Christian L. Castle, Attorneys -- Austin, Texas

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Transparency Starts Upstream for Streaming Royalties

From the Huffington Post, October 5, 2015

We've seen stories recently about various successes for artists in negotiations with major labels about "transparency" in the payment of the artist's share of streaming royalties received by record companies. This is great news of course, but the new buzz word "transparency" should be understood in context. There is nothing the digital services would like more than to deflect the ire of artists and songwriters who are enraged about minuscule royalties away from the services and onto record companies or music publishers. 

Creators need to be alert that they are not being duped into a false deflection because even in the best case, record companies can only pay on the royalties they receive from services.

The False Deflection

Mistrust between artists and labels is nothing new. That's why artists typically have the right to conduct a royalty compliance examination of their royalty statements from labels, often called an "audit" (but should be distinguished from "audited financial statements" as in the GAAP world which has nothing to do with royalty statements).

But remember how the money flows for artists in the case of ad supported streaming services: 

Advertiser → Ad Network → Service → Label/Aggregator → Artist

And for songwriters: 

Advertiser → Ad Network → Service → Publisher/PRO → Songwriter

The payment by the service to the label is covered by contract and the payment for the songwriter is covered either by contract or the compulsory license.

Artists who are signed to a label only get paid when their recordings are played on digital services when their label pays them a share of what the label gets--the typical arrangement. These artists have no direct audit rights against the digital service. The artist relies on their label to make sure that the label--and consequently the artist--is getting a straight count from the service.

Remember--most streaming royalties are a share of the service's advertising revenue. If you can't confirm that all the advertising revenue is paid through properly, that would be worse than a record company refusing to let artists see CD manufacturing records. It would be like the label telling the artist they can't confirm all the sales from WalMart while boosting WalMart as a a major retail channel.

The Blanche Dubois Method

Too often the label is either not able to get the service to agree to an audit clause in the label's agreement with the service, or the service makes it so difficult to audit--particularly an "upstream" audit that attempts to verify advertiser revenues--that no one can be sure if the advertising revenues are accurate. Advertising revenue that so many of the digital services depend on, especially the "free" services.

A digital service once told me that they refused to agree to audit clauses because they determined that being audited wasn't a good use of their resources. Very insulting.

Independent artists may have direct deals with digital services, but they often don't have an audit right against the service, or they distribute to digital services through an aggregator who may not have an audit right themselves. Artists rarely have an audit right against their aggregator, so the whole thing is what I call the Blanche Dubois method--relying on the kindness of strangers.

Songwriters are even worse off. If the digital services use the compulsory license under the Copyright Act, the government prevents songwriters, or even their publishers, from auditing the service. This is a huge gift to the digital services, and opens the door to shenanigans. Starting with a failure to properly license songs in the first place.

The Darkest of Black Boxes

The lack of accountability at digital services produces a large pot of unallocated money, often called the "black box". This "black box" means that money has been accrued by the service because they did not know who to pay (supposedly). Recent estimates from industry experts I've spoken to suggest that the total estimate--by the services--of the unallocated advertising revenue sitting at digital services is about $100,000,000. 

A similar version of this issue came up many years ago when the New York Attorney General pursued record companies about unpaid royalties for artists whom the record company was unable to locate. This resulted in a settlement under which record companies took a number of measures as reported by the New York Times

Under the agreement, Warner Music Group, Bertelsmann Music Group, Sony Music Entertainment and EMI Group must list the names of artists and writers who are owed royalties on their Web sites; place advertisements in leading music-industry trade publications explaining procedures for applying for unclaimed royalties; work with music-industry groups and unions to find artists who are owed royalties; and share artist contact information with one another. 

Do digital services do the same with their own "black box"? No. Shhh...it's a secret.

Given that the services are highly incented to fudge these numbers, I would not be surprised at all if a theoretical unicorn auditor who could get a good look at the actual earnings for all songs across all services would find that the estimate was off by at least two or three times $100,000,000. (The iTunes download service is not included in this estimate and is unlikely to have significant unallocated monies because Apple typically only let copyright owners post recordings on their system.)

One reason to believe that the black box is much higher is recent press suggesting that there is a startling amount of fraud in the online advertising networks. This fraud may well extend to Google's Doubleclick network. Doubleclick is one ad network that powers both Spotify and Pandora

If Advertisers are Suspicious, Should Artists Be Also?

One very significant example is that major brands and the mega-ad agencies like WPP are taking a hard look at whether online advertising even makes sense given the high degree of click fraud and scamming by ad networks. According to a recent article in the Financial Times, WPP CEO Sir Martin Sorrell "warned Google that unless it improves its efforts to weed out 'fake views' of online adverts, marketers will shift their focus back towards traditional media such as press and television." Sir Martin was reacting to a study that alleged that Google "has been charging marketers for YouTube ad views even when the video platform's fraud-detection systems identify that a 'viewer' is a robot rather than a human being" and Sir Martin stated the obvious conclusion that "[c]lients are becoming wary and suspicious."

Does anyone seriously think that massive defrauding of advertisers is somehow not present at all in the ad networks used by the digital services offering ad-supported services? And if advertisers are defrauded, is there some magic unicorn elixir that protects artists, songwriters, record companies and music publishers from being ripped off at the top of the revenue waterfall?

Transparency should start at the top of the waterfall--if artists can't trust the money their labels or aggregators collect from digital services, how much good does it do to get a really transparent report of really crooked revenue reported by the service to the label or aggregator?

The tension between artists and record companies as well as songwriters and music publishers over money is long standing and will probably never go away. That's fine, that's why we have audit rights.

But the relatively vast amounts of advertising revenue--large, unauditable oceans of advertising revenue plagued by fraud--that flow through digital services must be where real transparency gets real. And artists need to demand of their partners and managers that this issue is thoroughly vetted in negotiations.

It is also one of the few places where the interests of artists, songwriters, record companies and music publishers--and even digital services--are entirely aligned. This is where we should all be putting our shoulder down and digging in. We can fight with each other anytime. 

Given the degree of fraud that WPP complains of, it's no wonder these services make upstream advertising revenue so difficult to confirm. Harvard Business School Professor Ben Edelman called it back in 2009 with his prescient "Toward a Bill of Rights for Online Advertisers". The planks of Edelman's bill of rights applies as much to artists and songwriters as it does to advertisers:

An advertiser's right to know where its ads are shown. It is nonsense to pay for ad space without knowing where an ad will appear; sites vary too much in user quality and context. Even for "blind buys," advertisers need enough information to determine whether a given site qualifies to show an ad. Anything less undermines accountability--inviting fraudulent sites that devour advertisers' budgets. And with all manner of fraud--from spyware pop-ups to invisible banners to adult sites slipping into networks that claim to be brand-friendly--advertisers need to be wary.

An advertiser's right to meaningful, itemized billing. Clear records protect advertisers from accounting games. Otherwise, ad networks can claim "We already credited you for those clicks," knowing that advertisers cannot prove otherwise. But some ad networks provide invoices that are opaque at best.

Sound familiar? Think artists and songwriters deserve the same rights to know if they are being paid properly?

Artists are constantly being told by streaming music boosters how great it is and how we should all hitch our wagons to free music supported by advertising. Even Billboard and The Official Charts in the UK take streaming into account--that results in something of a self-fulfilling prophecy but does nothing to create even the level of assurance that creators routinely get from their record companies or music publishers.

If streaming is really providing such significant advertising revenue as we are told by the streaming boosters, we have to be honest and acknowledge that we have no idea whether it's calculated properly. Fighting with all the record companies or publishers in the world won't make that any better.

Meet the new boss--worse than the old boss.

 
 

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