Splitting Up the Spoils

Pho’s Jim Griffin on the state of the biz:

the worm is turning at record companies and their media parents everywhere, where financial statements and audits and following trails of money leads you to an industry swirling the drain and praying for the deus ex machinas of technology and government to rescue it from the very technological and government forces that are propelling digits along an increasingly shorter path between source and destination.

Ultimately, the Perfect Storm of forces converging on the business have executives who once feared government intervention pleading for it in Washington and Brussels and wherever they can pay someone to listen to their bleating cries for protection from their customers, who other industries will tell you in declaration and deed are Always Right.

Yes, the economy is going to hell, that’s true, and much of it is due to a gross imbalance between expectation and reality, a market that was largely fueled on digital media convergence but stopped in its tracks when content and capital went on strike, the jets cooled by law suits and log jamming that can only come from the highest-priced lawyers and lobbyists.

Ultimately, though, the expectation created by advocates and purveyors of what is called Digital Rights Management software are squarely to blame. They sold a bill of goods to the industry, telling them they’d turn digital music and media and art into digitally controlled products with no marginal cost and infinite protection and data mining, with the result that big media waits and waits and waits for control that will never come. Michael Eisner hypocritically swears Disney won’t release content unless it can be controlled at the same time he sends it down a cable wire into a flat-fee market of uncontrolled video cassette recorders, the same device Jack Valenti swore in court would kill the industry like the Boston Strangler.

Technologists everywhere need to become hyper-honest with industry executives who ask: No, we will not in our lifetimes harness and tether art. No, it wouldn’t be a good thing if we could. Art and anarchy go hand in hand, and conditioning access to granular pieces of knowledge and art on the ability of a parent to pay is a bad, immoral thing.

Let’s be clear: Digitization of music and media inherently liberates that content to find a shorter path to its audience, and whatever speed bumps we can shortsightedly build are quickly obviated by the new digital vehicles we build to move them. Control is not coming back, and there is no need to wait. The next vine is not a mechanism for control.

Fortunately, the next vine can destroy the motive for piracy without mechanisms. Actuarial copyright is our past and our future. Digital networks ought no more ask permission to use songs than should restauranteurs and public address operators or radio or television broadcasters. The fees we can collect from network operators can and will grow the pie dramatically, and technology can help us divvy that pie in fair ways that reward and incent creation.

But this future can only come from letting go. Talk of suing and prosecuting users and file traders is madness. Why require a digital network operator to control content and permissions when we offer Mel Karmizan a flat-fee to use whatever he wants, whenever he wants? Why should Clear Channel get essentially free reign over delivering content for a modest flat fee while we refuse to offer a proportionate fee to network users for the same freedom?

At the same time, I think it equally irresponsible for those with licenses, such as some webcasters, to continually whine over fees for compulsories other businesses would covet. When the rate was halved and the whining only increased I wondered if anything other than free – with artists uncompensated – could possibly satisfy those who seek to build businesses with other people’s art.

This business of music and art will be rebuilt and grow handsomely on fair, flat actuarial fees that offer bundled price with unbundled choice. It’s the way we’ve addressed every intersection of technology and media since electricity started spreading at the beginning of the last century. Ever since acoustic became electric we’ve responded with a pool of money and a fair – but not perfect – way of splitting up the spoils: Public address, radio, television, cable, satellite, and now webcasting all benefit from blanket compulsories that actuarially replace actual control.

It’s time we licensed digital networks at businesses and college campuses the same way we license restaurants, broadcasters and others for whom control is less efficient than actuarial fees. And it’s time we stopped whining over having to pay when this happens.

All I can say is “Whoa,” and I didn’t know “incent” was a word – you learn something every day.

UPDATE
Bob Bellin of MP3Player.com questions Griffin:

“When the rate was halved and the whining only
increased I wondered if anything other than free – with artists
uncompensated – could possibly satisfy those who seek to build businesses
with other people’s art.”

Jim – I loved your treatise but disagree with you here. Even with the rate halved, it amounted to several times annual revenue for many. As far as the artists are concerned, the total pie due them under the best circumstances, (assuming no rate change) will be a million or so, in aggregate, over the two year length of the CARP decision. I think that the talk about compensating
artists has conceptual merit but no practical implication here, as the payments will likely be comparable to those checks for thirty cents we used to get for phone company credits.

Wouldn’t it make sense to allow for a token payment based on a revenue percentage for this CARP period and then reassess if anyone has any real traction?

And what IS a reasonable rate when as you point out, for Clear Channel and Viacom it’s zero and for the publishers it’s a small percentage of revenue?

MORE
Rusty Hodge of SomaFM is even more pointed:

>At the same time, I think it equally irresponsible for those with licenses,
>such as some webcasters, to continually whine over fees for compulsories
>other businesses would covet. When the rate was halved and the whining only
>increased I wondered if anything other than free – with artists
>uncompensated – could possibly satisfy those who seek to build businesses
>with other people’s art.

Wow, you’re quoting the RIAA! “to build businesses with other people’s art.”

The only people who would covet those terms are the ones doing interactive services – these fees don’t apply to interactive services. This is plain old fashioned radio delivered over the internet. What businesses are coveting those terms? And those fees don’t appear to apply to subscription services. (Maybe Whitney can chime in here).

Webcasting, that is non-interactive music services delivered over the internet, is NOT in the business of making money off other people’s art. We are in the business of helping consumers FIND MUSIC they otherwise would never hear. Our value added is finding the music we think our listeners would like, and exposing them to it.

Webcasters provide FREE ADVERTISING to record companies, and the record companies don’t even appreciate it. (Actually, that’s not really true- many people in the record business DO appreciate it – the ones trying to get exposure for their records. Too bad the legal departments at the labels are working hard at keeping internet radio station FROM playing the music!)

The only difference between net radio and over the air radio is that there is more choice of programming over the net.

It also does a dis-service to the programmer who is creating these radio channels. Picking and mixing together the music is an art as well (although some large radio chains have made it more of a science than an art… a true DJ in the sense of the word is an artist).

>Public address, radio, television, cable, satellite, and now
>webcasting all benefit from blanket compulsories that actuarially
>replace actual control.

Except that the webcasting compulsories have too many complicated rules (songs per hour from box sets, same artists, etc. The tracking of this is complicated, and it interferes with the music programming).

>It’s time we licensed digital networks at businesses and college campuses
>the same way we license restaurants, broadcasters and others for whom
>control is less efficient than actuarial fees. And it’s time we stopped
>whining over having to pay when this happens.

But, over the air radio broadcasters don’t have to pay the fees Webcasters do. And I’m pretty sure that restaurants and nightclubs aren’t paying these fees either.

(Cell phone comparison – Imagine if a ring-tone supplier had to pay EACH TIME the phone rang? Would that be fair? No… but that’s how net radio stations are forced to pay. Hell, we even have to pay if someone is connected but not in the same room with their computer!)

UPDATE
Jim Griffin retorts:

I am keenly aware of and have studied the webcasting situation in depth, and was an expert witness at the proceeding.

Without regurgitating all the specifics, my thoughts are these: There should be an on-going panel, ala the Federal Reserve Board, that adjusts rates on a continual basis to effectuate the purpose of the Act and the Copyright laws and their foundation in the constitution, i.e., maximize public exposure to art with a balance to generate revenue to incent creation.

In my opinion, this requires a balance between setting a known rate in advance that allows proper business planning and adusting that rate to reflect changes in market and other factors. Further, I think the rate should respect differences in digital-bit-rate used (for example, 8 karat gold is quite different from 18k gold) and similar changes in technology.

The rates you mention are a product of a number of factors that have to do with not only the RIAA’s request but equally those proposals advanced by webcasters participating in the negotiations and the hearing. I am sympathetic to the notion that rates shouldn’t be “per song” and should instead reflect revenues or profits or some similar criteria, but this isn’t what was put before the panel by either side or necessarily practical for other reasons. Do I think more webcasters should’ve participated and advanced proposals more consistent with what they now claim is their economic reality? Sure, but for various reasons they chose not to participate or could not participate based on other considerations.

As a result, please don’t interpret my remarks as support for the current rates, which I think may be too low for some well-healed webcasters and too high for others.

Ultimately, I think the key here is that the rates are not mandatory, but access to the content is, and there is plenty of room for negotiation with SoundExchange and its constituents and waivers ala Artemis’ recent actions. If the effect of the rates is to produce sub-optimal revenues for SoundExchange, I have little doubt that this provides an incentive for different rates based on negotiation. The rates are mandatory for those who do not negotiate an alternative, but not set in stone for those who want to bargain with rights holders.

It is tough to substitute for a market with public policy decisions. Indeed, under the applicable consent decrees judges review ASCAP and BMI rates. This was the first of what may be many hearings on what is appropriate, and these rates — assuming they apply to a particular webcaster and they have not negotiated an alternative in advance or after the hearing — expire at the end of the year.

There is of course much public criticism of the RIAA in this process, and I can understand and appreciate much of it, but my experience doesn’t validate the malevolent intent applied by many to their role. For example, I testified as the RIAA’s expert witness (yes, I am prepared to hear more about how I sold my soul) but at no time in the process did they even once suggest how I should testify or ask me to say anything other than what I thought was the truth. I thought the RIAA’s attorneys exceptionally good and fair. They simply asked me to tell the truth as I saw it and to explain the technology and economics behind webcasting. My testimony is, I believe, a matter of public record.

Finally, to those who believe the only standard is parity with radio which pays nothing to sound recording owners, I must point out that the United States is a global exception in this regard and my guess is that this is attributable primarily to the warped role our media plays in our extended, non-parliamentary election process, with broadcasters wielding exceptional, disproportionate power. As a result, they get a break in the US like nowhere else, and I don’t think it should be used to model a fair system for webcasting.

At a Sunday LA Pho I once asked John Parres how much he thought webcasters should pay for the use of music. He offered an off-the-cuff opinion that it should be about 85% of their revenues, and while I won’t hold him to the exaggerated number I know he was making an important point: Artists deserve money from those who build businesses on their art, and now that we have a law that says the artist should get half the money we shouldn’t be cheap in setting the rate.