News media [1, 2, 3, 4] and previous DisCo posts [1, 2, 3, 4] have reported on several European countries’ efforts to create a so-called “ancillary right” in newspaper text and headlines.  This right would limit the ability to quote from or link to online news without paying a fee.  These proposals tend to be geared toward providing an additional revenue stream for news publishers, and in effect prevent search engines and online news aggregators from displaying excerpts from articles without a license.  This post aims to answer some of the common questions about ancillary rights.

What are ancillary rights?

The term “ancillary rights” is sometimes used to describe exclusive rights that provide copyright-like protection and remedies to something that is conventionally viewed to be outside the scope of copyright.  Lawyers sometimes refer to similar concepts using terms like “neighboring rights” or “paracopyright.”  Sort of like copyright, but not really; ancillary rights in news headlines would exist outside of (and perhaps even in violation of) the established international copyright system.

These proposals have also been described more prosaically, for example as a “snippet tax” or “snippet subsidy.”  It is also sometimes called the “Google tax” since the search company is one of the intended targets, but these proposals would affect many companies beyond Google, potentially including search, social media companies, and blogs.  The ancillary right law enacted in Germany is referred to in Germany as the Leistungsschutzrecht.

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Sit down before you read this: Internet companies pay more corporation tax than the European average, in some cases many times more.

According to the European Commission the average ‘effective’ corporate tax rate in the European Union and EFTA is 12.9%; in 2012 Amazon had a whopping 78% in corporation tax on its global profits. In that same year Yahoo had 37% and Google 19.4%.

It is important to note that corporation tax is paid on profits and not on revenues. In 2012 for example, the Commission says Amazon had global revenues of USD 61 billion, but profits of only USD 544 million. The difference comes from being a low margin business and from investments. If you don’t make much profit, you don’t pay much tax.

The Lux Leaks files list 340 companies who have received ‘comfort letters’ from the Luxembourg tax authorities. Of these, 32 are categorised as ‘Tech’, meaning more than 90% are not tech. Other sectors include: energy, finance, food, health, manufacturing, media, retail and travel. There is also a broad geographical spread with prominent European names including Ikea, Burberry, Vodafone, Volkswagen, GlaxoSmithKline and the Guardian Media Group.

The files have one clear message: companies from all sectors and all regions of the world have been using tax optimisation techniques.

A review of the tax incentives for the knowledge economy will need to address the whole knowledge economy and not just the digital sector. This is the conclusion the European Commission has arrived at.

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Yesterday Billboard reported on research by Pandora finding that music played on the service experienced increased sales.  The study found that, on average, sales increased between 2.31% and 2.66% for music played on the Pandora service.  The effect apparently grows with more spins.  That is, the more frequently a song was played, the likelier listeners were to purchase the track or album.  This data doesn’t even reveal all of the promotional value of the service: to what extent does it lead to concert and merchandise sales, for example?  The takeaway, however, is that digital radio play drives sales, in a quantifiable way, which artists can now analyze at an increasingly granular level.

The findings are consistent with observations made in music producer Steve Albini’s recent, colorful keynote at the Melbourne, Australia “Face the Music” conference.  Albini said:

“It’s no longer necessary to pay people to pay other people to play your records on the radio, only to have those people lie about doing so. It’s no longer necessary to spend money to let people hear your band.”

Albini also lauded that the Internet facilitates a “direct relationship” between fans and artists that “skips all the intermediary steps.” Nevertheless, while artists can now reach audiences directly, existing contractual arrangements and the legacy of industry structure limits the extent to which artists can be compensated by audiences directly.  Thus, as DisCo has noted before, while music services drive sales and pay out the vast majority of their revenues as royalties, those royalties are far more often paid to intermediary rights-holders, and the majority of the revenues don’t reach the artist.

Transparency problems aside, the fact that digital services represent the future of the music industry is increasingly hard to ignore.  Yesterday’s N.Y. Times reported a Sony Music estimate that in four years, streaming and subscriptions would constitute 60% of the music industry’s digital revenue, up from 18% now.  Sony executive Kevin Kelleher claimed to be “very encouraged with the paid streaming model”, while questioning the value of ad-supported models.

Yet digital services are rising to such prominence in the marketplace that, at least in Europe, Spotify appears to have overtaken iTunes in generating royalties for artists.  Given this data, combined with continued growth in legal digital music consumption (music listeners streamed more than 118 billion tracks in 2013), it is hard to understand commentators still suggesting people won’t pay for music.  YouTube, of course, is just launching its Music Key product, betting exactly the opposite.  Nevertheless, like Pandora and Spotify, Music Key keeps with the conventional wisdom that “having a free tier [i.e., ad-supported] as a springboard to get people to pay is key to winning members.”

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In discussions of Taylor Swift pulling her music from Spotify because the service wouldn’t make the music available solely to paying subscribers, which pays higher royalty rates, and Aloe Blacc’s Wired op-ed calling for higher royalties for songwriters from streaming services (but see: Spirit Animal frontman Steve Cooper’s thoughtful piece in Business Insider on “why Spotify is not the enemy”), there are a few important economic realities being ignored.

Spotify currently pays about 70% of its revenue to rightsholders.  That typically goes to middlemen — publishers for the musical work copyright, who then pay a portion to the songwriters, and record labels for the sound recording copyright, who then pay a portion to the musicians.

VC David Pakman (who testified in November 2012 before the House Judiciary IP Subcommittee about why the current music licensing scheme deters VC investment in new music services) recently analyzed data from middlemen in a few industries and found that many legacy middlemen are not earning the large share they take from creators in the digital age.  Record labels, for example, contributed a lot more value when they coordinated and financed studio time (which can now be done with a basic computer and Internet connection, and possibly a Kickstarter campaign), manufacturing records and CDs and got them to retailers (which is no longer the primary way of selling music), and marketing (which can be done online with free services).  Now, in the digital age, many of these services are no longer needed or performed.

In remarks last week at the Web Summit Conference in Dublin, Bono explained that rather than fighting against streaming, artists should be fighting for transparency:

Spotify is giving up 70% of all their revenues to rights owners.  But it’s just that people don’t know where the money is going because the record labels haven’t been transparent.

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The Internet has brought change to our society, just like previous technological advances such as the printing press, canals, cars, or mobile phones. Every advance engenders a debate about the appropriate policy and regulatory response. Sometimes actors affected by the changes around them call for a regulatory response to preserve that status quo or slow change.

In recent months, we’ve heard two arguments in European circles about Internet companies: the first is that Internet companies are not regulated; the second is a concept called “platform neutrality.”

Let me explain why both of these concepts are wrong.

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For tech industry watchers, a recent narrative has emerged that involves Amazon and Google evolving into head-on competitors.  Although this iteration of the narrative is new, the plot is merely a variation on a common theme: two Internet giants who started in different markets evolve quickly into fierce competitors.  (In fact, the Economist devoted a feature article to this phenomenon a few years ago, aptly named “Another Game of Thrones”).  The most famous recent example of this is Google and Apple in the mobile space, where Google’s former CEO, and now its Chairman, Eric Schmidt was booted off of Apple’s board after the two companies quickly morphed into fierce rivals.

Schmidt features in this story as well, as he — to the surprise of many — identified Amazon as Google’s biggest rival in a recent speech:

Many people think our main competition is Bing or Yahoo. But, really, our biggest search competitor is Amazon. People don’t think of Amazon as search, but if you are looking for something to buy, you are more often than not looking for it on Amazon. They are obviously more focused on the commerce side of the equation, but, at their roots, they are answering users’ questions and searches, just as we are.

It is helpful to look back at the origin stories of the two companies to understand how they are evolving.  When Google was founded in 1998, the number of websites on the World Wide Web was just starting to climb up the exponential growth curve.  At that time web search engines were relatively dumb (and “portal focused”) and one of the biggest Internet problems was how to find websites that had information that users were looking for.  Google set about revolutionizing the search space.  It also presented Google with its business model: if it could build a better search tool, it could also use the same insights behind that search tool to serve up more relevant ads to users.  The more relevant the ad, the more useful the ad would be to advertisers and the more they would be willing to pay for it.

Amazon, on the other hand, was founded to tackle a different problem with the early web.  The potential for the Internet to change how people shop was readily apparent (even to the U.S. government), but the logistical problems were immense.  A company needed grand ambitions, if its goal was to scale to such a size where shopping online would present a feasible alternative to running to the nearest big box store.  Skepticism about the security of exchanging financial information online was one of many 800-pound gorillas in the room; another was the daunting prospect of streamlining backend IT and warehouse technology to work efficiently at such a scale.  On top of that, the cost of shipping items around the country would be an added cost that its brick and mortar competitors did not have to bear.

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Perennial concerns about piracy might suggest that ‘the sky is falling,’ but the latest economic data from the “Sky is Rising” series reaffirms that an unprecedented amount of creative content is reaching consumers, through a growing number of authorized means.  With today’s release of the third Sky Is Rising report (infographic below), research firm Floor64 updates its previous surveys (1, 2), focusing on the significant growth in the U.S. in four segments of the digital content market: music, video, books, and games.

Internet-enabled access to content continues to drive growth in digital content consumption and availability, even in the wake of an economic downturn.  Data collected in the report reflects growing overall creative output, with more creators able to sell their work through more venues.  As a result, consumers are enjoying a greater and more diverse amount of entertainment, findings that are consistent with recent media accounts and DisCo posts.

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Last Friday, President Obama signed an executive order announcing the “BuySecure Initiative” to jump-start the adoption of enhanced security measures for financial transactions and sensitive data.  The goal is for financial institutions to implement tools like “chip-and-pin,” which would secure credit, debit, and other payment cards with microchips in lieu of basic magnetic strips, and PINs (like those standard on consumer ATM cards).  While the PIN feature speaks for itself, the microchips soon to be embedded in payment cards allow for dynamic authentication of the card’s validity and account information through strong encryption.

The new executive order was announced during the ongoing National Cyber Security Awareness Month, and comes on the heels of a massive data breach at JP Morgan.  The cyber threat landscape is not pleasant, particularly in the financial sector, but we at DisCo are an optimistic bunch.  We’d like to focus on the silver lining—the proliferation of methods of mobile and online payment, in addition to the long-awaited shift to chip-and-pin, partly spurred by consumer desire for enhanced security in the face of data breaches associated with traditional means of payment.

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Tomorrow night airs the third episode of PBS’s miniseries based on Steven Johnson’s book, How We Got to Now: Six Innovations that Made the Modern World – one of two new books on innovation by best-selling authors that raise interesting questions about the role of intellectual property in promoting technological development. The other is by Walter Isaacson, author of Steve Jobs, who has expanded his scope in The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution.

Both books place great emphasis on collaborative innovation. And both books place significantly less weight on intellectual property protection than policymakers in Washington. MORE »

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The mainstream media is catching onto the disruption theme we noted in last week’s post on the new HBO and CBS services.

On Friday, we covered announcements from HBO and CBS to offer over-the-top (OTT) video services, independent of cable packages.  Moreover, in addition to HBO and CBS’s recently announced projects, earlier this month ESPN had announced a nine-year deal with the NBA to deliver basketball games via an Internet streaming service, and just this morning Lionsgate and the Tribeca film festival organizer announced their own subscription video-on-demand (SVOD) service.

In all of these packages, the details will matter (and likely vary) greatly, but a review of the headlines shows that journalists have latched on to the potential end of the cable bundle’s reign.

At the New York Times, David Carr writes that the competition and certainty provided by Netflix may have been the catalyst for cable and broadcasting incumbents unpredictably venturing into this new territory:

Netflix pointed a way forward by not only establishing that programming could be reliably delivered over the web, but showing that consumers were more than ready to make the leap. The reaction of the incumbents has been fascinating to behold.

He also used theories about disruptive innovation and competition:

For any legacy business under threat of disruption, the challenge is to get from one room — the one with the tried and true profitable approach — to another, where consumers are headed and innovators are setting up shop.

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