There are two imponderables under the Music Modernization Act that I think could have a significant effect on valuations and investment: the designation of the mechanical licensing collective by the Register of Copyrights and the contemplated global rights database.
First the initial and any re-designation of the collective by the Register. It must be said that it would be nice to have the process by which the Register is selected be finalized in the pending legislation sitting in the Senate titled the Register of Copyrights Selection and Accountability Act (S. 1010). The House version of the bill has already passed on a near unanimous vote so hopefully the Senate will get around to voting on it sometime soon.
It must also be said that the statutory requirements to guide the Register in selecting the collective make it almost inevitable that the selection process will be the sound of one hand clapping. Given the bill’s supporters, it would only be surprising if that were not the case. After all, who can forget the drafting contortions of the Section 115 Reform Act to avoid calling the general designated agent by its true name.
But the remarkable part is in the re-designation of a different collective, the “new entity”, assuming that a latter-day Diogenes scours the countryside to discover that one can be found that meets the standards. Here’s what’s supposed to happen then:
PERIODIC REVIEW OF DESIGNATION.—Following the initial designation of the mechanical licensing collective, the Register shall, every 5 years, beginning with the fifth full calendar year to commence after the initial designation, publish notice in the Federal Register in the month of January soliciting information concerning whether the existing designation should be continued, or a different entity….
If a new entity is designated as a mechanical licensing collective, the Register shall adopt regulations to govern the transfer of licenses, funds, records, and administrative responsibilities from the existing mechanical licensing collective to the new entity.
Now…I know that they don’t worry themselves too much about the details in Washington (which can always be fixed through ever more regulations after all), but what if the collective being replaced by the designated “new entity” has made a substantial investment in its operations. This will be particularly true of the first collective.
Since the MMA doesn’t really state it, who will own the global rights database for example? That database of databases? The collective is going to have to manage that database and get it built (unless they outsource it to Google, I guess). That database will be the core asset of the collective’s business in all likelihood. Is it to have zero value? Is the Register going to be able to just take it? (There’s that word again.)
If you happen to be a publisher that has not been allowed to enter a direct license with digital music services, what assurances are there that there will be no interruption in your cash flow to be paid by the collective when the designated new entity takes over? This will not be a trivial undertaking, especially since the collective will control the revenue for every song ever written or that ever will be written that is exploited in the US and is not subject to a direct license.
If you’re an investor in a publisher that is owed money by the collective, is this “new entity” risk likely to drive up your valuation or multiple? Or drive it down?
And don’t forget that the MMA allows the collective to invade the black box for operating cost overages. If the Congress doesn’t fix the black box invasion problem, what assurances to you have that your black box money once taken will be replaced properly and timely? (Assuming the Congress will let the collective get away with what would very likely be a breach of fiduciary duty absent Holy Potomac Water being sprinkled on it.)
If you are the designated “new entity” what kind of indemnification against claims for improper accounting or audits will you be able to get from your predecessor? If you’re the predecessor, why would you ever give such indemnification? You’re likely out of business as there probably won’t be much of a market for former collectives. And will any of the collective’s board members stand behind those indemnity claims?
And the lobbyists say but the MMA can get passed! And that’s the most important thing!