Monday, April 30, 2007

SoundExchange: Show us your work!

Entertainment attorney Fred Wilhelms says, SoundExchange: Show us your work!

Do you remember taking math tests? Specifically, do you remember the warning you always got before you started?

As I remember, the idea was that the teacher would be able to tell if you understood the concept or just guessed the answer (or cribbed it from the smart kid in front of you). You had to demonstrate that you had some grasp of the subject, and just weren't making things up as you went along, hoping to guess the solution without knowing the reasons why.

It's time to tell the SoundExchange, SHOW US YOUR WORK!

This time the test is all about the real impact of HR 2060, the Internet Radio Equality Act (IREA), introduced this week in the House of Representatives. If IREA becomes law, it'll prevent the Copyright Royalty Board (CRB) royalty rates from taking effect on May 15.

Almost everyone thinks this is a good idea. That is, almost everyone who doesn't work for SoundExchange, with the exception of senator Dianne Feinstein and Ben Newhouse, the clearly befuddled editor at who thinks that because *he* thinks large webcasters provide enough choice for *him* everybody should agree with the CRB, because it has finally stamped out "free" Internet radio.

In his passionate, and increasingly lonely, defense of the CRB Internet Radio royalty rates, John Simson, SoundExchange's executive director, has started throwing around some remarkable numbers. If he's right, HR 2060 will put every US recording artist into debt to the big bad webcasters who are going to get a gigantic rebate on their 2006 Internet royalty payments.

It should be remembered that Simson, in common all the top executives at SoundExchange, used to draw a paycheck from the RIAA. So when he talks about artists being in debt to large bloodsucking companies, he should know what he's talking about.

Let's look beyond the fact that the last time he quoted a number, that stuff about Internet radio having $500 million in revenue last year, he was off by at least a factor of five, according to the author of the study Simson was "quoting." Simson's misrepresentation of that report might just be a mistake, so we can't say he did it on purpose, even if he's never acknowledged the error.

Half the money SoundExchange collects goes to record labels, yet all Simson can tell us is the IREA is "anti-artist." If I was a label who signed up with SoundExchange, I might think the organization really didn't care about me and the other labels, what with all this pro-artist rhetoric, and never mentioning the poor labels who will get shafted by IREA, too.

But then I'd look around, and I'd see SoundExchange is still clearly controlled by all those RIAA alumni, and I'd feel a lot better. I'd realize the SoundExchange spokespeople are smart enough to know the public isn't going to shed any tears if the major labels are actually going to get hurt, so it's better not to mention them at all.

I mean, the new royalty rates are going to mean millions of dollars a year to the members of the RIAA, yet we haven't heard a word from any of them since the CRB announced its decision. They aren't the shyest folk in Washington when it comes to protecting their interests, so I have to conclude they're happy with the job SoundExchange is doing as their mouthpiece, letting them sit back in the shadows while we're told how "anti-artist" the IREA is.

But sometimes the old RIAA rhetoric just slips out, even from as experienced an operative as John Simson. He was apparently able to keep a straight face when he blamed the crashing of CD sales on the rise of Internet radio while ignoring every other possible cause.

That kind of tunnel vision is hard to overcome, I guess.

You'd think that the RIAA would be running to the defense of such a loyal ally as him in such an important debate. But their silence is deafening. It really is ironic that Simson is reduced to publicly suggesting small webcasters may be being used to do the bidding of the big webcasters as if, given his own organization's close ties to the RIAA, he thought this kind of subterfuge was a bad thing. Let the poor artists be your poster children, even if you've demonstrated you would be happier dealing with far fewer of them.

Nevertheless, beyond all that, is Simson right about IREA? Is it going to be a disaster for artists? He gives us numbers that support his argument that it will be. But are they real numbers? Nobody knows, because *he isn't showing us his work*.

And he doesn't have to.

You see, SoundExchange is a private, not-for-profit, organization. Other than some very fundamental and general numbers that they have to give the IRS every year to maintain their tax-free status, they don't have to tell anyone outside their boardroom *anything* about their finances.

* They don't have to tell anyone how much money really comes in.
* They don't have to tell anyone how much money they pay out to
labels and artists, or how they decide who gets what.
* They don't have to tell anyone how many labels and artists are registered with them. This is actually funny, because the numbers keep shifting.
* They don't have to tell anyone what their operational budget is, or how that money gets spent.

And they seem to like it this way. Their handling of the "unfound artists" fiasco last year makes it clear that the less anyone outside the organization knows about what they do, the better they like it. They still haven't made a public announcement on what happened with the forfeited money from that campaign, although SoundExchange spokespeople did have to back off from claims that it would go
directly to other artists.

One good reason for that secrecy is that it permits them to make up numbers when they need them. Like right now, when all the hard work they've put in trying to cut Internet radio down to size is at risk of going for nothing because a lot of people don't agree with John Simson that there are too many Internet radio stations.

John Simson says the IREA is going to be a $50 million dollar windfall for "big webcasters."

How was that figure calculated? Does that mean they're going to be asking for, and getting, $50 million back from SoundExchange for payments already made? Is it just that they won't have to pay that much more that would have been due under the CRB? Is that windfall just for 2006, or does it go through 2010?

Is that total calculated with regard to the possibility that those big webcasters would probably end up signing direct licenses with the major labels that would permit the webcasters a discount from the CRB rates and permit the labels to cut out the artists completely?

I guess the prospect of those direct license cut-out deals aren't "anti-artist" enough to get Simson onto his white horse.

Simson says passage of IREA means that artists are going to have to write refund checks.

If the checks for 2006 that've already been paid to the artists were on the basis of royalties already paid, how does the failure to get an increase on the previous rates result in the need for a rebate? This sounds like the basest of scare tactics.

Will SoundExchange executives and staff be rebating any of their salaries or bonuses?

Simpson says "small webcasters" only paid 2% of the royalties in 2006.

Extrapolating SoundExchange's 1st Quarter 2006 royalty statistics, total 2006 royalties were approximately $56 million. Two percent of that is about $1.1 million. Live365 claims to have paid, just by itself, over $1 million to SoundExchange.

They can't both be right. I know who I believe.

Simson says artists, on the average, received $360 in royalties last year?

Maybe he meant $360 was the median, or the mode, rather than the mean. Maybe he meant something else entirely. The number he's quoting now just doesn't match up with other numbers they've used in the past. It is impossible to tell which is accurate and which is made up unless they SHOW THE WORK.

p2pnet's Jon Newton noticed something strange about the SoundExchange press release about distributions in the First Quarter, 2006. He saw the reserve for unregistered artists and labels was $5.7 million, which was more than ten time higher than the amount that SoundExchange claimed was at risk when it started that half-hearted attempt to find people before the royalties for webcasts before March 31, 2000 were forfeited on December 15, 2006.

It just don't add up. By Simson's "average," that $5.7 million reserve would be sufficient to cover over 13,000 "average artists" or over 4,000 more than SoundExchange admitted they couldn't find in October, 2006.

Furthermore, that $5.7 million is a full 40% of the entire royalty pool.

In other words, SoundExchange is admitting it can't pay out 40% of the money it's collected because it hasn't found the people who earned it.

Simson is fond of saying SoundExchange is just like a bank when it comes to dealing with artists. I suspect that there'd be a major run on any real bank that admitted it couldn't find 40% of its depositors.

It'd be educational for everyone if SoundExchange would tell us how much of that reserve is still there one year later and how many qualified claimants have come forward. Of course, any explanation would have to SHOW THE WORK, so I'm not expecting an answer anytime soon.

Simson has said he seeks transparency in SoundExchange affairs.

This is the time and place to start, if he was serious. That test is still going on. Whether or not SoundExchange deserves a passing grade depends on just one thing.

They've got to show their work.


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