On two sides of the country yesterday two branches of the federal government engaged in legal processes likely to affect competition in the music industry.
As DisCo previewed, yesterday the Senate Judiciary Committee’s Subcommittee on Antitrust, Competition Policy, and Consumer Rights considered the competitive challenges in the music publishing industry, and the effects on competition, innovation, and consumers. Witnesses from across the music ecosystem discussed the continued need for the consent decrees. Several urged that the consent decrees be strengthened with additional transparency safeguards, while others claimed they may no longer be necessary (at least in theory if you ignore all transaction costs and have a perfect marketplace). Over the last year alone, four federal courts have found evidence that the same publisher behaviors that gave rise to the consent decrees in the first place still continue today, suggesting that the consent decrees remain necessary to curtail anticompetitive behaviors.
Just as the Senate hearing ended in D.C., jury deliberations in the Blurred Lines case (which we covered when Robin Thicke initiated the litigation by filing for a declaratory judgment) resumed in California, ultimately ending in a judgment against Robin Thicke and Pharrell Williams, for millions in actual damages plus profits. Several observers have said that is “horrific” and “really dangerous”, as well as “a bad result” that is “bad for pop music” and “could make songwriting and recording a minefield for every artist”.
We’re taking part in Copyright Week, a series of actions and discussions supporting key principles that should guide copyright policy. Every day this week, various groups are taking on different elements of the law, and addressing what’s at stake, and what we need to do to make sure that copyright promotes creativity and innovation.
The fair use doctrine is an essential limitation on copyright which serves the public interest and benefits every sector of the U.S. economy. As fair use expert Peter Jaszi told the House Judiciary IP Subcommittee last year, “Everyone who makes culture or participates in the innovation economy relies on fair use routinely – whether they recognize it or not.”
The economic impact is particularly significant. Research commissioned by CCIA in 2011 concluded that industries depending upon fair use and related limitations to copyright generated revenue averaging $4.6 trillion, contributed $2.4 trillion in value-add to the U.S. economy (roughly one-sixth of total U.S. GDP), and employ approximately 1 in 8 U.S. workers.
A few examples of the many industries that depend on fair use are below:
On Monday, the New York Times reported about Amazon “disrupting” itself, not referring to Clay Christensen or his disruptive innovation theory by name, but using it in that sense. (Coincidentally, VC Marc Andreessen had a 17-part tweetstorm on the disruption concept and its misconceptions yesterday, which DisCo has covered before.) One aspect of this theory is that companies may have to radically shift directions when faced with competition from disruptive entrants — or cannibalize their own existing revenue stream when they realize that a disruptive innovation is what consumers will want and need, not an incremental innovation on their existing product. As DisCo has explained, Christensen’s work notes that executives at dominant companies are often hesitant to change business models to adopt lower profit margins:
One of the reasons why successful incumbents are so vulnerable to disruptive technologies — as Clayton Christensen pointed out in his seminal work — is that they have a hard time adopting a lower margin business model that would mean sacrificing their current hefty profit margins. This initial hesitance is often their death, as they are quickly forced out by new, more efficient competitors.
The New York Times discusses how, although Amazon’s revenues went down this quarter, it’s because they are in the process of shifting from a focus on physical books to digital media consumption, including television, movies, and music. Apple similarly disrupted itself when it released the iPhone, which made the iPod irrelevant, and shifted its focus from personal computers to consumer devices. Companies like Autodesk have also disrupted themselves with apps. Many other technology companies face these challenges, as Vivek Wadhwa wrote in a great Washington Post piece earlier this year about the technology industry and disruption, and challenges in leadership.
Self-disruption is likely to occur even more now that technology companies provide so much more than just technology products and services, and compete in industries like entertainment, media, and communication.
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.
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.
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.
TV is finally catching up with the digital age and catering to new generations of consumers — those who rely on services like Netflix, Amazon, and YouTube for most of their video entertainment. This week may have been a tipping point for online television, with HBO and CBS announcing over-the-top (OTT) services that don’t require a traditional TV subscription. HBO’s announcement came on Wednesday, with a product launch expected for 2015, and CBS’s CBS All Access was announced and launched yesterday to 14 cities, with more on the way. These new offerings should help encourage cord cutting and more competition with established broadcasters and cable companies.
The New York Times has a great run-down of the business and competition issues at stake, even pointing out the classic innovator’s dilemma of whether to cannibalize an existing revenue stream when faced with disruptive innovation and competition:
Television executives are eager to woo those viewers, who often are younger and represent their future audiences. But at the same time, these traditional television networks must perform a careful balancing act to not cannibalize the billions of dollars in revenue they generate each year through existing business models.
The Times also mentioned that this week’s announcements mean that “viewers have more options to pay only for the networks or programs they want to watch — and to decide how, when and where to watch them,” and quoted CBS CEO Leslie Moonves saying that their “job is to do the best content we can and let people enjoy it in whatever way they want.” But they did not point out that this is the classic formula for reducing piracy. As DisCo has said over and over (often quoting Kevin Spacey or Netflix executives), making content lawfully conveniently available in the format consumers want reduces piracy. A stand-alone HBO service is likely to increase the amount of subscribers. As The Oatmeal explained so well, there isn’t currently a lawful way to watch Game of Thrones for cord cutters. Giving people what they want — piracy demonstrates market demand — should help convert pirates into customers. Research confirms this, including studies of Spotify and Netflix entering the market in Norway and Spotify’s introduction in the Netherlands.
This week’s news demonstrates great potential in the market for OTT video, evidenced by Netflix’s meteoric rise and Aereo’s ongoing legal battle. A recent update from Aereo shows that it is “still standing up for innovation, progress, technology and our consumers,” now willing to even accept MVPD regulation in order to lawfully enter the market for online television. And on the subject of Aereo, the Times also noted that CBS had been planning this service for more than a year — which means the planning started during the Aereo litigation. As Moonves told the Times, “I am the old broadcasting guy here,” adding, “I continued to poke holes in it for the last year.” That’s certainly one way of putting it.
A decades-old statute is being taken advantage of by opportunist litigants to extract statutory damages or settlements from companies. Sound familiar?
While this could easily describe the phenomenon of copyright trolls or even patent trolls, I’m referring to the Telephone Consumer Protection Act of 1991 (TCPA). Like copyright and patent statutes, the TCPA also serves a noble purpose: penalizing misleading and abusive telemarketing practices. Unfortunately, like copyright, the TCPA grants plaintiffs large statutory damages per violation. The availability of these awards, which require no proof of any actual harm, has incentivized class action litigants to seek out opportunities to allege technical violations of the statute. In many cases, these claims don’t even address telemarketing activities at all, let alone abusive practices, but a class action can impose such substantial legal costs that opportunistic claims can coerce settlements where the costs of reaching a judge who can throw out abusive claims is high. As we’ve seen in the copyright context, statutory damages deter investment in new technology; the same thing happens to TCPA defendants, stifling innovation and development in tools for communication.
Some companies are starting to fight back against TCPA misuse. Several companies whose businesses clearly don’t constitute telemarketing have petitioned the FCC over the last few months in the TCPA docket regarding overbroad interpretations of the TCPA, including TextMe, an app for free messaging and calling; Stage Stores, a clothing retail company; and Santander Consumer USA, an automotive finance company. Additionally, some of these cases do make it to trial; Twitter and Path joined an amicus brief in August supporting Yahoo in the Third Circuit Dominguez v. Yahoo case.
Guidance from the FCC, courts, or Congress could help relieve the uncertainty over the reach of this 1991 telemarketing statute, and prevent it from being read so broadly as to deprive consumers of innovative new products and services for communicating in the 21st century.
Despite inexplicable opposition from certain outliers, it’s becoming widely accepted that the Internet enables and democratizes creativity and its dissemination more than ever before.
Earlier this week, Taylor Swift released her new single, Shake It Off, complete with a music video, and announced the release date for her forthcoming pop album, 1989. She did so in front of an audience, webcast live online. In Ms. Swift’s own words, “they’re telling me we’re making history because this is the first ever worldwide live stream for ABC and Yahoo to get together and I’m so excited I can’t even!” (It’s not clear whether she meant that it’s the first ever worldwide live stream for an album date announcement/single release party, or the first ever worldwide live stream for these companies together, or what, but her enthusiasm was contagious, and her fans didn’t seem to care.) In the view of Claire Suddath, a writer for Businessweek, however, Taylor Swift followed all the rules and everything about this was completely expected.
This was contrasted with Beyoncé’s now-legendary promotion-free drop of her “visual album” Beyoncé on Instagram at midnight in December (which she later followed up with an equally unexpected promotion-free remix of ***Flawless, released over social media at midnight a few weeks ago). “Weird Al” Yankovic did something similar this summer too, although he pointed out that he did it with his last album, before Bey, and that she was in fact ‘doing a Weird Al.’ While none of these examples involved displacing intermediaries and selling to fans directly like Louis C.K., Weird Al did notably take advantage of different video sites for each daily exclusive video release.
Yesterday, it was reported that Community, which had been canceled by NBC in May, was just picked up for a sixth season (at least) by Yahoo.
The creation and distribution of original programming by new entrants is a growing phenomenon. Traditional over-the-air broadcast television is no longer the sole source of episodic programming. As DisCo has previously noted, shows like House of Cards and Alpha House have risen to fame on web-based services like Netflix and Amazon, entirely in the absence of network backing. Just as record labels are no longer the sole gatekeepers to music production, it is increasingly clear that television networks are no longer the gatekeeper to serialized video content.
Increased competition and disintermediation in the market for video content is unmistakably a good thing for consumers, who have more options for entertainment than ever before, and for creators and entrepreneurs, who can produce programming without needing permission or funding from existing gatekeepers. This allows for more risk-taking and creative choices, without having to worry about what incumbents find desirable.