Category: Economics

Read Jonathan Taplin: “Sleeping Through a Revolution”

I know I’m a little late to the party in featuring this article by Jonathan Taplin, but anyone who has not yet read “Sleeping Through a Revolution” should find time to do so. Taplin is a former motion picture and music producer and has for the last 12 years been Director of the USC Annenberg Innovation Lab. This article is certainly among the best summaries of the challenges posed by the digital age — creative, economic, ideological, social, and existential.  As others have done, Taplin emphasizes the point that the creative class is merely the proverbial canary in the coal mine, already passing out in an increasingly poisonous economic climate. Citing some chilling data, like the fact that wealth consolidation among the 1% is now more acute than it was immediately before the Great Depression, Taplin very efficiently paints us a comprehensive mural depicting the state of affairs. Unfortunately, it’s kind of like “Guenerica” if all the figures were holding smart phones. Writes Taplin:

“… within 20 years, starting with Peter Thiel’s cohort at Stanford University, the organizing philosophy of Silicon Valley was far more based on the radical libertarian ideology of Ayn Rand than the commune based notions of Ken Kesey and Stewart Brand. Thiel, the founder of PayPal, early investor in Facebook and Godfather of the PayPal Mafia that currently rules Silicon Valley has been clear about his philosophy.

He stated, “I no longer believe that freedom and democracy are compatible”, his reasoning being that “Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women — two constituencies that are notoriously tough for libertarians — have rendered the notion of “capitalist democracy” into an oxymoron.”

One theme I’d like to highlight from Taplin’s article is the way he introduces the piece, citing a period in the late sixties when he says the most “critically acclaimed movies and music were also the best selling.”  This has been a big theme of mine since starting to write about these issues.  Because my own opinion is that Hollywood’s real golden era occurred between the late sixties and roughly the catalyst we call Star Wars. This was a transformative time when the movies that had the big runs, made the most money, and earned all the award nominations were the kind of films that today we would describe as “indie.” Obvious examples would be Woody Allen’s Annie Hall or Martin Scorcese’s Taxi Driver.  It was a time when mainstream, American film dealt with sophisticated material in a way that created great works of art that also dominated at the box office.

Hollywood studios and audiences moved steadily away from that kind of mainstream fare, which is not to say that everything big studios produce today is “bad,” but it’s certainly different.  The many reasons for the shift in material, at least initially, have little to do with the post-Napster market forces that have since exacerbated the problem by devaluing works across the board.  But I think the point Taplin is making is not to decry the fact that today’s Annie Halls aren’t box-office leaders, but that they face limited opportunities to survive at all.  And we can easily imagine that destructive model replicating across multiple sectors, as what used to be the middle of the economy is subsumed into the struggling 99%.  In keeping with Taplin’s sleeping metaphor, I find it interesting that the “revolution,” which gave us the shorthand 99% and 1%, was typical of our times — just a little trend that made money for social media companies but that anyone in power could safely ignore.

Read “Sleeping Through a Revolution” by Jonathan Taplin on Medium.

Pandora wins on appeal. But stay tuned.

This week, the 2nd Circuit Court of Appeals ruled in favor of Pandora, upholding a ruling by Judge Denise Cote in affirming the 1.85 percent of revenue cost set by the rate court as “reasonable.” Maybe, but any way you slice it, songwriters and composers are still getting hosed by streaming services  You’ve probably seen some of the headlines or statements made by songwriters you know saying things like, “20 million plays earned me about two dollars.”  Maybe you didn’t care because you figured the famous person who made that statement was already rich; but setting that logic aside, it ought to be clear that today’s generation of new songwriters and composers will not be building professional careers based on revenue streams that turn millions of plays into pennies.

Music streaming is cool and convenient, but even as the dominant players in the space congratulate themselves for being “innovators,” the reality is that a tiny handful of guys are making millions of contemporary dollars while enjoying the benefit of paying antiquated rates to publishers, who in turn pay songwriters and composers.  This is because ASCAP and BMI (generically called PROs for Performance Rights Organizations), who traditionally negotiate and collect fees on behalf of publishers for public performance licenses are locked into consent decrees whereby a court has set the rate at 1.85 percent of revenue for radio broadcasting.  Spokespeople for ASCAP have consistently pointed out the absurdity that this particular class of artists is more regulated than the corporations that profit by using their work. As such, the PROs back the proposal of the Songwriters Equity Act in an effort to change rate setting to better conform to the new market.

It should be obvious to anyone that a Pandora-like service isn’t exactly radio. The collective earnings of thousands of terrestrial radio stations add up to considerably more than the revenues of a single Pandora.  At the same time, a single Pandora reaches a global audience, even obviating the need for listeners to use terrestrial radio at all.  That’s just technological progress, and nobody hopes or expects to put that genie back in the bottle.  But because the one Pandora is allowed to pay the same percentage of earnings as the collective of all terrestrial stations, that’s the reason millions of plays worldwide translates into pocket change for songwriters and composers.

So, in a nutshell, the appellate court ruled that ASCAP may not raise its rates to new benchmarks that would be aligned with this dramatic shift in the market, and it also ruled that the individual publishers Sony/ATV and UMG may not withdraw only their digital rights from ASCAP  in order to negotiate those specific licenses separately with Pandora.  But consumers should not assume this is a “win” for streaming that will perpetuate their desire to have all the music they want for free for the rest of time.  Because now the major publishers are faced with an all-or-nothing option.  They either leave all their rights with ASCAP and BMI or pull out entirely, which Sony/ATV’s CEO has already indicated may be the response to the courts not allowing them to extricate themselves from the outdated consent decrees. Meanwhile, the Department of Justice is reviewing the consent decrees and may yet recommend that the courts are wrong in their determination that a rights holder may not partially withdraw one of its bundle of rights without withdrawing entirely from the PRO.  Either way, that ruling will likely be the end of that particular debate.

If the larger publishers withdraw from the PROs, they’ll demand higher rates from Pandora no matter what; but attorney and blogger Chris Castle in this post suggests Pandora doesn’t care about that if they can effectively bust the PROs by forcing the big publishers to jump ship and leave the organizations populated with smaller publishers, who have limited bargaining power.  Thus, instead of a system of collective bargaining that represents both large and small publishers, we may see a bifurcated market in which the large players negotiate against one another while the smaller players continue to choke on the crumbs.

There’s no reason to assume this will mean longterm benefits for consumers, either with regard to affordable access or especially with regard to fostering and sustaining the greatest diversity of works.  At the same time, what may happen to public performance licenses other than streaming is unclear.  Presently, your local bar pays an affordable fee to be able to play damn near every song ever recorded, and it pays that fee to no more than three PROs — ASCAP, BMI, & SESAC.  If the major publishers are no longer part of those catalogs, your local bar owner, depending on what music he wants to play as well as other factors like size of the business, may have to pay for all three PRO licenses and also deal with the major publishers, who will be free to charge whatever they want based on any criteria they decide because they are no longer subject to the ASCAP consent decrees.  If nothing else, it sounds like a pain in butt for a small business owner compared to the old system, but it could get rather complicated when you consider the number and types of venues, even websites, around the world that traditionally cover their music needs with one to three blanket license fees.

Whatever is to come, people should be clear that Pandora’s strategy isn’t about consumers, it isn’t about innovation, and it sure as hell isn’t about competition.  Nobody I know dislikes  streaming in principle. What’s not to like?  But it’s not THAT innovative. If you didn’t see it coming at least by the time Napster became a thing, you weren’t paying attention. The companies that have emerged as dominant players in this space aren’t particularly great visionaries; they’re just the guys who were in the right place at the right time to capitalize on a relatively obvious means of distributing music akin to what we historically called “radio.”  So, let’s not beat the word innovation to death when talking about companies like Pandora; and let’s especially not get suckered into thinking this is about competition.

It is the nature of business leaders to want to dominate, which is healthy in a market that doesn’t foster natural monopolies.  Unfortunately, the Internet does foster natural monopolies. Why do you think Google+ couldn’t take, or even share, the market with Facebook?  Because most of us don’t really need two of the same kind of social media environments  in our lives.  Hell, many of us, have to force ourselves to limit the use of just one.  It doesn’t matter how dominant Google is in other areas or how good their programmers are; the Internet generally favors one winner at a time in certain lines of business. And so it may be with music streaming.

On that note, it will be interesting to watch the relaunch of Apple’s entry into the streaming market. Reported to be a subscription-only service, Apple may be in a position to offer the best available terms to all publishers and re-assert itself as the only game in town much as it did with digital downloads in the wake of Napster. Of course that move was directly tied to sales of a little device called the iPod, produced by the company that rules in the arena of attracting customers to new gadgets.  Streaming, of course, isn’t about gadgets, at least it’s not about any one particular gadget.  At the same time, both European and US trade officials are already investigating whether or not Apple is using its still-dominant position in digital downloads as leverage against rivals like Spotify and Pandora.  Sure, but again, I think there are natural reasons why one player at a time will be dominant, regardless of trade regulations.

Whether it’s Pandora, Spotify, YouTube, Apple, or some other company, one downside of digital, worldwide distribution is that consumers may not need more than one service provider when all is said and done. And, if all this is heading toward consolidation of delivery models and consolidation of production models, while limiting the variety of career paths for the next generation of writers and composers, there is no guarantee that either consumers or makers of music are going to win in the long run.  As with other copyrights, the so-called reformers seeking “balance” in the new market are only too happy to leave intact any outdated provisions that favor their own earnings to the detriment of those whose works are essential for their business models to work at all.

All Content Creators Should Watch Porn

Yeah, that was a shameless use of a headline with a hook; but since you took the bait, here’s the switch. I don’t literally mean to say that all content creators need to watch pornography (that’s up to them), but I do mean that professional content creators might want to look at a business dynamic that has occurred in the porn industry. It’s technically legal. It’s reminiscent of the YouTube business model. And it produces exactly the opposite result creators have hoped would be made possible by the Internet.

Let’s review …

Both content producers and digital-age optimists will repeat the premise that the Internet is a catalyst for democratization. In theory, a creator of anything can manage her own destiny because traditional “gatekeepers” no longer hold the only keys to distribution. And it is true that we can all self-publish just like I’m doing now with this blog. But when produced works are popular enough to be the foundation of a business, the prospect of independent entrepreneurism can become an irrelevant technicality in contrast to the market forces and practices that foster financial success on the Web. I have proposed in other posts that democratization for small and mid-sized producers may be illusory because the same cheap means of distribution available to authors of works also provide the mechanisms for predatory companies to exert monopolistic control over an entire industry. It all begins with piracy driving down value, lowering wages, shrinking markets, and even limiting creativity in certain media and genres.

But what happened to porn?

Needless to say, “free” porn abounds on the Internet, and most of the video content is hosted on sites known generically as “tube sites” for the way they mimic YouTube, including enabling users to upload video clips. (And in this context, we’re only comparing clips uploaded to YouTube by users who do not have rights to the material.) But the similarities between these tube sites and YouTube are not merely technological. Historically, at least some of the material hosted on porn tube sites is there by permission, a collection of older clips that had exhausted their primary release windows and were used to drive traffic, primarily to paid subscription sites. In fact, the presence of ads linking to producer/distributors might give any viewer the impression that the tube site is a by-permission enterprise designed by “the industry” to use limited free clips as loss-leaders to sell subscriptions to newer and “premium” material. And this is true — or truish. Because what isn’t apparent to the user is that the lion’s share of the tube sites and the producing entities behind those banner ads are all owned by just one company, today called MindGeek, previously called Manwin. As porn star, entrepreneur, and occasional writer Stoya explains on her blog, Manwin first consolidated the major tube sites and then …

“ … used their traffic to sell ad space to those same production companies they enabled theft from. Production companies paid a lot for banners. Manwin then began buying the companies they had helped devalue, including Digital Playground—the company I was contracted to for a number of years. I believe the worst sorts of capitalists would consider Manwin’s behavior a win of the highest order.”

Naturally, any site that allows users to upload clips, will “unintentioinally” host infringing material, just like YouTube does millions of times each day. And just like YouTube, these sites remain within legal boundaries thanks to safe harbors in the DMCA and because they will comply with takedown notices (though not necessarily with any haste) sent by rights holders. When discussing this particular dynamic in the non-porn world of content, the debate usually becomes somewhat academic, with one side saying that the DMCA is outdated and useless for rights holders and the other side arguing some variation on the theme that “site owners can’t police the Internet” and the DMCA is sacrosanct because it protects free speech. But setting aside the theoretical legal debate, the business reality enabled by these dynamics created a monopoly. At present, as I understand it, most of the performers and performer/producers in the U.S. porn industry have contracts with this one company. David Auerbach, writing for Slate, says the following:

“MindGeek has become the porn monopoly, putting industry members in the paradoxical position of working for the very company that profits from the piracy of their work. The MindGeek hydra exerts so much force that people in the online-porn industry are scared to talk about it for fear of blacklisting. And MindGeek’s dominance should serve as a cautionary tale of the dangers of consolidating production and distribution in a single monopolistic owner.”

Creators of all stripes should notice that MindGeek, even though it now has an interest in paid subscription sites, does not take down its own tube sites which regularly infringe its own works. And if anyone thinks this is about high-minded populist ideas like “sharing” or “cultural diffusion,” pass me that pipe because this is just hardball business; it’s how monopolies are made. It may seem counter-intuitive to own a distribution franchise that infringes one’s own production franchise, but as the monopoly that owns the whole shebang (wrong word choice here?), MindGeek makes money from all revenue streams and can use “self-piracy” to exert downward pressure on wages or fees paid to contractors producing the work. Put another way, any producer/distributor in such a position can use infringing even its own works as a check valve against market value increasing to the point where it has to pay performers or labor higher wages. It’s a bit like Rockefeller owning the ore mine and the shipping company that carried the ore. To quote Auerbach again:

“ … industry workers have been in the difficult situation of seeing their work pirated on sites owned by the same company that pays them—imagine if Warner Brothers also owned the Pirate Bay.”

One need not expend much imagination there as Internet companies continue to enter the production business. What content creators need to understand is that MindGeek was able to attain its monopoly status by employing very similar tactics used by YouTube. Because in the time it takes a site owner to comply with thousands or even millions of takedowns, two important things are happening: 1) the site owner builds a pile of working capital; and 2) the market value of the material in question is driven down. Thus, thanks to outdated remedies and safe-harbors in the DMCA, a site owner with enough scale and capital is poised to first drive the value of works down and then take the next logical step to become an owner, or the owner, of production. And right there is why a frisson goes up my spine every time some well-meaning indie artist says the Internet is the future of production. “The distributor doesn’t necessarily need to make content that generates adequate money for the content producers, as long as it generates money somehow,” writes David Auerbach. And that is the economic model that becomes an existential threat to creators no matter what other debate we want to have about copyright law, free speech, or certainly how anyone feels about pornography.

Now, because pornography lends itself to being exploited in unique ways (e.g. by spammers), it is necessary to make clear that the manner in which porn tube sites play shell game with DMCA are different and seem to be more complexly insidious than the way YouTube does it. For instance, I spoke to Nate Glass, founder of TakedownPiracy.com, who offers the following example:

“Unlike YouTube, when Mindgeek suspends your account, they don’t remove all of the videos uploaded by that person. They just move all your other videos into their in-house ‘Unknown’ account so the videos can still generate them ad dollars. You can only imagine how inviting this is for spammers who use pirated video to promote their stupid ‘enlarge your penis overnight’ garbage.”

As stated, it is technically true that a creator of works is able to self-produce, self-promote, self-distribute, and generate revenue directly from her/his fans. In theory, this should produce a diversity of works, linking fans with their individual tastes; and as is so often the case, pornography appears to be in the vanguard testing this theory. Recently, Stoya and her partners launched an independent, pay-per-scene, site called TrenchcoatX. Offering specific styles of “curated smut,” as the site says, customers can buy short films or episodes for $3.99 each. By all appearances, TrenchcoatX contains the basic elements of the model people are referring to when they talk about democratization in the digital age. But whether or not this model can compete with free content on actual pirate sites or free content on tube sites that play fast-and-loose with infringement is another matter.

In the blog post cited above, Stoya offers her own perspectives on unlicensed use of her material, saying she’d prefer people use torrents than tube sites and is mostly okay with “sharing” her works if they’re attributed and not monetized. That’s for her to decide just as it is for any owner of any material. I understand where Stoya is coming from, though she may be overlooking the presence of traditional piracy as an underlying force giving the tube sites leverage in the first place. It is exactly the same force that puts Spotify and Pandora in a strong negotiating position when offering abysmal rates to creators of musical works. Ditto YouTube’s Music Key deal.

But this article isn’t about railing against piracy or MindGeek or even YouTube per se. What’s intriguing to me about the porn industry story is that by the early 1990s, it seems the industry had transformed from a highly-exploitative, male-dominated business into a more diverse, entrepreneurial, and woman-shared (if not led) enterprise. And it is certainly interesting, to say nothing of disconcerting, that the only catalyst required to swing the pendulum from entrepreneurial to monopolistic was the so-called democratizing power of the Internet.