worth a discussion. The policy underlying FARA is for the public to be aware of who is whom–disclosure not imprisonment, or at least disclosure first.

Enter the Miasma of Angst

There is something of a miasma of angst around passing the foreign adversary divestment legislation as applied to TikTok which is partly due to an extraordinary amount of commercial activity between the US and China which may tend to mask the underlying kinetic tensions between our countries. It’s quite difficult for Americans to grasp this kinetic part due to the Great Firewall of China, the language and cultural barrier, and China’s own propaganda which is way, way more effective and long lasting than anything the Nazis dreamed up. TikTok is, after all, a danger close propaganda missile battery.

The legislation seems to assume that China is an “adversary” and not a “belligerent”. Is that actually true?

There are other rather inescapable events that suggests that the U.S. is already in a war with China, at least as far as the Chinese government are concerned. It helps to understand that when people say the Chinese Communist Party or “the CCP”, they mean the Chinese government and vice versa, a government ruled by Chairman for Life Xi Jinping. The Chinese constitution is, for example, the Constitution of the CCP.

Always remember that Usama Bin Laden declared war on the US but nobody took him seriously. Nuff said.

Why is that relevant to TikTok? Well, here’s another declaration of war on the US that nobody noticed. On May 14, 2019, the CCP government declared a “people’s war” against the United States as reported in the Pravda of China, the Global Times operated by Xinhua News Agency (the cabinet-level “news” agency run by the CCP):

“The most important thing is that in the China-US trade war, the US side fights for greed and arrogance … and morale will break at any point…The Chinese side is fighting back to protect its legitimate interests. The trade war in the US is the creation of one person and one administration, but it affects that country’s entire population…In China, the entire country and all its people are being threatened. For us, this is a real ‘people’s war.'”

What is the “people’s war”? It is an old Maoist phrase (remembering that Xi Jinping’s father fought with Mao during China’s Communist Revolution). It has a very specific meaning in the history of the Chinese Communist Party according to Wikipedia:

People’s war, also called protracted people’s war, is a Maoist military strategy. First developed by the Chinese communist revolutionary leader Mao Zedong (1893–1976), the basic concept behind people’s war is to maintain the support of the population and draw the enemy deep into the countryside (stretching their supply lines) where the population will bleed them dry through a mix of mobile warfare and guerrilla warfare. 

So in the dimension of “unrestricted warfare,” what end state would the CCP like to see? Bearing in mind that they will avoid a shooting war in favor of the various other dimensions of civil-military fusion and following Sun Tzu’s admonishment o subdue the enemy without fighting. One way would be to impose economic damage on the United States.

The Unrestricted Warfare Dimension

What is this “unrestricted warfare”? That is a much bigger topic and I cannot emphasize enough the importance for every American and really everyone to understand it. Literally “Unrestricted Warfare” is one of the most important books on military strategy and geopolitics that nobody has read.

We think the book was published in Mandarin In 1999; it could have been earlier. It was written by two colonels in the Peoples’ Liberation Army of the Peoples Republic of China and entitled Unrestricted Warfare. The title is variously translated as Unrestricted Warfare: Two Air Force Senior Colonels on Scenarios for War and the Operational Art in an Era of Globalization, or the more bellicose Unrestricted Warfare: China’s Master Plan to Destroy America. 

Why is this important? You must understand that when the colonels say “to destroy America” they actually mean that very thing. China’s military and civil goal is to replace the United States as the global hegemon under the “mandate of Heaven.” (See 2050 China: Understanding Xi Jinping Thought.)

No kidding.

The thesis of the book is that it is a mistake for a contemporary great power to think of war solely in military terms; war includes an economic, cyber, space, information war (especially social media like TikTok), and other dimensions–including kinetic–depending on the national interest at the time. I think of Unrestricted Warfare as an origin story for China’s civil and military fusion policy, later expressed in various statutes of the Chinese Communist Party that were on full display in the TikTok hearings before Congress.

Although the book was translated and certain of the cognoscenti read it in Mandarin (see Josh Rogan, Michal Pillsbury and Gen. Rob Spaulding), it was largely unnoticed until recently. Except in China–the CCP rewarded the authors handsomely: Colonel Qiao Liang retired as a major general in the PLA and Colonel Wang Xiangsui is a professor at Beihang University in Beijing following his retirement as a senior Colonel in the PLA (OF-5).

The point of both Bin Ladin’s 1998 fatwa and Unrestricted Warfare, and the 2019 people’s war declaration, is both that each of them declared war on America, and that no one paid attention. We know where that got us with bin Ladin, there are movies about it.

To War or Not?

So the first question is what is the argument that we are not at war currently with China under their definition? Particularly given that they declared war on us with just enough plausible deniability to make you feel bad about shutting down TikTok–see what I did there? (I think the CCP declared war started much, much longer ago, but let’s stick with their people’s war declaration as a recent tangible event to keep it manageable and ignore, oh, say island building, expanding to the largest navy in the world, and the rest of it. (Read The Hundred-Year Marathon and see what you think. It may be worth reviewing the history on the Anglo-German Naval Agreement indirectly referenced in a Noël Coward song.)

Don’t Let’s Be Beastly to the Germans by Noël Coward is reflective on “excessive humanitarians”

It is also worth remembering that should open hostilities with China actually break out, i.e., in the colonels’ words should the current level of unrestricted warfare go kinetic, CCP-owned companies operating in the US will fall under an entirely more intense level of scrutiny. This is permitted by international laws of armed conflict and doesn’t even require additional US national laws although there surely will be many.

In the first instance, is the ostensibly private company actually private? What if good old chummy Mr. Tok turned out to be a colonel in the People’s Liberation Army and just didn’t get around to telling anyone? (I don’t think anyone in Congressional hearings ever asked him.)

And what if TikTok complied with the CCP laws that apply to Bytedance for sure and may apply to TikTok that require there to be a CCP cadre in each company? (See Article 19 of China’s “Company Law.”) If a private company’s staff members are also members of the armed forces of a state or have combat functions for an organized armed group belonging to a party in the conflict, they are not considered civilians.  Further, if a private company is directly involved in military operations (e.g., cyber attacks or psy ops), it may lose its civilian status and become a legitimate military target under the Geneva Conventions. (Further reading, an excellent article from West Point on topic. I don’t think anyone ever asked Mr. Chew if he was a serving member of the PLA.)

So if China invades Taiwan and the US comes in on the side of Taiwan, but TikTok assists in even psychological warfare ops to support that war effort for China against Taiwan (and possibly the US), then what happens? What if it turns out that senior Tiks are reservists or active duty in the Peoples Liberation Army that they just kind of didn’t mention before? Good old Uncle Chew? This kind of thing can also get you sanctioned if you try hard enough. Remember this came up with Elon Musk when Starlink allegedly thwarted an attack by Ukraine (which he denied for other reasons).

So about those licenses….Do artists really want to be used as a honeypot? Especially if TikTok keeps its algorithm, ostensibly shuts down in the US, but parks outside the US and still assaults US users?

Chronology: The Week in Review: Search is Ripping Us Off Again, this time for AI; #FreeJimmyLai; the MLC loves the MLC almost as much as the NMPA

In case you think that infringement of copyrights in AI training happens only to rock stars, photographers, record companies or movie studios, let me give you a personal anecdote that might cause you to reconsider. I asked Bing’s Copilot AI tool to list the deal points in a record producer agreement, and this is what I got back:

Copilot

Certainly! When negotiating a producer agreement, several key points should be considered. Here are some common negotiation points from the artist’s perspective:

  1. Scope of Engagement:
    1. The producer is generally engaged for one album project at a time.
    1. Clarify the scope of work, including the number of songs or recordings to be produced.
  2. Budget and Compensation:
    1. Determine the budget for the project (e.g., $10,000 in your case).
    1. Agree on the producer’s compensation, which may include an upfront fee, points on sales, or a combination.
  3. Ownership and Rights:
    1. Address ownership of the master recordings:
      1. Will the artist own and control the masters?
      1. Does the producer retain any rights?
  4. Credits and Royalties:
    1. Specify how the producer will be credited on releases.
    1. Discuss any royalties or backend points for the producer.
  5. Recording Schedule:
    1. Set a timeline for recording sessions.
    1. Define the two-week period for your project.
  6. Logistics:
    1. Determine where the recordings will take place.
    1. Outline the artist’s approval process.
    1. Define the producer’s deliverables.
  7. Termination Clause:
    1. Include provisions for termination if either party breaches the agreement.
    1. Address payment for work completed up to that point.

Remember that each negotiation is unique, and it’s essential to tailor the agreement to your specific needs and circumstances. Legal advice is recommended to ensure compliance with local laws and industry standards1 3 4.

Source(s)

1. An Artist’s Guide to Negotiating Record Producer Agreements – Medium

2. Negotiating a Music Producer Agreement: 7 Key Issues

3. 5 Things to Look for in a Music Producer Agreement – Lawyer Drummer

4. How to Negotiate: Steps, Phrases & Tips to Win the Deal – Selling Signals

Notice that Copilot lists “Source(s)” and that source #1 is an article from Medium.

My article.

I’ve written a number of articles about negotiating producer agreements and I can categorically say I haven’t given permission or been asked to give permission for any of those articles to be scraped and used to train AI. So how did it come to be in Copilot’s training materials?

My guess is that Medium (and probably a lot of other sites) were crawled by Bing’s spider and that copies of Medium pages were stored in Bing’s (or Microsoft’s) data centers. When Microsoft launched its Copilot AI tool, one could imagine that the temptation would have been strong to use those copies as part of the training tools for Copilot. In fact, the Verge reports that “companies around the web are using your site and its data to build massive sets of training data, in order to build models and products that may not acknowledge your existence at all.”

Are you surprised then that two of the biggest operators in the AI space are the search engine operators Google and Microsoft? This is another example of how Big Tech helps itself to your data and work product without you even knowing it’s happening. So now what? Now I know I’m being ripped off, and I’m wondering if Medium is in on it.

The Verge tells us:

The ability to download, store, organize, and query the modern internet gives any company or developer something like the world’s accumulated knowledge to work with. In the last year or so, the rise of AI products like ChatGPT, and the large language models underlying them, have made high-quality training data one of the internet’s most valuable commodities. That has caused internet providers of all sorts to reconsider the value of the data on their servers, and rethink who gets access to what. 

Ya think?

#FreeJimmyLai

In case you were wondering if the Chinese Communist Party is serious about using TikTok to collect data as they please, Hong Kong publisher Jimmy Lai is a perfect example of what happens when a company refuses to cooperate. The CCP took over Jimmy’s Apple Daily newspaper and arrested him. Jimmy has been in prison for three years and has still not come to “trial” (whatever that means under the CCP).

Blake Morgan sounds off in Hypebot on how TikTok uses music as a honeypot to hook innocent users

The MLC Reup

The MLC gets a five year review of how they are doing. The Copyright Office conducts that review of both the MLC and the DLC. The public (that’s you) gets a chance to weigh in now because the MLC and the DLC filed their respective written statements about their respective awesomeness.

One of the most interesting exchanges happened between Graham Davies (who essentially is the public face of the DLC and is the head of the Digital Media Association) and the NMPA. Graham offered muted criticism of the MLC which irked the easily irked NMPA who offered a rather scathing response.

The most interesting thing about the exchange was that it was the NMPA–not the MLC–that responded to Graham. Tell you anything?

Taking Away the Punchbowl: Removing Open Market Investments from the MLC

Whenever someone is holding your money, you kind of want to a lot of about it, don’t you? You want to know how much, where they hold it, and when you get it back, right? Seems reasonable. But not only does the MLC hold what is likely to be hundreds of millions in black box money, they don’t really tell you these attributes, do they?

Plus they tell you that somehow the Music Modernization Act authorizes them to invest your money in the open market to obtain some theoretical government mandated rate of return, yet the Copyright Act says nothing of the kind.

They then refuse to disclose how they intend to invest OPM and who bears any losses and makes any profit from these open market transactions. They don’t just refuse to tell songwriters, because why tell them whose money it is, they don’t just refuse to tell the Copyright Office who is tasked by Congress with overseeing their operations, they also dodge answering questions from the very Congressional committee that oversees the MLC.

The other problem is that the longer the MLC delays in distributing the black box to the correct copyright owners, the more likely it is that the MLC will choose the nuclear option–market share distribution to the copyright owners who are overrepresented on the MLC’s board without regard to copyright ownership. And just to be clear what that means, it means the black box money is going to get shared with people who aren’t entitled to it thus leaving lots of hungry people.

Many people believe that this is exactly the intent and that the market share distribution will happen right after the MLC gets redesigned to operate for another five years at the punchbowl. Why? Because when the market share distribution happens it very likely will tip off an aggressive no-shit backlash against the MLC that would likely argue they can’t be trusted with much of anything at all.

It’s entirely possible that if the MLC has been this secretive about the amount of black box money in its grasp, the lobbyists never came clean with Congress about just how much the services were paying for their retroactive safe harbor in the form of undisclosed and unallocated monies. Remember the big scramble to deny a press report that the black box was over $1 billion? Maybe that press report wasn’t so far off after all.

Fortunately, there is a simple solution. Congress needs to take away any control or decision making about the unallocated black box money from the MLC. This could be as simple as a technical amendment forcing the MLC to act in a transparent manner and disclose the current investments of the black box money, any desposits and withdrawals, and to force distributions to occur when claimed by the correct owner.

The entire concept of a market share distribution should be eliminated from the Copyright Act because it creates a perverse incentive not to find the true owners by the people who benefit from the market share distribution. This moral hazard was obvious from the time the lobbyists drafted Title I of the Music Modernization Act and it should come as no surprise that it has failed miserably.

There’s no time like the present to fix it. Decisions about the black box should be taken away from the MLC and placed far, far outside if its orbit of the network of interlocking boards, consultants, accountants and companies surrounding the MLC and its confederates.

Chronology: The Week in Review: MLC Redesignation Proceeding Highlights Ownership Issues for the Government’s Musical Works Database; TikTok’s SOPA Problem; Google’s Nonindemnity Indemnity for AI

One of the few things Congress got right in Title I of the Music Modernization Act is the five-year review of the mechanical licensing collective. Or more precisely, whether the private company previously designated by the Copyright Office to conduct the functions of the Mechanical Licensing Collective should have another five years to continue doing whatever it is they do.

Impliedly, and I think a bit unfairly, Congress told the Copyright Office to approve its own decision to appoint the current MLC or admit they made a mistake. This is yet another one of the growing list oversights in the oversight. Wouldn’t it make more sense for someone not involved in the initial decision to be evaluating the performance of the MLC? Particularly when there are at least tens of millions changing hands as well as some highly compensated MLC employees, any one of whom makes more than the Copyright Royalty Judges.

What happens if the Register of Copyright actually fires The MLC, Inc. and designates a new MLC operator? The first question probably should be what happens to the vaunted MLC musical works database and the attendant software and accounting systems which seem to be maintained out of the UK for some reason.

I actually raised this question in a comment to the Copyright Office back in 2020. In short, my question was probably more of a statement: ‘‘The musical works database does not belong to the MLC or The MLC and if there is any confusion about that, it should be cleared up right away.” The Copyright Office had a very clear response:

While the mechanical licensing collective must ‘‘establish and maintain a database containing information relating to musical works,’’ the statute and legislative history emphasize that the database is meant to benefit the music industry overall and is not ‘‘owned’’ by the collective itself….Any use by the Office referring to the public database as ‘‘the MLC’s database’’ or ‘‘its database’’ was meant to refer to the creation and maintenance of the database, not ownership. [85 FR at 58172, text accompanying notes 30 and 31.]

So if the current operator of the MLC is fired, we know from the MMA and the Copyright Office guidance that one thing The MLC, Inc. cannot do is hold the database and its attendant systems hostage, or demand payment, or any other shadiness. These items do not belong to them so they must not assert control over that which they do not own.

Which would include the hundreds of millions of black box money that the MLC, Inc. has failed to distribute in going on four years. I’ve even heard cynics suggest that the market share distribution of black box will occur immediately following The MLC, Inc.’s redesignation and the corresponding renewal of HFA’s back office contract which seems to be worth about $10 million a year all by itself.

What would also have been helpful would be for Congress to have required the Copyright Office to publish evaluation criteria for what they expected the MLC’s operator to actually do as well as performance benchmarks. Like I said, it’s a bit unfair of Congress to put the Copyright Office in the unprecedented position of evaluating such an important role with no guidance whatsoever. Surely Congress did not intend for the Copyright Office to have unfettered autonomy in deciding what standards to apply to their review of a quasi-governmental agency like the MLC, yet seems to have defaulted to the guardrail of the Administrative Procedures Act or some other backstop to sustain checks and balances on the situation.

But at least the ownership question is settled.

Breaking the Internet Yet Again: TikTok’s SOPA Problem

TikTok users swarmed over the Capitol to protest and impede a Congressional vote that would force the sale of the ubiquitous TikTok. Can Camp Pelosi redux be far behind? Well, no, because this was a digital swarm which is just different, you see. It’s just different when Big Tech tries to protect an IPO.

TikTok’s tactics are very reminiscent of Google’s tactics with SOPA or Napster’s tactics with Camp Chaos.

But not even Napster had the brass to go to full on papal indulgences. Yes, that’s right: NunTok will save the IPO.

Nuns good, TikTok bad!

I wonder which Washington lobbyist thought of NunTok? Perhaps this guy:

Google’s Nonindemnity Indemnity for AI

Some generative AI platforms are trying to make users believe that the company will actually protect them from copyright infringement claims. When you drill down on what the promise actually is, it’s pretty flimsy and may itself be consumer fraud.

AI is Using Forks and Knives to Eat Your Bacon…and then there’s the political clout

The Internet is an extraordinary electricity hog. You know this intuitively even if you’ve never studied the question of just how big a hog it really is. AI has already taken that electricity use to exponentially extraordinary new levels. These hogs will ultimately consume the farm if that herd is not thinned out.

This is nothing new. Consider YouTube. First of all, YouTube has long been the second largest search engine in the world. So there’s that. Reportedly, YouTube’s aggregate audience watches over 1 billion viewing hours per day.

To put that in context, the electricity burned by YouTubers works out to approximately 600 terawatt-hours (TWh) per year. (A terawatt hour (TWh) is a unit of energy that represents the amount of work done by one terawatt of power in one hour. The prefix ‘tera’ signifies 10^12. Therefore, one terawatt equals one trillion (1,000,000,000,000 or 10^12) watts.)

600 TWh is roughly 2.5% of global electricity use, exceeds the combined consumption of all data centers and data transmission networks worldwide, and “could power an American household for about 2 billion years. Or all 127 million U.S. households for about 8 years.”

And that’s just YouTube.

AI’s electricity consumption is a growing concern. Data centers worldwide, which store the information required for online interactions, account for about 1 to 1.5 percent of global electricity use. The AI boom could potentially increase this figure significantly.

A study by Alex de Vries, a data scientist at the central bank of the Netherlands, estimates that by 2027, NVIDIA could be shipping 1.5 million AI server units per year. These servers, running at full capacity, would consume at least 85.4 terawatt-hours (TWh) of electricity annually. This consumption is more than what many countries use in a year.

AI’s energy footprint does not end with training–after training comes users or the “inference” phase. When an AI is put to work generating data based on prompts in the inference phase, it also uses a significant amount of computing power and thus electricity. For example, generative AI like ChatGPT could cost 564 megawatt-hours (MWh) of electricity a day to run.

According to de Vries, “In 2021, Google’s total electricity consumption was 18.3 TWh, with AI accounting for 10%–15% of this total. The worst-case scenario suggests Google’s AI alone could consume as much electricity as a country such as Ireland (29.3 TWh per year), which is a significant increase compared to its historical AI-related energy consumption.” Remember, that’s just Google.

And then there’s bitcoin mining. Bitcoin mining involves computers across the globe racing to complete a computation that creates a 64-digit hexadecimal number, or hash, for each Bitcoin transaction. This hash goes into a public ledger so anyone can confirm that the transaction for that particular bitcoin happened. The computer that solves the computation first gets a reward of 6.2 bitcoins.

Bitcoin mining consumes a significant amount of electricity. In May 2023, Bitcoin mining was estimated to consume around 95.58 terawatt-hours of electricity. It reached its highest annual electricity consumption in 2022, peaking at 204.5 terawatt-hours, surpassing the power consumption of Finland.

By some estimates, a single Bitcoin transaction can spend up to 1,200 kWh of energy, which is equivalent to almost 100,000 VISA transactions. Another estimate is that Bitcoin uses more than 7 times as much electricity as all of Google’s global operations.

Back to AI, remember that Big Tech requires big data centers. According to Bloomberg, AI is currently–no pun intended–currently using so much electrical power that coal plants that utilities planned to shut down for climate sustainability are either staying online or being brought back online if they had been shut down. For example, Virginia has been suffering from this surge in usage:

In a 30-square-mile patch of northern Virginia that’s been dubbed “data center alley,” the boom in artificial intelligence is turbocharging electricity use. Struggling to keep up, the power company that serves the area temporarily paused new data center connections at one point in 2022. Virginia’s environmental regulators considered a plan to allow data centers to run diesel generators during power shortages, but backed off after it drew strong community opposition.

It’s also important to realize that building data centers in states that are far flung from the Silicon Valley heartland also increases Big Tech’s political clout. This explains why Oregon Senator Ron Wyden is the confederate of the worst of Big Tech’s excesses like child exploitation and of course, copyright. Copyright never had a worse enemy, all because of the huge presence in Oregon of Big Tech’s data centers–not their headquarters or anything obvious.

Wyden with his hand in his own pocket.

A terawatt here and a terawatt there and pretty soon you’re talking about a lot of electricity. So if you’re interested in climate change, there’s a lot of material here to work with. Maybe we do this before we slaughter the cattle, just sayin’.

Serving Fans in Self Preservation Moves: A TikTok case study

Fans don’t expect you to give up your right to choose your channels or to survive. If you are in a situation where the platform like TikTok overplays their hand and is so unreasonable that you have to walk away, it’s not your fault. It’s your right. But it is undoubtedly inconvenient for fans when platforms are impossible to deal with and their use of the music they love to create UGC is disrupted due to business.

But although TikTok is undoubtedly a big platform, it’s not the only game in town and there are other platforms that are licensed among TikTok’s competitors, particularly YouTube, Facebook, Instagram, and Snapchat.

https://www.statista.com/statistics/1293870/us-social-media-platforms-short-form-video/

Of course, YouTube started the trend of putting up messages for fans saying “You can’t get what you want because of these enemies of humanity who refuse to recognize our Big Tech Godhead” or something like that. These messages use the terminating licensor’s branding. I have never understood why the public messaging when tracks are taken down for whatever reason is not a material deal point in any license.

These automatic messages are programmed by the terminated service alone. The copy in the message is written by the service alone. There is never input from and certainly no approval of the terminating licensor. 

I find this unusual. For example, these licenses frequently have negotiated rules about mutual approval of press releases, credit, use of brands, display of copyright notices and other public speech. These are widely accepted and largely standard provisions. So if there are rules about some public speech, surely it’s a short step to also include in those rules any automated messages that convey information to the public about the licensor’s exercise of their rights either during or after the term. That licensor approval, especially mutual approval with the licensee, seems quite reasonable particularly if that messaging includes a reference to the licensor or its branding.

It’s entirely justified for license negotiators to require a meeting of the minds about post termination messaging to our fans and their customers when tracks stop becoming available. (We may have driven fans/customers to the platform in the first place for uncompensated customer acquisition cost, but that’s another discussion.)

Points to Consider

Part of that messaging to fans could be suggesting that since that track is no longer available on TikTok (or whoever), go to a platform where it is available on licensed platforms. This is just good consumer information rather than creating the confusing implication that it’s not available on TikTok so it’s not available anywhere.

Then the question is how to convey that information on alternate legal sites in a way that doesn’t become an unreasonable expectation of the terminated service and also doesn’t favor someone else. It seems like one easy way to do this would be to create a page of licensed platforms that excludes the terminated platform and put that link in the “track unavailable” message. An example is the “Why Music Matters” site, but obviously excluding the terminated site as to the catalog concerned.

This will require having control over that message and the right to force a correction if the platform fails to comply.

It may not be that simple for fans to move videos from one platform to another with the music intact, but that should be considered.

Fans don’t expect artists or songwriters to take a rube deal just to keep making tracks available on a platform that doesn’t respect them. But both the platform and the copyright owner should want to make it easy on fans rather than confusing consumers with a self-serving message.

If you want to explain why a track is no longer available, explain it. Don’t make it more confusing.

Chronology: The Week in Review: TikTok has a Napster Problem; @Helienne on Spotify’s new free goods; @MarshaBlackburn’s tour de force

When Universal withdrew from TikTok, the social media company was suddenly thrown back to its pirate-site roots, at least for the Universal catalog of all sound recordings and many, many songs. The eponymous TikTok is now on the clock to take down or mute Universal’s entire catalog. So tick tock baby.

Universal head Lucian Grainge made the case for the company’s approach to terminating its TikTok license because his negotiators were unable to reach a meeting of the minds with the other side. Pretty simple, really. This is not a big deal, it happens every day. Because in a free market capitalist system, “fair” is where we end up. Which means you have to end up somewhere, including nowhere.

Lucian made that case in an open letter to artists and songwriters as a community. There are some great nuggets in that letter, but I like this section to explain the casus belli:

The terms of our relationship with TikTok are set by contract, which expires January 31, 2024. In our contract renewal discussions, we have been pressing them on three critical issues—appropriate compensation for our artists and songwriters, protecting human artists from the harmful effects of AI, and online safety for TikTok’s users.

We have been working to address these and related issues with our other platform partners.  For example, our Artist-Centric initiative is designed to update streaming’s remuneration model and better reward artists for the value they deliver to platforms.  In the months since its inception, we’re proud that this initiative has been received so positively and taken up by a range of partners, including the largest music platform in the world.  We’ve also moved aggressively to embrace the promise of AI while fighting to ensure artists’ rights and interests are protected now and far into the future.  In addition, we’ve engaged a number of our platform partners to try to drive positive change for their users and by extension, our artists, by addressing online safety issues, and we are recognized as the industry leader in focusing on music’s broader impact on health and wellness.

With respect to the issue of artist and songwriter compensation, TikTok proposed paying our artists and songwriters at a rate that is a fraction of the rate that similarly situated major social platforms pay.  Today, as an indication of how little TikTok compensates artists and songwriters, despite its massive and growing user base, rapidly rising advertising revenue and increasing reliance on music-based content, TikTok accounts for only about 1% of our total revenue.

Let’s not forget that TikTok does not have some statutory or other legal or theoretical right to use Universal’s recordings or songs.  Their rights come from one place–their contract with Universal. No Universal contract, no Universal content. (Sorry copyright infringer apologists in the professoriate.).

Contracts have a duration, and when contracts end you negotiate an extension. If you can’t get an extension or a new agreement, remember the clock is ticking and time is running out–fair is where we end up, so one place to end up is nowhere. Stuff happens. Contracts frequently address what happens when the contract is over and the relationship must be unwound, sometimes called post-termination conditions which are just as much of a promise as anything else in the contract even if the duration (or the “term”) of the agreement is over.

The answer to what happened with Universal is simple: TikTok couldn’t close. Mr. TikTok may be a lot of things, but he’s no Blake.

Now that TikTok allowed their Universal deal to spin out of control, the termination clause(s) of their agreement no doubt become effective. If I had to guess, I would guess that TikTok must immediately stop any new uses of Universal content. Then it would not surprise me if TikTok has about 30 days to take it all down so they are on the clock…so to speak. I would also guess (or hope) that Universal has some post term conditions that will protect them from having to take TikTok’s rube deal on DMCA takedowns. The difference between a post term DMCA take down and a bald take down with no pre-existing contract should be that TikTok has a unilateral obligation to police their network for at least a period of time after termination. Failing to do so could leave them open to breach of contract for failing to satisfy post-termination conditions. Or something like that.

Let’s not forget that TikTok started out as a pirate social media site that got retroactive and prospective licenses in settlement of potential copyright infringement lawsuits. If licenses terminate, TikTok is essentially in the same position as it was before the license–at least as to the content that is covered by the terminating license. 

But of course TikTok won’t be in exactly the same position as the status quo ante, because the company is dependent on passing itself off as this inevitable legitimate company, i.e., a licensed platform. That was not the case when TikTok began licensing to avoid mammoth copyright infringement lawsuits. And therein lies the rub. 

TikTok may have a Napster problem. Once you let unlicensed material into a platform, it’s deuced hard to get it out, even if you have license. And as Judge Patel said in granting an injunction against Napster, “I’m sure that anyone as clever as the people who wrote the software in the case are clever enough, as there are plenty or those minds in Silicon Valley to do it, [to] come up with a program that will help to identify infringing items as well.”  

Thank God for the smart people.

So what happens now? Looking to recent history, Spotify was in a similar pre-IPO position when David Lowery and Melissa Ferrick sued the company for massive use of unlicensed songs. This led Spotify to go to Congress to rewrite the copyright laws in order to stop future litigation (called the “Music Modernization Act” with its probably unconstitutional retroactive reach back safe harbor). They were able to do that because of compliant lobbyists and the hunger among the elites for cash money from a Spotify IPO (or more precisely DPO). Plus Congress got to hang out with famous people and generally felt good about it because dissenting views were strangely absent in the mainstream media.

What do you think will happen if TikTok also goes to Congress to change the law to protect their cash cow and undermine artists and songwriters like Spotify did? They may send lobbyists to Capitol Hill with some walking around money, but if you haven’t picked up on it yet, at least half of the Congress despises TikTok. How does TikTok thread that needle?

TikTok’s response reads like it was written by the editorial staff at the People’s Daily:

“It is sad and disappointing that Universal Music Group has put their own greed above the interests of their artists and songwriters.

Despite Universal’s false narrative and rhetoric, the fact is they have chosen to walk away from the powerful support of a platform with well over a billion users that serves as a free promotional and discovery vehicle for their talent.

TikTok has been able to reach ‘artist-first’ agreements with every other label and publisher. Clearly, Universal’s self-serving actions are not in the best interests of artists, songwriters and fans.”

Note to Mr. TikTok and his PR bagmen, that “exposure” angle is not a winner. Not to mention that artists drive their fans to TikTok in huge numbers which is the real “free” promotion as in “uncompensated”. Also, newsflash, there is no free lunch so don’t embarrass yourself by starting the old “free promotion” okie doke. Mr. Tok needs to go home, think about his priorities and try again.

Also, don’t forget that TikTok has to do “blind check” licenses because it lacks the functionality to track and pay royalties, even the broken market centric royalty deal. Blind check licenses are the rough equivalent of an agreement not to sue TikTok rather than an industry standard royalty deal. Over time, it’s likely that the amount of the blind check must increase to compensate for the blindness.

The Universal episode is revealing, however. If TikTok thought they were going to get away with jamming artists because “exposure”, they need to go home and reconsider their life. The situation is completely out of control for one reason–TikTok underestimated Universal’s resolve. And they broke one of the cardinal rules of Business Affairs.

Never let it get to the point that you can’t just write a check.

@helienne’s Panel with Streamers and Label reps about artist centric, streaming fraud and Spotify’s new free goods

I interview Helienne Lindvall about a panel she was on in Europe with reps from Spotify, Deezer and WMG about artist centric implementation, streaming fraud and the new free goods, aka, Track Monetization Eligibility. 

How do you say “Bless your heart” in Mandarin?

If you didn’t watch the Big Tech hearing at the U.S. Senate, you should at least watch Senator Marsha Blackburn’s grilling of Mr. TikTok. Must-see TV.

@CrispinHunt on the TikTok showdown

Just in Time for Senate Hearing, TikTok’s Malthusian Algebra Meets Universal’s Artist Centric Mandate

MTP readers know that I’ve got no time for the scumbags at TikTok and never have. But it’s getting ridiculous and now the company has collided with Universal.

It was only a matter of time.  The artist-centric approach to royalty payments endorsed by Lucian Grainge requires more of the platforms than just rearranging the deck chairs on the Titanic.  It requires that the services say goodbye to a flat royalty pool calculated using impenetrable algorithms, formulas, and Malthusian algebra.  

It requires that the services open their checkbooks.  For you pie fans, it requires that the services grow the pie.  And not just for sound recordings, but songwriters, too.

If the collision between TikTok and Universal is any indication, getting past the threshold question is going to be a battle royale.

Here’s the other insulting part:  TikTok apparently wants to be able to create AI works (from whatever source derived) and repopulate their offering with these allegedly royalty free works.  Of course, AI tracks should not be royalty free at all since the AI will inevitably be ripped off from somebody.  

As I understand it, TikTok wants to salt the royalty pool with AI to increase the denominator and lower the per-stream royalty.  This, of course is insane. Whatever you think about AI, before you even get there it should be obvious that only royalty bearing tracks should be in the calculation for paying royalties.  Otherwise, the payments will be understated.  Which is of course what TikTok wants. Which was inevitable as soon as monkeys took photos.

But perhaps even more troubling is TikTok’s apparent refusal to be transparent about what it is doing to stop recruiting for illegal cartel activities, child trafficking and promoting hate speech—especially real porn with fake artists. They could do it but they won’t fix what Lucian calls “the tidal wave of hate speech, bigotry, bullying and harassment on the platform.”

Whatever bright and shiny object TikTok and their legion of lobbyists waive in front of artists, who is willing to have their music used as a honeypot for harmful acts?

It’s time for big changes at TikTok and if they are unwilling to modernize and reimagine their business, those who want to shut them down will be unleashed.  

And may find some new allies.