USMCA: Safe Harbors Still Safe…For Now

The agreement reached this week on a new — and apparently final — version of the U.S.-Mexico-Canada trade agreement (USMCA, née NAFTA 2), is likely to be viewed as a setback by those looking to rein in the influence and market power of Google, Facebook and other U.S. technology giants.

The new agreement retains language mirroring Section 230 of the Communications Decency Act, despite a last-minute push by members of Congress from both sides of the aisle to get it removed.

The provision, which provides digital platforms with immunity from legal liability for content posted by their users, was originally intended to create a safe harbor where online platforms could find their sea legs in the early days of the internet. But it has come to be viewed by many in Congress and elsewhere today as a sop to the now behemoth tech companies, allowing them to profit from the spread of fake news, harassment and other dubious content unconstrained by regulation.

Retaining the language in international trade agreements could make it more difficult for Congress to repeal of modify Section 230 in the U.S. — as many on Capitol Hill would like to do — by obligating the U.S. by treaty to maintain the current, laissez-faire standard.

“I had one disappointment… [Section] 230, but I was too late coming in on it,” House Speaker Nancy Pelosi (D-Calif.) said at a press conference Tuesday to announce the agreement. “I lost – they had 230 in the agreement, there are some members that wanted that… it’s a real gift to big tech.”

In another win for tech companies, the agreement also includes language barring Canada and Mexico from enacting data localization laws that could force U.S. companies from processing and storing data collected from Canadian and Mexican citizens in those countries. A similar localization requirement in the European Union’s General Data Protection Regulation (GDPR) forced many U.S. technology companies to significantly retool their operations, at considerable expense.

Many outside the U.S. view such “data sovereignty” laws as a way to push back against the implicitly American-ized cultural and economic influence of the internet’s dominant platforms, and see the E.U. standard as a model for other territories. The provision barring them in the USMCA could raise at least a speed bump against their further spread.

Technology companies dodged another bullet could have poked a hole in their copyright safe harbor as well. The agreement retains language modeled on Section 512 of the Digital Millennium Copyright Act that shields user-generated content platforms from copyright liability for content posted by users, so long as the platforms follow a prescribed notice-and-takedown process.

Though once championed by rights owners looking to export U.S. copyright standards, many have since soured on the idea of including DMCA-like language in trade agreements, and the music industry in particular pushed hard for its removal from the USMCA.

With technology companies increasingly viewed as on the run politically — from GDPR and the E.U.’s recent adoption of a new Copyright Directive to rising concerns in the U.S. over their market power and porous content moderation — many in the copyright industries see their best chance since since the DMCA was enacted to roll back the scope of the safe harbor, which they blame for diverting billions of dollars of value from rights owners to technology providers.

The U.S. Copyright Office in coming weeks is expected to release the long-awaited findings from its nearly five-year review of Section 512, which are widely anticipated to include recommendations for modifications of the law.

The head of the Copyright Office, Karyn Temple, this week stepped down from her post to join the Motion Picture Association as general counsel, a move widely viewed in Washington as indication that the report’s findings will be favorable to copyright owners.

As with Section 230, however, retaining the 512 safe harbor in trade agreements could throw a wrench into legislative efforts to amend the DMCA by limiting Congress’ room to maneuver.

In a statement following announcement of the agreement, National Music Publishers Association president and CEO David Israelite lamented the result, saying publishers “remain concerned that the DMCA safe harbors in the agreement continue to devalue creators’ work and protect Internet service providers who should be doing more to prevent piracy and infringement.”

If there is hope for Sections 230 and 512 reformers at this point, it lies with the Senate, where Majority Leader Mitch McConnell, once a vocal supporter of USMCA, seems to have gotten cold feet on putting it to a vote now that a deal has been reached. In a statement Tuesday, McConnell said the Senate will not take up the USMCA until sometime next year, angering Democrats in the House, who want it see it done before Christmas.

McConnell is likely reacting to concerns raised by some Republicans that, in his zeal to claim a legislative victory, President Donald Trump made too many concessions to the Democrats, and Democrat-aligned groups on the terms of the agreement, particularly those relating to worker and environmental protections.

With an impeachment trial of Trump looming, where McConnell will need to hold his caucus together, he likely wants to avoid forcing his members into an awkward position of possibly opposing the president on a key priority until after the impeachment furor dies down — one way or another.

Delays can be deadly in Congress, and McConnell has now set the USMCA on a highly unpredictable path. Even in normal times, the appetite for taking potentially high-profile votes tends to dry up in election years. And these are anything but normal times.

A lot of mischief could still be made between this week’s hand shakes and whenever the USMCA ultimately comes to the Senate floor for a vote.

The Last Picture Show?

The U.S. Justice Department is preparing to end the so-called Paramount consent decrees that have long barred major movie studios from owning movie theaters.

The decrees have been in place since 1949, the result of a series of anti-trust actions brought by the department against various studios over restrictive booking practices, including the favoring of their own theaters over others in distributing their movies and “block booking,” in which studios forced theaters to book an entire slate of films to get the highest-profile releases.

In announcing the move, the head of DOJ’s anti-trust division, Markan Delrahim, noted that technology and market realities have long-since left the original purpose of the decrees behind, as streaming and other non-theatrical forms of distribution have grown more important to Hollywood’s bottom line and reshaped how people watch movies.

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Spotify Works the Margins

In its first-quarter earnings report, Spotify missed Wall Street’s earnings target by a whopping $0.53 a share, despite beating expectations for both revenue and paid subscriber growth.

The streaming service posted a net loss of $0.90 per share, compared to the consensus estimate of $0.37, even as top-line revenue grew by 33 percent year-over-year and beat the Street by 3 percent.

Part of the shortfall could be attributed to various promotion campaigns the streaming service ran during the period, which included discounted service bundles offered in partnership with Hulu. But the stark disconnect between revenue and earnings underscored a long-standing concern over Spotify’s core business model.

“The most important thing is [Libra] will enable paying for things digitally in many of the places around the world where those kind of methods just doesn’t exist. A service like Spotify, you can imagine what would happen by allowing users for instance to be able to pay artists directly,”

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Spotify’s Crypto Strategy

Given the volume of chatter in the music business around blockchain and cryptocurrencies, this week’s confirmation that Spotify has signed on to Facebook’s planned launch of a cryptocurrency-based payment system called Libra will no doubt set tongues wagging anew.

So far, Spotify is the only music or media-related organization among the launch partners, but its presence and prominence is sure to fuel speculation about the intentions of other steaming services and media providers regarding blockchain.

In truth, though, the move likely reveals more about Spotify’s own ambitions that about the future prospects for blockchain in the music business.

For starters, Libra isn’t very blockchain-y. Transaction data on Libra will not be bundled into blocks and will not be chained, although transactions will be recorded sequentially by time-stamp. Nor will there be any mining. Libra coins will be backed by a reserve made up of fiat currencies and fiat-denominated instruments and will be issued by the Libra Association, a not-for-profit foundation being established in Switzerland, much as a central bank controls the fiat monetary supply.

In lieu of miners, Libra will have “validator” nodes, and consensus will be established by an internally developed protocol rather than by a proof-of-work or proof-of-stake type consensus mechanism used by fully decentralized blockchains like Bitcoin and Ethereum.

The Libra blockchain, in fact, will be permissioned, at least initially, and the right to run a node on the network will run you at least $10 million.

With no mining as an incentive, node operators will be rewarded by being granted separate, registered Libra Investment Tokens, which will appreciate in value based on earnings from the reserve.

Not exactly how Satoshi drew it up.

There are legitimate reasons to design the system that way. Mining is a slow, resource-intensive process that constrains through-put on other blockchains and undermines their scalability. Any system meant to operate at Facebook scale will need to be faster and more scalable than even Ethereum and other blockchain 2.0 protocols.

Pegging Libra coins to a reserve of fiat-based assets will enhance price stability and discourage speculation, while assuring users that they will easily be able to convert their coins to fiat.

Facebook is also launching a crypto-wallet for use with the service called Calibra, which it has registered with the U.S. Treasury Department as a money service business and will comply with anti-money laundering and know-you-customer regulations.

Still, the design smacks a bit of Facebook trying to slip into the financial services business through the back door without being licensed by dressing Libra up in the buzzy trappings of blockchain and crypto.

European financial regulators, in fact, already think they smell a rat and are calling for quick action to review Facebook’s plans.

So what’s Spotify’s angle?

In a blog post Tuesday, Spotify’s chief premium business officer Alex Norström framed it as a way for the streaming service to reach audiences that lack ready access to traditional banking and financial services.

One challenge for Spotify and its users around the world has been the lack of easily accessible payment systems – especially for those in financially underserved markets. This creates an enormous barrier to the bonds we work to foster between creators and their fans. In joining the Libra Association, there is an opportunity to better reach Spotify’s total addressable market, eliminate friction and enable payments in mass scale.

That is no doubt true. But it’s also probably not the whole story.

For all its crypto-compromises, Libra still offers elements of a peer-to-peer payment system, albeit within a walled garden. Any Facebook user can sign up for a Calibra wallet and start making and receiving payments directly.

The open-source Move programming language Libra is written in also supports smart contracts, which means users will be able to create their own applications and tokens.

It’s not hard to imagine a future integration in which artists are able to upload their music directly to Spotify, tie it to a smart contract, and receive payments for streams immediately via Libra. Married to the potential reach of Facebook, that could make for an attractive alternative to the traditional record business for artists.

Spotify, in fact, has already been learning and experimenting with how to marry a creator ecosystem with its distribution platform on the podcasts side since its acquisitions of Anchor and Gimlet Media.

Artists and songwriters could also expect to see a bigger piece of the per-stream pie than they get under the current system, especially if Spotify is successful in its effort to rollback the Copyright Royalty Board’s recent rate-setting.

Further, for a publicly traded company like Spotify, Libra’s connection to the traditional financial system is a feature, not a bug. Exposing part of its revenue to the extreme volatility of Bitcoin and other decentralized cryptocurrencies would be an accounting and reporting nightmare, and a serious risk to its valuation.

Finally, Spotify is likely to have Libra to itself among the major music streaming services, at least for a while. It’s hard to imagine Amazon, Apple or Google being in a hurry to integrate their services with a Facebook payment system. So, if Spotify were to make a serious play at luring artists away from the traditional label system, it would be unlikely to face much competition from its largest current rivals.

‘Friends’ In Need

Who needs “Friends” more, Netflix of AT&T’s WarnerMedia? 

That was the question put by this week’s headline-grabbing deal in which Netflix agreed to pay $100 million to keep streaming rights to the venerable sitcom for another year. After that, Netflix may still get access to Rachel and the gang but the series is also likely to become available on AT&T’s planned direct-to-consumer streaming service as well.

“Friends” is obviously a valuable series to Netflix, or it would not have paid so handsomely for non-exclusive rights. But calculating that price would have been a fairly straight forward process for Netflix. It knows how many of its subscribers watch the series and how often, and it can calculate its value for attracting new subscribers. For AT&T and WarnerMedia, not so much.

AT&T plans to launch its direct-to-consumer service at the end of 2019 and plans to populate it largely with its own programming, at least in the early years. While Warner has a vast library of content, going back decades, from its many film and television production studios, it doesn’t calculate the value of the movies and TV series in that library the same way Netflix would. 

Like Netflix, AT&T is in the business of selling subscriptions: to wireless service, broadband, landline phone service, and more recently pay-TV through its acquisition of DirecTV. WarnerMedia, however, is built around selling content, in discreet units, for limited times. It has to reckon not just how much a piece of content is worth, but where it worth the most, as AT&T CEO Randall Stephenson acknowledged this week

Is “Friends” worth more in broad distribution through platforms like Netflix, or being kept out of circulation to be used as an exclusive to drive subscriptions to the new streaming service? 

And “Friends” is a fairly easy case. The series is more than 20 years old and, presumably, its costs have long-since been recouped, apart from residuals. So in a sense, AT&T and Warner are playing with house money. 

AT&T also spent $104 billion to acquire Time Warner, including assumption of debt, and now has more than $180 billion in debt on its balance sheet. It can’t really afford to leave a cash cow like “Friends” in the barn without fully milking it. 

But not every series is going to command the sort of premium “Friends” can pull in for a non-exclusive deal. AT&T is going to have to make a tricky calculation for every piece of content WarnerMedia owns, and for every new production it finances: Is this movie or series worth more in distribution, or driving subscriptions? 

That could make for some difficult investment decisions, to say nothing of negotiations with potential investors, creators and other rights owners in a new piece of content. 

Over time, as AT&T collects more direct consumer viewing data, that calculation could get easier, or at least more reliable. But there’s a long way to go between now and then.