Sony Hack Reveals That MPAA's Big '$80 Million' Settlement With Hotfile Was A Lie

from the of-course-it-was dept

Wed, Dec 24th 2014 12:09pm — Mike Masnick

For years, we've pointed out that the giant "settlements" that the MPAA likes to announce with companies it declares illegal are little more than Hollywood-style fabrications. Cases are closed with big press releases throwing around huge settlement numbers, knowing full well that the sites in question don't have anywhere near that kind of money available. At the end of 2013, it got two of these, with IsoHunt agreeing to 'pay' $110 million and Hotfile agreeing to 'pay' $80 million. In both cases, we noted that there was no chance that those sums would ever get paid. And now, thanks to the Sony hack, we at least know the details of the Hotfile settlement. TorrentFreak has been combing through the emails and found that the Hotfile settlement was really just for $4 million, and the $80 million was just a bogus number agreed to for the sake of a press release that the MPAA could use to intimidate others.

“The studios and Hotfile have reached agreement on settlement, a week before trial was to start. Hotfile has agreed to pay us $4 million, and has entered into a stipulation to have an $80 million judgment entered and the website shut down,” the email from Sony’s SVP Legal reads.

Considering the time and effort that went into the case, it would be no surprise if the movie studios actually lost money on the lawsuit.

The good news for the MPAA is that the money was paid in full. There were some doubts if Hotfile would indeed pay up, but during the first weeks of December last year the $4 million was sent in three separate payments.

Of course, all of this is just for show. You can safely assume that none of the much lower $4 million went back to any content creators. Instead, it's likely it got plowed back into the MPAA's vast "anti-piracy" machine, allowing it to be used for other lawsuits and funding investigations by state Attorneys General.

Still, is it any surprise that the industry famous both for its fictional "Hollywood Endings" and "Hollywood Accounting" where a hit movie like one of the Harry Potter films can bring in nearly a billion dollars, but still have a "loss" for accounting purposes, would create a made-up scenario in which everyone pretends many tens of millions of dollars are paid due to "infringement"?

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Filed Under: copyright, file sharing, settlements, sony hack
Companies: hotfile, mpaa

81 Comments

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Anon E. Mous (profile), 24 Dec 2014 @ 12:16pm

Wow. And I thought only Disney was good at telling tales of make believe, guess the MPAA likes tales of make believe too.
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Anonymous Coward, 24 Dec 2014 @ 12:34pm

So...1/20th of the original amount. Can we do that for prison sentences and fines for "pirates" too?
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jupiterkansas (profile), 24 Dec 2014 @ 12:42pm

Re:
Disney is the MPAA.
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Carlie Coats, 24 Dec 2014 @ 12:45pm

Disbarment?
And why isn't this a legal-ethics violation which should cause the disbarment of all the attorneys involved??
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PRMan, 24 Dec 2014 @ 12:50pm

Re: Disbarment?
Yeah. This seems like fraud on the court.
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Anonymous Coward, 24 Dec 2014 @ 1:42pm

Material misstatement
If a publicly traded company were to do this settlement/announcement thing, it would be a securities violation, a material misstatement of expected revenues at the least.

I wonder if is plausible to argue that a company that knows that their industry proxy is lying could be accused of misleading the public materially, about the actual success in fighting piracy which is material to their business.
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Kronomex, 24 Dec 2014 @ 1:50pm

Like all Hollywood "films" this had to have the baddies defeated and a happy ending. The truth? Snort, snigger, chortle.
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Anonymous Coward, 24 Dec 2014 @ 2:09pm

we trust this company not to do anything illegal based on their word alone why?
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Anonymous Coward, 24 Dec 2014 @ 3:41pm

no surprises here, so move along! there isn't a true word comes out of the mouths of anyone who is or is associated with the entertainment industries! i really am hoping that there will be actual evidence found of who was involved in the raid on Dotcom. now that would really set things aglow, especially as how the NZ Supreme Court reckons the raid on the mansion was legal!! if that isn't as a favor to the DoJ and Hollywood, i dont know what is!! disgraceful way of conducting 'JUSTICE'!!
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Anonymous Coward, 24 Dec 2014 @ 5:03pm

Never trust the MAFIAA.
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That Anonymous Coward (profile), 24 Dec 2014 @ 6:37pm

This is a common tactic, it is all about having the big scary number to trot out... the problem is the numbers have grown so large they aren't realistic anymore. They are designed to scare settlements out of the otherside or people who might cross them.

This is just yet another example of how copyright is being turned into a magical tool to bludgeon people into doing what you want.
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Anonymous Coward, 24 Dec 2014 @ 6:44pm

Just curious why no one seems particularly concerned about privacy interests in this matter. Lots of juicy gossip without even a moment of reflection on the privacy interests of those whose private communications were wrongfully taken.
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That One Guy (profile), 24 Dec 2014 @ 7:06pm

Re:
To date I have yet to see an article on TD covering the leaks that include private information that wasn't also newsworthy.

An email between two people at Sony talking about the weather? Not newsworthy, and hence no one is bothering with them.

An email between two people discussing funding an AG and writing the legal documents he's sending out? Absolutely newsworthy, which is why it's being covered.

When you've got evidence that a company or group of companies is conspiring to basically buy out public officials, then you'll excuse me if I don't think 'That's private, you shouldn't talk about it!' carries much weight.

It is private to be sure(or was anyway), but it's talking about something that directly affects the public, and is therefor of interest to the public.
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G Thompson (profile), 25 Dec 2014 @ 3:13am

Re: Re: Disbarment?
It's absolute fraud especially if used as a reference structure in any other legal ducuments asking for discoveries etc in other court cases Especially in countries within EU, Aust, NZ, etc..

My spidey sense is tingling and next week I might go searching Lexis for anything that could cause the Solicitors/attorneys major probs in the above jurisdictions (especially Australia). And yes its a form of fraud
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Whatever (profile), 25 Dec 2014 @ 5:48am

I was waiting for this one to come up, because I knew what the spin would be.

The settlement is simple: 80 million is the big number, which would apply if another agreement was not reached. Now, in that reduced 4 million agreement, there may be other stipulations that must be met (such as not starting a similar service, or providing future user information and cooperating in court if called for related business, etc). If those were not met, it's very likely that the deal would revert back to the 80 million.

It also needs repeating that the MPAA and RIAA have said over and over again that they aren't suing people for the money, they are suing them for the deterrent factor against others. Part of that is keeping those very large judgements / agreements there to be used as a reminder of what may happen.

My personal guess: 4 million was about all Hotfile could manage, leaving the owners enough to live well and not have to restart their piracy based business.
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Anonymous Coward, 25 Dec 2014 @ 6:05am

Re:
Finally decided to log back in after spamming other articles with useless commentary?

I think this takes quite the bit of wind out of the MPAA's sails. Claiming that "pirate sites" make billions of dollars seems a lot more impressive. Not so much when they actually end up not paying ridiculous fines.
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Sheogorath (profile), 25 Dec 2014 @ 7:06am

The real problem
Still, is it any surprise that the industry famous both for its fictional "Hollywood Endings" and "Hollywood Accounting" where a hit movie like one of the Harry Potter films can bring in nearly a billion dollars, but still have a "loss" for accounting purposes, would create a made-up scenario in which everyone pretends many tens of millions of dollars are paid due to "infringement"?
That's the real reason Son¥ kicked up such a stink about the hack, isn't it? Because people are now able to find out what Son¥-produced music and films really made as opposed to what the company claims they grossed.
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madasahatter (profile), 25 Dec 2014 @ 8:32am

Re: Re: Re: Disbarment?
Interesting you mentioned NZ because may give Kim Dotcom's lawyers some interesting ammunition to use. That most of these cases are smoke and mirrors ploys.
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Anonymous Coward, 25 Dec 2014 @ 2:56pm

Re:
No. They could make that part of the settlement agreement. It says that they agree Hotfile pays one amount, but tell the courts another.
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Anonymous Coward, 25 Dec 2014 @ 3:07pm

Re:
So it could have been 80 billion. It's still a meaningless number.
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Whatever (profile), 25 Dec 2014 @ 11:12pm

Re: Re:
I have made 2 posts in about 5 months here (this is the third). You can ask Mike, he says everything is anonymous but it never is... )
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Anonymous Coward, 25 Dec 2014 @ 11:35pm

Re: Re: Re:
Right here, via your profile, are posts you've made. Less than five months ago.

What is it with you copyright fanboys? If you're going to lie, make some effort to do it properly.
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CharlieBrown, 26 Dec 2014 @ 1:47am

Re: Material misstatement
You made me realise why they did this: Taxes. They announce an $80 million settlement that will no doubt go into the anti-piracy fund, which is probably tax deductible. Therefore they received $4 million and tax deducted $80 million.
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Anonymous Coward, 26 Dec 2014 @ 2:56am

Re:
So, what you're actually syaing is that the MPAA extorted, through the use of lawsuits, just enough money to put a company out of business it didn't agree with.

Good to know.
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Anonymous Coward, 26 Dec 2014 @ 5:23am

Moral of the story

MPAA and certainly its fucking ilk, are pathalogical LIARS.......and these folks are essentially BUYING laws
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Anonymous Coward, 26 Dec 2014 @ 6:32am

Re: Re: Re: Re:
You seem to be assuming that "two posts" equates with "two comments", which is not necessarily so. It just as easily could refer to the submission of comments (including multiple comments) to two articles.
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Anonymous Coward, 26 Dec 2014 @ 10:06am

ask mike...
"ask Mike, he says everything is anonymous but it never is... )"

cycling vpn, no java/flash/cookies, spoofed/striped headers/referrers/agent.,,

Maybe (probably) there's some nsa spook out there with trick automated route timing attacks who knows exactly who I am, and what I post, and puts it all into my big ass waste of space profile, which is likely littered with inaccuracies- but how would Mike know anything about me?
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That One Guy (profile), 26 Dec 2014 @ 2:27pm

Re: Re: Re:
That's because certain people have distinctive patterns to their talking/typing.

For example, if person A uses a particular phrase or argument all the time in their speech(like say, exhibiting a pathological obsession over getting a particular person to 'answer them'), and they go away, and Person B shows up and uses the exact same phrase/argument, the odds are fairly good that they are the same person.

You don't need to check IP address of a poster, if the poster is going to provide their own identification like that.
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Anonymous Coward, 26 Dec 2014 @ 4:28pm

Re: Re: Re: Re: Re:
Look at his profile - he's made posts on multiple unique articles throughout the week on October, and the week at the end of September.

Even if by some convoluted definition "two posts" equated "multiple posts on two articles", he's still visibly lying through his teeth.

Seriously, if you're going to log out to pose as a concerned sockpuppet, don't look like a complete tool doing it.
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RD, 26 Dec 2014 @ 8:11pm

Re: Re: Re: Re: Re: Re:
Just auto-report his lying ass and move on to real discussion of the topics.
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Anonymous Coward, 27 Dec 2014 @ 6:23pm

If paying that much , Id have a request that after i pay the full amount i need copies of the payments made to the content creators, If this is really for infringement that that should not be an issue.
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That One Guy (profile), 27 Dec 2014 @ 7:49pm

'No such records found'
At which point you would get a single sheet of paper with zero entries on it.

Not a single cent of that money will end up in the pockets of the actual content creators, it's instead funneled straight to the lawyers for more lawsuits, or into the bank accounts of various politicians to buy more copyright owner(which is not the same as content creator mind)-friendly laws.

Which is funny, given the excuses for these kinds of lawsuits is supposedly to protect the content creators, yet they don't see any rewards from the lawsuits themselves, so for all the claims of the apocalyptic losses they suffer from piracy, the lawsuits don't actually seem to be any good at returning those 'lost profits' to the actual creators.
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Anonymous Coward, 28 Dec 2014 @ 7:19am

Re: 'No such records found'
This comment leads me to believe you are inclined to share whatever capital gains you may realize from the sale of your home with those who built it since they, and not you, were its creators.
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Anonymous Coward, 28 Dec 2014 @ 8:27am

Re: Re: 'No such records found'
So now you're saying creators don't deserve capital gains. Gotcha.
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Anonymous Coward, 28 Dec 2014 @ 8:55am

Re: Re: Re: 'No such records found'
No, I am saying that the previous commentor was blowing self-righteous smoke since it seems most likely that he/she would not transfer any part of the proceeds from their home sale to the people who built it. Yet, this is what they use as the basis for criticizing the copyright owners.
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Lois Lerner, 28 Dec 2014 @ 11:46am

Re: Material misstatement
One wuld think all of these fake losses would attract the attention of the IRS. Good thing their political party benofactor has their agents chasing soccer moms and grassroots political novices instead.
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Josh Parker, 28 Dec 2014 @ 2:36pm

Less and less sympathy for Sony
While it seemed initially like Sony was a victim in this hack -- and I actually had sympathy for the company -- that lasted about five minutes. Now that Sony's true face is coming out, leak by leak, and with the company threatening Web sites that report on the lost emails, etc, it's hard not to revel in a little Schadenfreude.
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That One Guy (profile), 28 Dec 2014 @ 3:20pm

Re: Re: 'No such records found'
Tell you what, next time I sell a house, or anything really, and try and increase the price by claiming I'm selling it to 'Benefit the builder/creator', and then give them nothing, then you might have a point.

The *AA's file these lawsuits with the excuse that they're doing it 'For the artists/creators'. To then not give those artists/creators any of the money resulting from the lawsuits simply exposes their lies. The lawsuits have nothing to do with 'protecting the creators', the creators are simply an excuse, an attempt to justify the lawsuits.

They can claim that they're suing sites/individuals due to copyright infringement all they want, but until the money from those lawsuits starts going to the creators of the infringed works, they aren't allowed to lie and claim that the lawsuits have anything to do with the creators, and get a pass on their lie.
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Anonymous Coward, 28 Dec 2014 @ 4:47pm

Re: Re: Re: Re: 'No such records found'
No, what is used as basis for criticism is the fact that for all the bluster about money being "stolen" from content creators, money is never returned to them.

A more appropriate analogy would be the police appropriating stolen goods for themselves instead of returning them. This would not be considered acceptable. Why do copyright holders get a free pass?
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Anonymous Coward, 28 Dec 2014 @ 4:56pm

Re: Re: Re: 'No such records found'
Your home builders benefited when the house was first purchased, just like many within the music industry benefit when they are paid for their effort by the labels. Once the dust has settled, the home purchaser has a recorded deed and the label has the music equivalent of a recorded deed, a copyright recorded with the Copyright Office.

The fact one transaction is a home and the other a song is a difference without a distinction. In each a person has been payed for providing to the purchaser something of value.
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That One Guy (profile), 28 Dec 2014 @ 6:07pm

Re: Re: Re: Re: 'No such records found'
And in each case, the one who provided the money for the creation is the actual owner, and much like it would be dishonest for me to claim that I was selling a home to benefit the builder, if I didn't give them any money from the sale, it's likewise dishonest(or, to be blunt, a lie), to claim that a lawsuit over a song/album/movie that the creator doesn't own, one where none of the money from the lawsuit will ever reach the original creator, is being done for their sake.

It's not, the lawsuit is solely for the benefit of the copyright owner, the musician/creator is just being used to drum up sympathy and try and hide who really benefits from the lawsuit, those being the lawyers and labels.

Like I said above, file the lawsuits for copyright infringement all you want(or defend those that do), just don't lie and claim that they're 'to protect the artists', when the truth is they are anything but.
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Anonymous Coward, 28 Dec 2014 @ 8:32pm

A label is like any investor. It makes an investment hoping that the investment pays off sufficiently to make the effort worthwhile. Interfere with the investment's income potential and it makes it all the more likely that future investments will be harder to come by if you happen to be a musician who depends upon them. In this regard it is not deceptive to say that attempting to hinder infringement does devolve to the benefit of the musicians, though I do agree that owners are the primary beneficiaries and musicians less so.
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Anonymous Coward, 28 Dec 2014 @ 10:29pm

Re:
If musicians aren't the beneficiaries you don't get to lie that they are to garner sympathy.
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Ninja (profile), 29 Dec 2014 @ 1:56am

That's the problem with the MAFIAA, they think big penalties will do anything to stop activities they happen not to agree with. Except that they boost the numbers so high that those fines are either treated as lies (which is the case here) or they turn the examples into martyrs even if they happen to be the perfect personalities to vilify. Amusing.
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PaulT (profile), 29 Dec 2014 @ 3:17am

Re: Re: Re: Re:
Plus, of course, when the IPs have been checked and it's confirmed that it's the same obsessed liar behind all the posts, they just whine about their privacy being violated because Mike checked the public information logged on his own server...
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Anonymous Coward, 29 Dec 2014 @ 5:26am

Re: Re:
But they are beneficiaries in that the hampering of infringement continues to make music a worthwhile investment opportunity for investors, i.e., labels.
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Anonymous Coward, 29 Dec 2014 @ 5:55am

Re: Re: Re: Re: Re:
There seems to be an AC poster replying to TOG and a few others at the moment who writes in the same style as a certain previous poster who often screamed censorship when there posts started to become hidden. I wonder how long it will be till the screaming of censorship begins again.
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Anonymous Coward, 29 Dec 2014 @ 6:15am

Re:
"And I thought only Disney was good at telling tales of make believe, guess the MPAA likes tales of make believe too."

Want to see the best examples of fantasy writing in history?
Hollywood bookkeeping!
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Mike Masnick (profile), 29 Dec 2014 @ 7:11am

Re: Re: Re: Re: 'No such records found'
The fact one transaction is a home and the other a song is a difference without a distinction.

Now be fair (I know, I know... that's asking a lot from you). When you buy a house, you buy a house. When you give a label your copyright, all the label has done is loaned you money which you then need to pay off many times over because every dime the label gives you or spends on promoting you is added back to the tab you have to pay the label.

The label purchases nothing. It gives you a loan on HORRIBLE terms, and then forced you to pay it back while keeping the copyright.

A "difference without a distinction" other than that it's very, very different deal than a purchase.

Why do you so misrepresent everything to make copyright holders look better than they deserve? It's almost as if your sucking up to them...
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John Fenderson (profile), 29 Dec 2014 @ 8:07am

Re: Re: Material misstatement
"One wuld think all of these fake losses would attract the attention of the IRS"

Only if those fake losses were being used to evade taxes. I'll bet you that they're not.
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Another lie, 29 Dec 2014 @ 9:53am

isoHunt
"A settlement with MPAA was reached in 2013, that stipulated $110 million"
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Anonymous Coward, 29 Dec 2014 @ 12:08pm

Re: Re: Re: Re: Re: 'No such records found'
Labels are not to my knowledge in the loaning business. While I cannot say it has never happened, I am unaware of any case where a label's investment was required to be paid back, even if the project went south and proved to be a monetary bust. I have seen agreements where the investment had to be recovered before royalty sharing kicked in.
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That One Guy (profile), 29 Dec 2014 @ 2:48pm

Re: Re: Re: Re: Re: Re: 'No such records found'
Does a band have to pay back the 'advance' that they get from a label after signing? Yes, they do, that money is most certainly not a 'gift', which makes it a loan, on, like Mike said, terrible terms.

"So we'll 'give' you this money that you can use to record your songs, though you'll need to pay it all back from the profits resulting from the music you make. Oh, and we also keep the rights to any songs you write and record as part of the deal, so even if you go elsewhere when your contract is up, the music stays with us."

If I 'give' you $100, and demand that you pay it back, I didn't 'give' you anything, I loaned you money, even if I try and claim that it's something else.
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That One Guy (profile), 29 Dec 2014 @ 2:55pm

Re: Re: Re:
The major labels could die off tomorrow(and what an awesome thing that would be), and there would still be people willing to pay others to make music. There would still be musicians making music, with or without being paid to do it. There would still be fans of music. The labels are not required for music to exist, so just because something benefits the labels, it does not automatically benefit the musicians that they've conned into signing with them.

And if they actually cared about 'benefiting musicians' then they'd give those musicians a cut of the money they get from the lawsuits supposedly done 'to protect them', the fact that they do no such thing however shows that they are only interested in benefiting themselves.
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Anonymous Coward, 29 Dec 2014 @ 4:28pm

Re: Re: Re: Re: Re: Re: 'No such records found'
> I am unaware of any case where a label's investment was required to be paid back

> I have seen agreements where the investment had to be recovered before royalty sharing kicked in

In short the band doesn't make anything from this arrangement. Do you not read what you type before hitting "Submit" or is this how all copyright fanboys roll?
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Anonymous Coward, 29 Dec 2014 @ 4:33pm

Re: Re: Re: Re: Re: Re: Re: 'No such records found'
Actually, no, they do not have to pay it back. Most recording agreements between labels and musicians provide for the payment of royalties by the labels to the musicians, with the proviso that royalties will commence being paid once the label has recovered its investment.

Now, before you and others here go off on a tirade about creative bookkeeping, that is a separate issue from the simple concept of a label recouping its non-recurring costs before a royalty stream commences. In fact, this concept (whether or not it makes any sense is a matter for another discussion) is not at all uncommon across a broad spectrum of industries besides those involved in entertainment, and these include high tech. I personally do not recommend this concept be integrated into agreements, but I have seen it included in domestic and international R&D and production agreements enough times to know that others do not share my view.
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Anonymous Coward, 29 Dec 2014 @ 4:44pm

Re: Re: Re: Re: Re: Re: Re: 'No such records found'
Not sure criticism is in order.

If an advance is a loan, it has to be paid back come He** or High Water. The fact the song was a dud that earned nothing would not relieve you of your obligation to pay (just like you would have to keep up mortgage payments even if your house burns down). Thing is, I have never seen such a provision in any recording contract. The advance is the musicians' to keep, but future expectations of income are subject to the advance and other named expenses first being paid to the label before royalties are paid to the musicians. For simplicity's sake I have used the term "advance". In practice the investment typically comprises an advance payment(s) to the musicians and other expenses associated with a song's production (studio time, session musicians, production, advertising, distribution, etc.).
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That One Guy (profile), 29 Dec 2014 @ 5:22pm

Re: Re: Re: Re: Re: Re: Re: Re: 'No such records found'
Yes, they absolutely do. The 'terms' may not be worded the same as a standard loan, but the band is absolutely paying back the money they were 'given', oftentimes several times over, before they start seeing any real money themselves from their music.

This article covers it fairly well, but basically, when a band is conned into signing with a label, the label gets the lion's share of any profits made from the music sold. Until the band is 'recouped', that is the band has 'paid back' the money the label 'gave' them, their cut of the profits from the music is instead used to pay back the what they 'owe'.

Only after the band has fully paid back what they were 'given' do they actually make any money from their own music, until that happens, the label is raking in the cash, while the actual musicians are screwed.
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Anonymous Coward, 29 Dec 2014 @ 6:18pm

Re: Re: Re: Re: Re: Re: Re: Re: Re: 'No such records found'
Yours is a rather unique definition of what comprises a loan. No matter what you may call a label's investment, it should be borne in mind that the label, and not the musician, assumes the risk of loss that a song will fail to generate any income, or generate insufficient income to cover the investment.
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That One Guy (profile), 29 Dec 2014 @ 7:04pm

Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: 'No such records found'
That's the nature of an investment, you don't always make a profit. The difference between a standard investment and the recording business version though is that even if a band fails to recoup(and again, it's worth noting that a labels can make several times over their 'initial' investment, with the band still 'owing' money), the label still owns the music and can do with it what they want. A standard investment might get you some stock in a company, some controlling interest, but I doubt many 'investments' outside of the recording industry have clauses that give the investor total ownership over the company being invested in.

Were that a standard loan, only the incredibly stupid would even consider it. 'Oh sure, we'll give you $150K to buy a house, just keep in mind that you need to pay it back. Oh, and whether you do or not, we still own the house.'
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Anonymous Coward, 29 Dec 2014 @ 7:28pm

Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: 'No such records found'
My curiosity is piqued. Do you have some relationship with the music business that informs your belief that money is owed and must be paid back even if a song fails to generate any income? I have seen numerous agreements, none of which required what you insist is required. They did provide for the recovery of investment before further payment to the musicians, but none had an obligation of the type you seem to believe is the case.
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That One Guy (profile), 29 Dec 2014 @ 7:46pm

Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: Re: 'No such records found'
Did you read the article I linked to above? In it they quote a musician talking about how despite the label making bank on his band's music, they were still on the record as 'owing' a hefty amount of money.

Here's the quote in question:

A word here about that unrecouped balance, for those uninitiated in the complex mechanics of major label accounting. While our royalty statement shows Too Much Joy in the red with Warner Bros. (now by only $395,214.71 after that $62.47 digital windfall), this doesn't mean Warner "lost" nearly $400,000 on the band. That's how much they spent on us, and we don't see any royalty checks until it's paid back, but it doesn't get paid back out of the full price of every album sold. It gets paid back out of the band's share of every album sold, which is roughly 10% of the retail price. So, using round numbers to make the math as easy as possible to understand, let's say Warner Bros. spent something like $450,000 total on TMJ. If Warner sold 15,000 copies of each of the three TMJ records they released at a wholesale price of $10 each, they would have earned back the $450,000. But if those records were retailing for $15, TMJ would have only paid back $67,500, and our statement would show an unrecouped balance of $382,500.

I do not share this information out of a Steve Albini-esque desire to rail against the major label system (he already wrote the definitive rant, which you can find here if you want even more figures, and enjoy having those figures bracketed with cursing and insults). I'm simply explaining why I'm not embarrassed that I "owe" Warner Bros. almost $400,000. They didn't make a lot of money off of Too Much Joy. But they didn't lose any, either. So whenever you hear some label flak claiming 98% of the bands they sign lose money for the company, substitute the phrase "just don't earn enough" for the word "lose."
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Anonymous Coward, 29 Dec 2014 @ 8:35pm

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Yes, I read it today and when it was first posted. Importantly, it does not contradict anything I have said. I have already noted that "accounting" is an issue deserving of a separate discussion. What I am commenting upon here concerns the statement that a label's investment is a loan. While it may seem so, it is a mistake to call it by that name since the risk of loss resides with the label and not the musicians. While I can never foreclose the possibility that a really wacky contract has at some time in the past been executed that is truly a loan, I can say I have never seen one executed between a label and its musicians. In all contracts I have dealt with the risk of loss resided with the label, which is the antithesis of what comprises a loan.

BTW, if it was as you believe a loan, then money advanced to the musicians would not be deemed "income" by the IRS. Would you care to bet on the likelihood that money paid as an advance to the musicians has been reported by them to the IRS as earned income on their 1040s? How do you think the IRS would view things? I have a good idea, and "not income because it is a loan" is not it.
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That One Guy (profile), 29 Dec 2014 @ 9:13pm

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Yes and no I would say. It may not be a loan in the legal/financial sense, but the fact that a band is contractually obligated to pay it back out of their share does make it at the very least similar to one in practice.

As for the 'risk', unless a band is really bad(in which case the label needs to fire the moron who signed them), the fact that the label is taking something like 70% of the profits from the music means that they have decent odds of making their 'investment' back, even if the band itself never 'recoups'.
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Anonymous Coward, 30 Dec 2014 @ 5:28am

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Actually, there are many great musicians whose work, for various reasons, never strikes a responsive chord with consumers of music. Frankly, I never cease to be amazed at the high level of talent scattered throughout all of the creative industries and just how precious few of these talented people actually make a very good living following their dreams and passion. Sadly, for the vast majority their artistic talent is manifested, if at all, as a hobby while they provide for the daily necessities of themselves and their families by other means. There is much truth behind a t-shirt bearing the words "Why yes, I am an actor. Can I take your order?"
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Mike Masnick (profile), 30 Dec 2014 @ 5:28am

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Yours is a rather unique definition of what comprises a loan. No matter what you may call a label's investment, it should be borne in mind that the label, and not the musician, assumes the risk of loss that a song will fail to generate any income, or generate insufficient income to cover the investment.

Did you really used to work as a high powered business lawyer? Lenders are ALWAYS assuming the risk that the loan won't bring a return. That's how lending works.

Furthermore, lenders will often write off loans.

A recording contract, while not *identical* to a typical loan is very certainly a form of the loan in which the musicians are required to pay back not just the advance but every other penny related to the band out of its miniscule royalties before they receive another dime. And yes, the record labels continue to claim that the money is owed in perpetuity.

The only real difference from the loan is that the payout only comes from the (miniscule) royalties or (in the case of 360 deals) from other money earned by the musicians -- rather than 3rd party income. But, in nearly every other way it's like a loan. Oh, except for the fact that even after you pay it off, the label still owns the copyright.

It's a terrible, terrible deal for musicians, which is why fewer of them seem willing to take it now that there are pretty damn good alternatives.
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Anonymous Coward, 30 Dec 2014 @ 6:24am

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I am surprised that the concept of a loan seems to be so difficult to grasp. A loan must be paid back, usually with interest, and within a specified time period. If it is not paid back, the lender has the legal right, but not the obligation, to secure payment via resort to our courts. BTW, if a loan is forgiven the amount of the forgiveness is deemed earned income for income tax purposes (as many who have escaped under-water mortgages via short sales are, much to their chagrin, finding out). In the case of recording contracts the advances are already deemed earned income, which could not be the case if the advances were merely loan proceeds. My God, imagine taking out a mortgage and then being told you had to add the mortgage amount to your income for tax purposes.

The contracts typically executed between labels and musicians reflect neither of these characteristics. Money already in the musician's hand remains there, and no resort may be made to seek its return should the investment fail to realize a return.

If I take out a business loan to expand my business, but my business fails, I am nonetheless expected to pay back the full amount of the loan. If the venture contemplated by a recording contract fails, I have not seen any contract containing a provision that the funds advanced must nevertheless be paid back by the musician. What the contracts typically delineate is the order of priority for the receipt of future revenue generated by the works created under the contract. Priority of payment and the conditions associated therewith is in no way the equivalent of a loan.

Now, do not get me wrong. I well understand why such contracts have the appearance of being loans. My point is simply that risk of loss cannot be ignored, and that risk is being borne solely by a label when it invests its funds under a recording contract. If the work tanks it is the label that takes the financial hit, and not the musician.
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Mike Masnick (profile), 30 Dec 2014 @ 7:05am

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As I said, it is quite like a loan, but with only slight differences, including the way in which it is paid back.

But your insistence that it has to be paid back and that there is no risk on the lender is simply wrong. Lenders write off bad loans all the time. The risk is always on the lender.

The "risk of loss" is the same under both.
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Anonymous Coward, 30 Dec 2014 @ 8:58am

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My insistence it has to be paid back? I am saying quite the opposite. It is recouped by the investor only if revenue is received, and without recourse against the other party to the contract in the event no revenue or insufficient revenue is received to fully recoup the investment. A loan does have to be repaid, and while loans can be forgiven (as you properly note), in the ordinary case of loan forgiveness it represents income to the debtor and becomes a taxable event.

More accurately, a label contract typically (but not universally) includes a royalty provision that incorporates the recoupment of enumerated expenses prior to royalty payments being made to the musician. This is not the same as loaning a sum certain that must be repaid (typically with interest) by a date certain.

BTW, most loans are made by lending institutions where their only responsibility is to lend an agreed upon amount of money. They generally provide no other services to the debtor. The same is certainly not the case with respect to the role played by investors in venture transactions (yes, I consider the creation of a song, book, movie, software, invention, widget, and the like a venture), be they a label or otherwise.
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Mike Masnick (profile), 30 Dec 2014 @ 9:47am

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My insistence it has to be paid back? I am saying quite the opposite.

Yes, you insisted that "a loan" needed to be paid back "come hell or high water." That's the insistence I was talking about.

The same is certainly not the case with respect to the role played by investors in venture transactions (yes, I consider the creation of a song, book, movie, software, invention, widget, and the like a venture), be they a label or otherwise.

If you consider a recording deal to be more equivalent to a venture investment than a loan then you truly have no idea what you're talking about.

A venture investment involves selling merely a small portion of the equity in your business -- yet you retain the right to the profits and a significant percentage of ownership in the equity. All a venture investment involves is selling a small ownership stake. It also does not require paying back the investment -- though there may be liquidation preferences upon a sale.

That is NOT AT ALL what a recording contract is.

There is no rational person who would view a recording deal as being closer to a venture investment than a loan. It is neither exactly like a loan or an investment, but it is A HELL OF A LOT CLOSER to a loan.
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Anonymous Coward, 30 Dec 2014 @ 12:17pm

I was saying it was not a loan, so of course there is no obligation to dig into one's savings and pay it back. If it was a loan there could be such an obligation.
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Mike Masnick (profile), 30 Dec 2014 @ 1:37pm

Re:
I was saying it was not a loan, so of course there is no obligation to dig into one's savings and pay it back. If it was a loan there could be such an obligation.

Do you not see how absolutely wrong and ridiculous you are here?

You are defining a loan very, very, very narrowly -- saying that it requires you to pay it back. I've already pointed out that's not true.

Yet at the same time, you define a "venture investment" incredibly broadly, such that it covers a situation that is clearly not a venture investment at all.

When myself and others here pointed out to you why the record label contract has MANY SIMILARITIES to a loan, you just go right back to "but it doesn't require you to pay it back."
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Anonymous Coward, 30 Dec 2014 @ 4:42pm

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Really, sincerely, just stop. You've already proven that you're an idiot, a tool and a liar when it comes to semantics. If you think that consistent trolling and posting over multiple articles lasting over several months somehow miraculously counts as "two posts", it's clearly given that you're not here to argue; you're here to cocksuck anyone just because they get sexually aroused when calling everyone else a pirate.

Seriously, stop. You're an insult to any organism with a functioning brain.
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Anonymous Coward, 30 Dec 2014 @ 8:35pm

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I do understand your viewpoint, but believe that deference to the legal definition of what comprises a loan is a more prudent position for a number of reasons, one of which includes remaining in compliance with our tax laws.
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Mike Masnick (profile), 31 Dec 2014 @ 5:32am

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I do understand your viewpoint, but believe that deference to the legal definition of what comprises a loan is a more prudent position for a number of reasons, one of which includes remaining in compliance with our tax laws.

Okay. Then you have to admit that tax law ALSO treats a recording contract and a venture investment *entirely* differently as well.

Yet you had no problem insisting they are one and the same.

Once again, it seems, you choose definitions that suit you and ignore it when the same rules you seek to apply to others are applied back to you.
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Anonymous Coward, 31 Dec 2014 @ 6:42am

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No, I do not agree with what you say at all. There are many variations of such contracts, and the provisions and ramifications of each must be considered individually. Since the discussion here has centered around whether or not advances are loans, I have tried to limit my comments accordingly.

You made the point that they are like an "Aereo Duck" (my phrase), they have all the hallmarks of a loan and few if any of an investment, so in practical effect they are loans. While I do not disagree that there are some similarities, on the whole they are not loans as that term is commonly understood by many otherwise rational people simply because the obligation to pay back advances is not absolute and independent of whether or not the venture is a success. Unless revenue is actually earned pay back, known as recoupment within the entertainment and other industries, never takes place and the entity making the advance is without recourse against the other party to the contract. If it was a loan the money would have to be paid back nevertheless, just like a mortgage has to be paid back even if the home covered by the mortgage burns down to a small pile of ash.

Now, I am not defending the typical structure of these types of contracts, nor am I lending aid and comfort to the labels. I am merely pointing out that agreements such as these are much more complex than people here can even begin to imagine, that in my view they are much more in the nature of a joint collaboration between the musician and label that bears little resemblance to what is typically associated with a loan agreement, and that a recoupment provision may look like a loan to the uninitiated, but most decidedly is not.

BTW, if for some reason you take umbrage with my viewing recording contracts as venture arrangements, then call them something like "development and production agreement", "collaboration agreement", or whatever other terms you believe best befit a business arrangement where one provides "ideas and their creative application" and another provides "funds and services" to achieve the mutual goal of creating a song from whole cloth, fixing it in some tangible form, and then distributing the resulting work to the public at large with the hope that it will strike a responsive chord and generates copious amounts of revenue sufficient to make the entire effort worthwhile for the benefit of all the parties.

And...if you ever have a loan forgiven, learn what happens when you are sent a Form 1099-C and what it means come income tax time. Hint, the loan amount that has been forgiven, which when received was likely not a taxable event, magically transforms in earned income, which most definitely is a taxable event unless it falls within a narrow band of exceptions specified in the IRC. Yeah, that sucks, but it does represent "an accession to wealth, clearly realized, over which the possessor retains complete dominion and control", the classical definition under our tax laws for what comprises earned income.
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Anonymous Coward, 4 Jan 2015 @ 8:43pm

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Keep shilling, barnyard girl. Maybe if you cocksuck antidirt hard enough he'll actually let you swallow!
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Anonymous Coward, 5 Jan 2015 @ 5:05am

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Apparently good manners and respect for the good faith opinion of others is not something you are being taught right now by your parents. Perhaps you would benefit from having your electronic toys taken away and being grounded until after your middle school prom.
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Anonymous Coward, 8 Jan 2015 @ 9:43pm

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Good faith opinion? What a crock. Lies don't constitute good faith opinion. You've demonstrated that you'd rather take hearsay, insults and barnyard impersonations over logic and citations.

No one believes you, Slonecker.
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Anonymous Coward, 5 Feb 2015 @ 5:10pm

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So why is that my fault? Why would me acceding to your demands of throwing money at these people make a difference?
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Anonymous Coward, 28 Dec 2019 @ 11:35pm

Whatever and Slonecker just hate it when due process is enforced.
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