Author: David Newhoff

David is an author, communications professional, and copyright advocate. After more than 20 years providing creative services and consulting in corporate communications, he shifted his attention to law and policy, beginning with advocacy of copyright and the value of creative professionals to America’s economy, core principles, and culture.

IAB Report Reveals Flaws in Internet Supply Chain

Internet companies and digital rights activist organizations have spent considerable resources over many years promoting the idea that we should think of the Web as an extra-legal territory.  From Barlow’s  evangelical Declaration of the Independence of Cyberspace in 1996 to current debates over the relevance and meaning of an “open” Internet, one recurring theme that still holds sway among many people is the idea that these networks should operate beyond the boundaries of public or private regulation.  Digital rights proponents—many of them funded by Silicon Valley corporations—at times come rather close to describing the Internet as a religion—as though it runs on esoteric virtues like freedom, good intentions, and the human spirit rather than, y’know, money.

For better or worse, the Internet most of us use every day is one vast, complex media platform designed to attract advertising dollars, which means the major Silicon Valley firms and their shareholders have more than a vested interest in a sustainable digital adversing ecosystem.  As such, it’s worth noting that their own anti-regulatory rhetoric often used to lobby for a laissez faire approach to all things Web can potentially backfire and threaten the viability of their own existence, like unfettered deforestation in the Amazon.  (I mean the real Amazon).  And according to a new report released last week by the Interactive Advertising Bureau (IAB), conducted by EY, the digital advertising ecosystem in the U.S. is currently losing an estimated $8.2 billion a year in value due to “fraud and flaws in the Internet supply chain.”

Without working in digital media planning and buying, it’s tough to fully understand the advertising ecosystem, but this video created by IAB is a helpful overview that at least gives one a pretty good idea as to why it’s called an ecosystem.  Media buying and selling in a market with billions of pages in constant motion is naturally a complex universe of interdependent functions, which are necessarily automated and, therefore, not entirely transparent to all parties. Available online inventory is purchased through a semi-automated exchange where the available inventory of impressions is bought and sold, functioning much like any other commodities exchange.  At the most basic level, advertisers are paying for impressions, which are supposed to be based on real human traffic to the sites and pages where they have directed their ads. But because the system is complex, partly opaque, and because any site owner can serve ads to his page, there is tremendous opportunity to exploit imperfections in the system for profit.

As complex as the system may be, dishonest brokers have developed a variety of equally sophisticated methods for either siphoning ad dollars away from the intended market or for using the advertising ecosystem to deliver malware or conduct scams and theft. For instance, the IAB report estimates that Invalid Traffic is costing the industry $4.6 billion.  One example of Invalid Traffic would be an advertiser paying for ad impressions based on a volume of non-human traffic to a given site or page.  Serving ads to bots or generating false impressions via clickfarms are among the growing problems for the advertising industry. Additionally, this type of Invalid Traffic is interrelated with the two other corruptions in the supply chain identified by the IAB report—Malvertising+ and Infringed Content.

Infringed Content (e.g. piracy sites) is estimated by the report to be draining value from the advertising ecosystem to the tune of $2.5 billion. The lion’s share of that number represents a combined estimate of either paid-for content or ad-supported content that would be legally consumed if Infringed Content could instantly be made to disappear from the Web. I have written in earlier posts about advertisers losing brand value when their ads appear on sites dedicated to infringed content, but this report identifies specific ways in which Infringed Content is related to Invalid Traffic. For instance, a user who visits a pirate site is increasingly vulnerable to malware, which can then slave the user’s device to generate Invalid Traffic for ads in a variety of ways unbeknownst to the user.

Malvertising+ is estimated in the report to be costing the industry $1.1 billion in value and is described thus:  “Malvertising+ refers to the potential distribution of malware across a larger population of consumers by compromising a single advertisement or script than would be possible through compromising a single website or content source.”

In a nutshell, Malvertising+ includes various methods by which bad actors are using the advertising ecosystem to deliver malware that may either be used to generate fraudulent revenue via Invalid Traffic or to attack individual users with scams like ransomware, which installs a virus to seize control of a user’s system so the hacker can then charge a fee for its release.

Suffice to say the IAB report cites too many examples—and they’re fairly technical—to describe in this post, but to put that $8.2 billion in lost value in perspective, this article by TechCrunch, citing ZenithOptimedia, states that the projected U.S. ad spend for all Internet advertising—which includes more than the portion relevant to the report—in 2015 was expected to have been approximately $51 billion.  That means just about 16% of the total domestic spend on online advertising is being poured into what the IAB report calls an “untrustworthy supply chain.” Presumably, there is a tipping point at which advertisers can lose confidence in the digital advertising ecosystem, which seems to me the kind of outcome one might expect from an entirely unregulated Internet.

Because each of the various types of corruption identified in the report represents criminal activity, it seems likely that the remedies necessary to maintain confidence in the advertising supply chain will comprise some combination of both law-enforcement efforts and voluntary measures on the part of key players in the advertising ecosystem. And it is interesting that the second largest corrupting force identified in this report happens to be Infringed Content.  After all, the Internet industry—particularly Google—has spent such vast resources devaluing the relevance of copyright in the digital age and claiming that ISPs cannot “police the Internet” whenever the copyright holders have sought voluntary measures to mitigate mass infringement.  But if the ad buyers cannot have confidence in the market, then the ad sellers may suddenly find both the will and the ability to stifle the opportunity of pirates and thieves to leech off legitimate trade.

Is Adele an anomaly?

According to Peter Kafka writing for re/code, the fact that Adele has broken all-time records with sales of her new album “25” while simultaneously rejecting streaming services is too much of an oddity to provide any guidance for music professionals vis-a-vis their business models.  Kafka writes the following:

“If you are looking for big lessons in Adele’s success selling more albums in the last week than anyone, ever, don’t. She’s the definition of anomaly.”

He raises a valid question—one I certainly can’t ignore, having criticized many Internet industry pundits for citing exceptions in order to prove rules on a variety of topics.  And nobody can deny that megastars like Adele are rare individuals; but this has always been true of megastars, which is not quite the same thing as saying that their business models have always been radically different from smaller stars or middle-class creators. The business model that sold The Beatles and The Kinks was fundamentally the same; the Beatles were simply more popular and, therefore, sold more recorded music.

In truth, though, I think the significance of Adele and Swift boycotting these services scares the hell out of people invested in the streaming future because it just might reveal how naked the emperor really is.  Looking at the top ten tracks on Spotify this week, I see several artists—in first place is Rihanna—who could theoretically do just fine, or better, without that service’s nickels and dimes.  And as for the “music discovery” argument, I see that tracks in 5th and 7th place are both from the soundtrack for a film called Fifty Shades of Grey, which means these songs had a decent shot at discovery via a rather old model.

So, it seems that the real question is whether or not some portion of contemporary artists really can learn anything from Adele or Swift (or Prince) even if most artists cannot realistically expect to achieve that level of popularity. After all, streaming is financially nominal to all artists and songwriters, so the risk in keeping music off these platforms—especially for the purpose of windowing the release of a new album—isn’t necessarily as high as pundits like Kafka might suggest.

David Lowery, frontman of the bands Camper Van Beethoven and Cracker (both typical, middle-class bands), and founder of the artists rights blog The Trichordist, offered me this insight when I spoke to him about the relative value of streaming:

“Camper Van Beethoven earns more from sales of live albums and oddities not available on streaming services than the albums available on streaming services even when calculated at source.  And Camper Van Beethoven as an obscure, cult band works more like a “new” band than you would think.  We rely on new discovery as well. But when a single sale of one album provides as much revenue as 7,000 free streams on Spotify/YouTube  it makes more sense for us to pursue sales in a grassroots manner and sustain the business by putting the money into new works.  I know. I’ve tried it both ways. My free streaming critics may be unwilling to admit this but  I’m pretty good at business.  I’ve made a profit every year as a musician and my tech credentials are generally better than my critics. Remember in 2005, many pundits were declaring MySpace the future of the music business.  That’s ten years ago.” 

To date, the argument from from the pundits of “conventional wisdom” has been that artists less popular than Adele can’t afford not to be on Spotify, et al because that’s where prospective fans are hanging out. The implication is that even if these platforms are not revenue providers, it’s either swim in the stream or go over the falls into obscurity.  As Paul Resnikoff of Digital Music News writes in a recent post:

Artists like Ari Herstand told fellow musicians that they were compromising their careers if they didn’t go where the fans were; vitriolic pundit Bob Lefsetz called you an idiot for challenging the emerging status quo.  And this of course goes beyond Spotify: YouTube, Soundcloud, Rdio, Pandora, Apple Music, and half-a-dozen other big platforms are woven into this stained fabric.

But it seems that the digital music market has generally fostered two things:  false hopes for many new creators and billions of dollars for the peddlers of false hopes. As such, there is now such an overabundance of works—even great works—that obscurity can only be the status quo for most artists. Meanwhile, the paths to market cannot logically be “discovery” through digital platforms and social media alone; there’s just too much stuff out there.  So, it’s entirely possible that all consumers, even digital natives, relate to music, discover music, and share tastes in music in similar ways to their pre-digital forebears. Yet, in regard to a star like Adele supposedly “living” where the real fans are not, Kafka makes the following odd statement:

“If you still insist on looking for lessons, you might head in this direction: We live in a pop music, track-and-hook world, but Adele lives in her own world, and it turns out lots of other people do, too. And an educated hunch is that many of those people are women, and/or older* than the people who camp out at Spotify and YouTube, and many of those people are happy to pay for a thing they like if it is convenient, which buying songs from iTunes (or even at an actual store!) can be.”

I’m not sure how educated that hunch really is.  For one thing, I believe the age range of Adele fans is actually quite broad.  Her songs are played on my terrestrial radio station and my teenage daughter’s station, which is not true of Taylor Swift, who also successfully snubbed streaming, but whose fan base almost certainly comprises a majority of digital natives. Additionally, while age demographics among Spotify users are hard to find, one source I located states that 55% of its 75 million users are women, and I have to imagine some of these women fit the profile of the Adele fans Kafka presumes to describe as outliers. (As a side note, I’m not sure why Kafka mentions purchase via iTunes, when “25” is available for download.)

Above all, Kafka is guilty of the same fallacy that pundits like Bob Lefsetz, and even like John Seabrook in this recent article for The New Yorker, tend to promote. And this is the fallacy of believing that the axiomatic statement “streaming is the future” is beyond all question.  Although there is plenty to love about streaming technology itself, I think the business as it exists today is well within the boundaries of question. After all, one cannot confidently call a revenue-free model “the future” without some reasonable doubt.

We are from the 80s. We are not afraid of these machines.

Kafka also seems determined to emphasize the fallacy of the digital divide—as though the truly contemporary consumers are cruising Spotify and YouTube, while their decrepit, technologically challenged parents are (snort-laugh) buying CDs.  Of course, I’d point out that the more time a prospective music fan has to “camp out on Spotify and YouTube,” the younger they probably are and, therefore, the less likely they are to be buying anything on their own. Also, most digital natives are the children of us Gen Xers, and we are not our parents who still have (snort-laugh) AOL email accounts; we are in fact the earliest adopters of all this fabulous technology that people are convinced has metamorphosed the millennial music consumer into some unfathomably wired creature.  Yes, streaming is convenient and cool, but it’s not quite so revolutionary as it is sometimes made out to be. And if the business models never provide real revenue for the music makers, it could still fail plenty before it truly succeeds.

Still, Adele actually is an anomaly, though not necessarily the way Kafka describes.  As David Lowery explains on The Trichordist, 1% of the artists today earn 77% of the revenue. And so, he writes:

Perhaps the larger irony here is that those who sought to destroy the major labels through piracy have only empowered them. The major labels now not only capture the larger share of revenue from recorded music but also as a result they also capture the most favorable deal terms (including equity shares) from the digital service providers (DSP). The net result being that indie and DIY artists who once accounted for a robust middle class of musicians have been pushed down into the realm of hobbyists. Of those few, rare indie/DIY outliners that manage to flourish none of them will get equity stakes or the same terms that the major labels do from the DSP’s.*

This is the harangue many of us have been on for years:  that piracy can only lead to wealth consolidation and destruction of the middle-class creator for the same reasons devaluation of human labor will always cause harm to the middle-class workers in any business sector.  Meanwhile, pundit Bob Leftsetz loves to cite the relative success of superstars in his many rose-colored editorials, which come very close to saying that complaints about piracy or predatory business practices by streaming services only come from musical “losers.”  As cited in this older post of mine, Leftsetz writes:

Superstar talent may make less money off recordings than in the past, but the live business far exceeds the money it once made. And then there’s sponsorships/endorsements and privates and sync and so many avenues of remuneration that no one who is a superstar is bitching.

Skipping the bullshit about alternative revenue sources, which professional artists have criticized to death, what will Bob say about his sanguine superstars if many more of them decide to follow Adele’s lead and tell services like Spotify to get stuffed? Or at least to wait their turn like the tertiary delivery platform they deserve to be?  And this brings us back to the central question:  How major does a musical artist have to be to tell Spotify and Pandora to get stuffed and not suffer for it? If no artist is leaving real money on the table, then what does any artist of any size really have to lose?  How badly do the investors in the streaming future want to find out?

*This should not be misconstrued as a generic indictment of labels. For a nuanced perspective on related issues, as well as a debunking of another piece by John Seabrook, see Chris Castle’s piece here.

Yunghi Kim puts real skin in the game.

In a Thanksgiving announcement, veteran photojournalist Yunghi Kim created ten $1,000 grants to be awarded one time to ten photographers.  The $10,000 kitty fueling this generous gift came from awards to Kim paid by copyright infringers of her work, and she states her reasons for creating the grants thus:

“I am doing this to emphasize the importance of copyright registration of your work and as a way for me to give back to the profession of photojournalism, an industry that I love and I am proud to be a member of for more than 32 years.”

It’s hard to miss the significance of Ms. Kim’s use of this money in contrast to Google’s recent announcement that it would pay legal fees IF certain YouTube video creators happen to find themselves in lawsuits resulting from DMCA disputes. At best, that announcement is an empty PR gesture; and at worst, it’s a $400-billion-dollar gorilla potentially menacing independent rights holders.  Meanwhile, ten grand is real money for a photographer–real money for most people–and the fact that Kim decided to do this with it, and to emphasize the need for creators to protect their work, is an encouraging start to the week.

See the full story at Petapixel here.