Why Startups Should Be Included In The Music Modernization Act

Adding to the already intense level of criticism being levied at the Music Modernization Act, this piece from Chris Castle delves into the legislation’s failure to properly include startups, and why they should be more present in the legislative process and the act itself.

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By Chris Castle of musictech.solutions from The Trichordist 

Who took on the Standard Oil men
And whipped their ass
Just like he promised he’d do?
Ain’t no Standard Oil men gonna run this state
Gonna be run by folks like me and you

Kingfish, written by Randy Newman

If you’re one of the small group that has actually read the Music Modernization Act, I think you’d have to come away with the idea that this is legislation by the big boys for the big boys.  Nowhere is this unfortunate flaw more apparent than in the way that digital media companies “modernize” the way they treat themselves.  No wonder Digital Media Association (Amazon, Apple, Google, Pandora, Spotify) and the Internet Association (Amazon, Facebook, Google, Pandora, Spotify) love it so much–it’s just the same old story from Standard Oil or United Fruit.

But is MMA really intended for the biggest corporations in commercial history playing footsie or should we believe the sales pitch that it is intended for the innovative startups and new entrants?

It is not surprising that startups were apparently excluded from the legislative process that created MMA and are themselves silent–or silenced–observers.  Given that Google, Amazon, Apple and Spotify are on the other side, startups know which side butters their bread and what will happen if they voice any criticisms.  Like the python in the chandelier, nothing really need be said; startups know what happens if they challenge the big boys, particularly Google and Amazon who probably host their companies, serve their advertising or drive traffic to them.

The MMA permits these massive and aggressive incumbents to ultimately decide how much startups pay for access to the blanket license that we are told by DiMA’s CEO will unleash innovation and “fuel the next wave of creativity“.  Yet–if startups can’t afford to buy in to the license, it won’t do them much good, and as drafted the MMA allows their incumbent competitors to decide how much that buy-in will cost any startups or other of the much ballyhooed new entrants.  This all before a startup has to pay royalties to the collective–and in addition to any royalties.

How can this be fair?  It’s easy when your lobbyists write the rules.

The Congress delegates the government’s authority under the Music Modernization Act by creating two main bodies around the new government-mandated blanket license:  The “mechanical licensing collective” which is to represent those with songs to be licensed and the “digital licensee coordinator” which is to represent music users wishing to license those songs under the new blanket mechanical license.  Music users will answer to the “digital licensee coordinator,” presumably under some membership agreement yet to be drafted.

Both these bodies are supposedly approved by the Register of Copyrights (the head of the U.S. Copyright Office), but the Register has the unenviable position of being constrained to appoint certain types of entities or people by statutory criteria in the MMA.

One of those criteria is very majoritarian, if not downright oligopolistic–and I would suggest that for both the collective and the digital licensee coordinator the math alone limits the Register’s choice to one entity.  Here’s the relevant language for how the Register selects the collective:

“[The Register must choose an entity that] is endorsed by and enjoys substantial support from copyright owners of musical works that together represent the greatest share of the licensor market for uses of such works in covered activities, as measured over the preceding 3 full calendar years;”

And here’s the mirror version of the relevant language for how the Register selects the “digital licensee coordinator” (or “DLC”):

“[The Register must choose an entity that] is endorsed by and enjoys substantial support from digital music providers and significant nonblanket licensees that together represent the greatest share of the licensee market for uses of musical works in covered activities, as measured over the preceding 3 full calendar years”

So one thing seems true for both the collective and the coordinator:  They can only be entities enjoying “substantial support” by at least a plurality if not a majority of their respective markets on either side of the same coin.  I’m not quite sure how that definition presents a choice to the Register–more like it allows the biggest players to dictate the Register’s choice.  (How can there be two pluralities much less two or more?)

I would submit that this structure is a long-term recipe for disaster.

Others have and are writing about the conflict-ridden aspects of the collective, so I will focus here on the digital licensee coordinator which is equally, if not more, conflict-ridden than the collective.

By definition then, startups–who are potential music users most in need of the blanket license without having to pay minimum guarantees–are evidently excluded from any possibility of becoming the digital licensee coordinator.  The Congress effectively prohibits the Register from appointing one of them as the DLC, even if they were brave enough to raise their hand (see Yelp in the EU antitrust ruling against Google).

And don’t forget a main selling point of the MMA:  The music users (i.e., the “licensees”) pay an “administrative assessment” to cover the costs of running the mechanical licensing collective.  (An inherent conflict?)  The MMA authorizes the DLC to “equitably allocate the collective total costs across digital music providers…but shall include as a component a minimum fee for all digital music providers.”  (Although note that the assessment as a whole and perhaps the allocation ultimately has to be approved by the Copyright Royalty Judges–and good luck to startups being able to afford to appeal to the CRJs or a higher court.)

Plus the MMA authorizes the DLC to “[e]ngage in efforts to enforce notice and payment obligations with respect to the administrative assessment….”  AND the DLC also gets to set the “dues” payment for each “member.”

So if a startup wants the blanket licence, they have to pay a share of the assessment apparently determined by a representative of their biggest competitors PLUS a membership fee.  And then they get to pay royalties to the collective.  Note that this is a radical departure from the current law and adds another gatekeeper in between songwriters and their money.

If a startup fails to make all these payments, they can lose the blanket license even if they have paid all royalties on time.  No one can tell you what the minimum fee will be or the startup’s share of the assessment.  In fact, as new startups will likely enter the allocation for “membership” all the time, a real time percentage allocation for each “member” of the DLC will likely change pretty much constantly.  Plus the collective can enforce the blanket license royalties and the DLC can enforce the assessment payments and membership “dues” (aka rents).

“Modernization” legislation is an excellent opportunity to level the playing field for these companies that are no doubt afraid to challenge the incumbents like Google (known for being specially vindictive to any startup that challenges them–see Foundem and the European Union’s multi-billion euro antitrust litigation against Google).

It’s also important to realize that there is an exponential difference between the group of companies that the Register takes instruction from on the MLC compared to the group instructing the Register for the DLC.  Candidates for the DLC include Amazon, Apple, Google and Spotify–three of the biggest companies in commercial history plus the streaming platform that is easily the dominant actor in its relevant market both in the U.S. and many other countries.  This basically assures that no startup will ever be included as the DLC absent a government-mandated rotation.

The Music Modernization Act is a great opportunity to do something positive for the market rather than continue to reenforce the most dominant incumbents in history (see 60 Minutes, “The Power of Google“).  After all, it was their own carelessness and “permissionless innovation” that got us to this point.

Here’s some free advice to Congress:  Go wild.  Require appointing a startup or two or three as the DLC from time to time.  And since you’re dictating many attributes of the MLC’s board, if you really want to go truly off the reservation, require one of those startups to be from some place like Austin, Athens, Northern Virginia or Salt Lake–anywhere but Silicon Valley.  Wouldn’t that be real modernization rather than real entrenchment?

As a wise old Member of the Texas Congressional delegation once told me, they get to climb the ladder to the American Dream like everyone else.  What they don’t get to do is pull the ladder up behind them once they get to the top.

By limiting the choices of who can be the DLC, the government is mandating control to only the biggest of the big.  And giving them an antitrust exemption as the cherry at the top of the ladder.