Start Me Up! The Music Modernization Act

There’s a lot happening in the U.S. recorded music industry right now! For the first time since enactment of the 1976 Copyright Act, and with some provisions dating back to 1909, sweeping legislative reforms introduced in December 2017 will generate the largest increase in compensation for songwriters in the history of recorded music. Why does this matter? Without songwriters there is no music. Why does this matter now? Since 2000, music piracy and changes in music consumption have devastated songwriter compensation. Where will this money come from? Projected strong growth in digital streaming consumption and sweeping operational changes in the clearance of composition copyrights will blaze this trail. Let me walk your through the key points and developments.

On December 21, 2017 U.S. House Reps. Doug Collins (R-GA) and Hakeen Jeffries (D-NY) introduced H.R.4706, The Music Modernization Act of 2017.  NMPA Praises U.S. House introduction of The Music Modernization Act.

On January 24, 2018, U.S. Senators Orrin Hatch (R-UT), Lamar Alexander (R-TN) and Sheldon Whitehouse (D-RI) followed with introduction of S.2334, The Music Modernization Act of 2018, adopted in its entirety from the U.S. House bill, with wide bipartisan support, something that rarely happens on Capitol Hill these days. NMPA Praises U.S. Senate Introduction of The Music Modernization Act.

To provide some relevant background, you should know that there are two copyrights in recorded music, one for the actual song, written by the songwriter(s), with the copyright usually held by the music publisher(s); and one for the sound recording, recorded by the recording artist, with the copyright usually held by the record label. Most music listeners know the recording artist as this is the face of the performance. While some recording artists write their own material, and therefore also hold the composition copyright, a vast majority of recorded songs are written by songwriters that you probably don’t know. The recording artist and record label earn royalties based on free market negotiations. The songwriter(s) and publisher(s) earn royalties based on government mandated rates under a statutory compulsory license, in which they must grant use of the song.  In the case of digital streaming services, a dominant and increasing form of recorded music consumption in our world today, the recording artist earns about 13 times more in royalties than the songwriter. The Music Modernization Act will change that.

The key provisions include a new standard for mechanical royalty rates for songwriters and publishers, for the digital delivery of music, based on a willing buyer, willing seller approach. It also permits rate courts to consider how much the recording artist is receiving in royalties for use of the sound recording, when setting performance royalties for use of the composition. Also very important, this legislation provides for the first time, an audit right for songwriters. It should be noted that songwriters receive two different royalties for digital streaming, the mechanical royalty paid directly by the Digital Service Provider (DSP), and a performance royalty paid by the songwriter’s Performance Rights Organization (PRO). Publishers and songwriters are aware that they have not always received the mechanical royalties due to them. They know this because upon review of their royalty statements, they see performance royalties for their digital streams with no corresponding mechanical royalty. Up until now, they had no ability to audit the DSPs and challenge this. With this new legislation, they will. It should be noted that the DSP’s have acknowledged that they are currently holding more than $1 billion in unpaid mechanical royalties for songwriters, simply due to the fact that they do not have the correct and complete identifying information to distribute these royalties. This new legislation will address this as well.

This leads into the next key point of the legislation, which will answer many of the questions you must have at this point, as to how these Digital Service Providers (DSPs) will fair in this new process. The Music Modernization Act provides for a new entity to be created, “The Collective”, to administer blanket licenses for mechanical digital streaming use, which will also serve as a “universal identifier database” of each composition copyright. Don’t worry, your tax dollars will not be footing the bill, nor will the music publishers.  The DSPs will foot the bill. Why on earth would they do that?  First, creation of “The Collective” and the adoption of blanket licenses will free DSPs from future copyright infringement liability. Second, the DSPs will enjoy significant cost savings under the new blanket clearance approach. Let me explain. Today, the DSP’s incur significant expense to clear the composition copyright for the songs on their service. Unlike the sound recording copyright, which they can simply clear through the record label, the composition copyright can only be cleared by tracking down ownership of 100% of the song. This task can be very difficult, time consuming, and expensive, as one particular song may have multiple songwriters and multiple music publishing firms, stretched across the globe, and probably identified differently for each.  Today, there is no one entity that sources all this information. “The Collective” will change all that, as it will serve as a “universal identifier database” of each composition copyright. DSPs will clear rights through “The Collective” under one blanket license for all songs, eliminating the administrative burden of single song rights administration.  The music publishers will be responsible for administration of “The Collective”, which also gives them the ability to protect their proprietary information, which is very important. Further, this “universal identifier database” will provide a level of transparency necessary to insure proper and full payment of royalties by the DSPs to songwriters and publishers.

PROs ASCAP and BMI will also benefit from a change in rate court oversight. Currently, there are two judges assigned specifically to hear rate court hearings. This bill will provide the opportunity to use randomly selected judges.  It will also serve to assist in paying more free market Performance Royalty rates for music used in production. It will allow more data-driven decisions to be made by rate court judges in determining Performing Rights payouts from ASCAP and BMI.  More on music production here.

The exclamation point to all of this was the recent outcome of the 2017 Copyright Royalty Board (CRB) hearings. On January 27, 2018, The Copyright Royalty Board (CRB) issued a press release announcing a dramatic increase in royalty rates for songwriters for the period 2018 through 2022. CRB dramatically increases rates for songwriters. The court increased the overall percentage of revenue paid to songwriters for interactive streaming services, from 10.5% to 15%, to be phased in over a five year period.  Further, they removed the Total Content Cost (TCC) cap, giving publishers the benefit of a true percentage of what labels are able to negotiate in the free market. This will result in the most balance between record label and publishing rates in the history of mechanical licensing. The historical ratio of 13 to 1 will improve to 3.82 to 1. Further, a late fee has been added if the DSPs don’t pay up in time.

A tremendous amount of effort by songwriter advocates has led to this landmark rate increase and the crafting of the Music Modernization Act. Finding consensus among the wide group of interested parties with competing interests, is remarkable to say the least. This legislation has been endorsed by major songwriter and music publisher organizations SONA, AIMP, and the NMPA; Performance Rights Organizations (PROs) ASCAP and BMI, and the Digital Media Association (DIMA). It’s far from perfect, but it’s considered a huge win for music creators!

At the same time, like any good plan, there are issues and controversies and challenges still to solve. Wixen Publishing, who holds some important copyrights for songwriters like Tom Petty, Neil Young, and Janis Joplin, filed a $1.6 billion copyright infringement suit against Spotify in the final weeks of 2017. They are not happy with the Music Modernization Act provision that will relieve DSPs of infringement liability beginning in 2018 and are generally not happy with previous class action settlements. Wixen’s Spotify Lawsuit

As to challenges still to solve, I have one word, YouTube. The International Federation of the Phonographic Industry (IFPI) reports that of the 1.1 billion people worldwide who listened to subscription paid and ad supported digital streaming music in 2016, 900 million listened to YouTube.  For those 900 million users, YouTube paid out $553 million in royalties. That’s 61 cents per listener. For the 212 million who listened to all other digital streaming services, the Digital Service Providers paid out $3.9 billion in royalties. That’s $18 dollars per listener.  Lyor Cohen, YouTube’s new global Head of Music reports that YouTube pays $3 to music creators per 1,000 streams. He does not mention that YouTube is estimated to earn $13 per 1,000 streams. That’s a 77% gross profit margin for a product that makes up about 20% of Google’s P&L.  Further, he claims YouTube pays better than Spotify.  When he makes that statement he is referring  only to ad-supported revenue.  It’s not a meaningful comparison as YouTube is primarily ad-supported, while Spotify currently has 60 million paid subscribers and growing, out of a total 140 million subscribers.  Spotify Premium pays $120 per user annually.  Lyor Cohen on YouTube.  Some will argue that YouTube offers valuable promotion for up and coming artists. The IFPI reports though, that very few users actually discover music on YouTube, that 76% of all YouTube music users listen to songs they already know.

While challenges still exist, the future is promising. The recorded music industry is in it’s third year of rising revenues, following 15 years of decline. Goldman Sachs projects that the global market will reach $41 billion by 2030, more than double the $15.7 billion we saw in 2016. The full year 2017 figures will be released soon and I will provide my usual annual update then. In the U.S., mid year 2017 results are very encouraging with retail revenues up 18% on strong growth in streaming.  RIAA mid year 2017 results.  2018 will surely be heralded as a key year for music creators with the expected adoption of the Music Modernization Act!

In light of all this terrific news, it seems fitting to lead us out with these legendary Rockers, still at it five decades later  “..I’ll take you places you’ve never seen..”  Start Me Up!

Cover Photo Credits: LA Guns Lead Singer Phil Lewis New Year’s Eve 2018 The World Famous Whisky A Go Go

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March 16, 2018 By Cynthia Drew In Music P&L /   1 Comment

Google and the Internet of Things 2017 Update

As a follow up to my first article on Google, the internet and technology juggernaut whose innovations in search and advertising have made their brand one of the most recognized in the world, this update will focus on the leverage such dominance brings. Google core products, including Search, YouTube, Android, Google Play, Maps, Chrome, and Gmail, each have over one billion active users monthly. 2016 Net Income totaled $19.5 billion, up 19% to 2015, driven on 22% growth in Google Properties revenue, formerly referred to as Google Websites revenue. Gross profit margin was 61%, down slightly (1%) to 2015. Net profit margin remained steady at 22%, and the effective tax rate was 19%.

Taking a closer look at Google Properties revenue, 2016 revenue totaled $63.8 billion, comprising 71% of total Google revenue. While Google doesn’t currently disclose the product breakout in their public filings, there’s enough public information available to estimate the pieces. Analysts Eric Sheridan at UBS and Justin Post at Merrill Lynch both estimated You Tube revenue to be about $12 billion in 2016. I estimated Google Search revenue at $50.5 billion and Android at $1.3 billion. Google dominates the global search engine market, maintaining a near 90% worldwide market share since 2010, although they have lost a little ground recently, currently holding a little under 87%. Android revenues, driven on mobile ad revenue, experienced strong growth in 2016, with my estimate reflecting a 60% increase to 2015.

While clearly Search revenue dominates the Google revenue story, investors are now paying closer attention to YouTube as analysts have become very bullish on this product segment and project revenues to reach $20 billion in 2018, and $27 billion by 2020.   Merrill Lynch now believes YouTube may reach a $90 billion valuation on a standalone basis. YouTube’s $90 million valuation.

The P&L success of the YouTube operating model finds its roots in the Digital Millennium Copyright Act (DMCA) of 1998, legislation enacted before user generated content sites like YouTube existed, and before the significant transformation in digital technology we enjoy today. Google’s YouTube takes full advantage of the DMCA “Safe Harbor” provision that provides full protection from infringement liability for content flowing through their lines. To qualify, Google must meet certain guidelines, including promptly blocking access to newly discovered infringing material, and terminating repeat infringers. However, the responsibility for surveillance and enforcement lies with the musical creator, not with Google. Most in the music industry view YouTube as a huge problem, a large global firm making billions of dollars, at the expense of the little songwriter who is struggling to survive.

Before we get into the latest key developments surrounding “Safe Harbor” protections for large powerful platforms, it’s important to note a recent operational change at Google’s YouTube, that also has a disparate impact on the songwriter with less than 10,000 YouTube views, and more importantly, that forces program loyalty provisions for all of their content providers. In 2013, Jack Conte, a struggling musician on YouTube, founded Patreon, a platform where musicians can post their content and find backers to support them. Content creators are projected to earn $150 million on the crowd funding platform in 2017.  Digital Music News reports that in order for musical creators to add external links to their videos, to sites like Patreon and Amazon, they are now required to join YouTube’s Partner Program, which carries an additional requirement, of a minimum of 10,000 views. It’s important to note that most content creators on YouTube depend on external links to earn money, that Google’s YouTube controls 60% of all streaming audio business in the world, and that it pays for only 11% of total streaming audio revenue artists receive. 1

Wait, there’s more. Are you familiar with Senate Resolution 1693 Stop Enabling Sex Traffickers Act of 2017? This bills amends the federal criminal code to include those who benefit from “participating in a venture” that supports child sex trafficking, to be subject to the same consequences as those who are directly engaged in this criminal activity. To achieve the intended goal, the bill seeks to amend the Communications Act of 1934, specifically Section 230 on Safe Harbors, to remove the protections communication and content delivery companies currently receive, should a sex trafficker use their company’s internet platform to advance their cause. Since introduction, the bill has received wide bipartisan support and additional sponsors, as well as support from companies like 21st Century Fox and Oracle. However, pro-internet groups like the Center For Democracy and Technology and the Electronic Frontier Foundation, powerful organizations well funded and with close ties to Google and similar minded Silicon Valley internet firms, are against this legislation. They are concerned that the removal of the Safe Harbor provision, as it relates to child sex trafficking, will set a precedent and open the door for further erosion of Safe Harbor provisions that could ultimately impact the organizations whose causes they are advancing. Background on the Stop Enabling Sex Traffickers Act.

Huge thank you to the Association for Independent Music Publishers (AIMP) for a very informative panel discussion on these important matters, featuring Jonathan Taplin, Director Emeritus of the Annenberg Innovation Lab at USC Annenberg School for Communication, member of the Academy of Motion Picture Arts and Sciences, who also sits on the California Broadband Task Force. I highly recommend Mr. Taplin’s book “Move Fast and Break Things” How Facebook, Google, and Amazon cornered culture and under-mined democracy.

I’ll leave you with this epic performance from my beloved rockers, incredibly on point some 25 years ago, and always forward thinking…

“.. You can’t trust freedom when it’s not in your hands, when everybody’s fighting for the promised land.. I don’t need your civil war.  It feeds the rich, but it buries the poor..”

Guns N’ Roses “Civil War” Live Paris 1992

Enjoy!

1 Jonathan Taplin, “Move Fast and Break Things”

Feature Image Credit: Cynthia Drew with Rock&Roll soul sister Tammy Michaud on the GN’R stage Labor Day Weekend 2017, at The Gorge Amphitheater in the stunning Wenatchee Valley, just over the mountains from Seattle, Washington.

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October 30, 2017 By Cynthia Drew In Music P&L, Rock&Roll, Technology /  

Google and the Internet of Things

Continuing in my series on mobile and internet technology, this month I take a look at Google, the internet and technology juggernaut that generated $75 billion in gross revenue and $16.3 billion in net income in 2015. Net profit margin was 22% and the effective tax rate was 17%. The stock closed 2016 at $793.02 with a market capitalization of $554 billion. Google takes pride in not being a conventional company. Their innovations in search and advertising have made their brand one of the most recognized in the world. Their core products, including Search, YouTube, the Android mobile operating system, the Google Play app store, Maps, the Chrome internet browser, and Gmail each have over one billion monthly active users. Google believes they are just beginning to scratch the surface. In 2015 they created a new public holding company named Alphabet, a collection of businesses, the largest of which is Google, as well as new businesses Verily, Calico, X, Nest, GV, Google Capital, and Access/Google Fiber.

 google-pl

Focusing on 2015 Google Websites revenue of $52.4 billion, at 70.2% of total segment revenue, up from 67.4% in 2013, the firm’s SEC filings describe this segment as advertising revenue on Search, Google Play, YouTube, Gmail, Finance, and Maps. While Google does not publicly report earnings by product line, Search, YouTube, the Android mobile operating system, including the Google Play app store, are the key product lines in this segment. For 2015, researching multiple sources of earnings estimates, including these two by eMarketer and Forbes, I estimate the breakout to be:

google-websites-new

 

I should note that there is considerable debate about how much Android contributes to Google’s bottom line, with annual revenue estimates ranging from $300-$500 million to $1 billion, to as much as $31 billion, as recently claimed by Oracle in their lawsuit against Google.  Oracle is suing Google for copyright infringement, for using its Java software to develop Android, without paying for it. Five years of litigation continues following a January 2016 U.S. Supreme Court ruling where Google lost in their effort to derail the case. Any settlement figure would be a function of this estimate, where it may be appropriate to include “Search” ad revenue. We’ll leave that decision to the copyright finance valuation team assigned to the case.

In the Search space, competition is fierce. Competitor Microsoft’s Bing market share continues to increase, at 22.3 percent in October 2016, compared to Yahoo at 11.7 percent, with Google still leading the pack at 63.6 percent. Considering that Bing was first introduced in May 2009, and that it also largely powers Yahoo Search, Microsoft is certainly gaining ground. Bing finally catching up to Google. U.S. Search Engine market share.

The biggest advantage Bing has over Google right now is their paid advertising platform. Bing is closing the gap by offering more niche advertising, and at lower prices. New functionality in the Ad Preview and Diagnostics tool is starting to turn Bing Ads into a major player in the paid search advertising world. It’s likely that more marketers will start using Bing Ads as an online advertising platform for budgetary reasons alone. If combined with more design, functionality, and visibility changes, Bing could start closing that gap between them and Google faster than ever before. Another increasing threat is in Europe where the European Commission has instituted new personal privacy provisions. Further, many European countries have launched legislative attacks on Google’s ambiguous privacy policy. This presents a significant opportunity for Bing to rise up and force Google out of Europe.

In the smartphone space, Google’s Android operating system is the hands down leader at 86.2% market share, compared to Apple’s iOS at 12.9%, according to the latest Gartner research.  Android, which was launched in 2008, makes money for Google in two ways, advertisements supplied by Google shown on Android phones, and revenue Google takes from its mobile app store, Google Play, which some technology analysts predict will soon overtake the Apple app store. Google Play to overtake Apple App store.

Also, in 2013, Starbucks dropped AT&T to partner with Google to provide an improved WIFI experience to their customers. Google will also work with Starbucks at developing the next iteration of the Starbucks Digital Network to provide increased content. Interestingly, I should note that following a recent flurry of iOS 9.3 updates, the functioning of my Apple iPhone 6 has declined dramatically when connected to Starbucks WiFi. Starbucks Google partnership.

The final point of analysis, and of course near and dear to my heart, is the subject of music video and Google’s YouTube, which was estimated to gross $5.6 billion in revenue, and net $1.6 billion or 28.6% margin to Google’s bottom line in 2013. Advertising Age on Google’s YouTube.  In the U.S. they were expected to net $1.08 billion, just 6.3% of all of Google’s net U.S. ad revenues for the year, but 20.5% of the $4.15 billion U.S. online video ad market.  Forbes contributor Tim Worstall on Google’s YouTube.  We can only rely on estimates as I noted earlier, in that Google does not publicly disclose financial results by product line. My 2015 gross revenue estimate for YouTube is $7.5 billion.

The P&L success of the YouTube advertising revenue model finds its roots in the Digital Millennium Copyright Act (DMCA) of 1998, the most important amendment to the U.S. Copyright Act of 1976; legislation enacted before user generated content sites like YouTube even existed, and clearly long before the significant transformation in digital technology we enjoy today. Google’s YouTube takes full advantage of the DMCA “Safe Harbor” provision that provides full protection from infringement liability for content flowing through their lines. To qualify, Google must meet certain guidelines, including promptly blocking access to newly discovered infringing material, and terminating repeat infringers. However, the responsibility for surveillance and enforcement lies with the Musical Artist, not with Google. Once a user uploads a video from a concert for example, probably without a license from the Artist, a global marketplace with at least five billion active users monthly, is instantly able to access this creative work for free. While Google’s YouTube is clearly not the only source of music piracy, the sheer global volume of the user base and ease of access to musical content, certainly makes it a major player. In the U.S., music piracy is a serious problem and results in the loss of $12.5 billion in total output annually, another $2.5 billion to downstream industries, the loss of 71,000 jobs, and $422 million less in U.S. tax revenue. The RIAA on the true cost of music piracy.

Further, Google’s YouTube is permitted to operate under an advertising revenue model, markedly different from a royalty based revenue model that has long been the standard in the recorded music industry. Musical Artists are in the fight of their lives! Multiple advocacy groups, including The Grammy Creators Alliance, The Future of Music Coalition, and the Berklee College of Music’s Rethink Music Initiative to name a few, are waging in earnest, a campaign for U.S. Copyright reform that reflects today’s music delivery system, that will protect Artists’ compensation, and that will ensure an enduring legacy of creative expression for years to come.

Looking abroad, in September 2016 the European Commission proposed modernizing copyright rules to help European culture flourish. The EU has adopted the Digital Single Market Strategy to offer better choice and access to content online and across borders, and to promote a fairer and sustainable marketplace for the creative industry. EU Press Release.

The winds are shifting and the message is becoming more clear. As the global recorded music industry is gaining legislative ground, particularly in the EU, and as consumer and music industry awareness and activism are on the rise, and as the Google YouTube development team has begun to respond with technology advances like Audible Magic and ContentID, expect to see transformative change in digital copyright law and protections, that will ultimately put some pressure on the YouTube profit model. Further, here is an interesting point if you’re really paying attention.  Today’s technology graduates are more interested in the altruistic goals that silicon valley offers, like working on products that will change the world, as opposed to Wall Street, where attractive compensation packages apparently don’t carry the same level of gravitas. Talent wars: Silicon Valley vs. Wall Street. Then perhaps it’s not a stretch to say that these young grads will not want to play a role in the continuing erosion of the Artist P&L and musical creativity in our society.

Let me leave you with this thought. What value does music create in your life? Think about that first piano recital where your daughter was so excited to play Beethoven’s “Moonlight Sonata”; or that hard fought comeback to competitive gymnastics performing the floor routine of your life to Bill Conti’s “Theme From Rocky”; or the incredible emotion flowing at the debut reunion performance, twenty three years in the making, of a legendary and iconic Rock & Roll band! What about the pure joy and hope you feel when your very special and brilliant 55 year old brother writes his first set of lyrics to the “Twelve Days of Christmas” and then sings them to his girlfriend! Yes! “…take me down to the Paradise City.. yeah yeahah!” For those of us who cannot possibly imagine a world without music to fill our souls, with pure unbridled emotion and purpose that inspires us every day, our message is simple. We’re on it and we’re in it for the Artist! Count on it.

 “Ten years ago they sent a machine from the future, “You Could Be Mine”

 

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January 3, 2017 By Cynthia Drew In Music P&L, Rock&Roll, Technology /