RIP Jay Frank: 2012 Podcast Interview

Very sad to hear of the passing of Jay Frank, one of the great innovators in digital music.  By way of tribute to his over the horizon and around the corner thinking, I thought I would share a podcast interview from 2012 when he had just founded DigSin and he had invited me to participate in the Leadership Music Digital Summit in Nashville circa 2012.

Jay was a guy who both had big ideas and could execute.   Damn few.

 

The Return of the Ethical Pool: @marchogan on User Centric Royalties

Marc Hogan has an interesting post on Pitchfork about “user centric” royalties.  (“Is There a Fairer Way for Streaming Services to Pay Artists?”)

He echoes the common arguments about user centric.  These theories are mostly about  comparisons to the current model of the “big pool” and its hyper-efficient market share distribution of streaming service revenues.  Or as Mr. Hogan puts it, a direct democracy vs. electoral college approach.  (Let’s remember what happened when the Greeks tried direct democracy.)

It’s not just that user centric is fair.  Life ain’t fair.  It’s that the big pool model is wildly inaccurate and deceives fans.  The problem with user centric isn’t that it’s too complex, it’s that by comparison the “big pool” method isn’t complex enough.

And let’s also realize that when you pay artists’ at a royalty rate that starts several decimal places to the right, there is no measurable downside in “not playing”–or withdrawing from the service altogether.  So the alternatives are not direct democracy or electoral college, it’s the much simpler choice of in or out.  If you don’t give me a good reason to be in, and if by being in I cannibalize higher margin sales, then maybe I just sit this one out.  (Hundreds of Quebec artists made this point recently.)

Of course, I’m willing to be educated otherwise, but it seems that the really simple thing would be to have a fixed per-play rate.  That’s definitely not true now, which makes this statement a bit bizarre:

Spotify’s chief economist, Will Page, has raised a couple of points in defense of the existing model. Under the current system, every time you stream a song, it has the same value….

If by “value” they mean “same pennies”, that is definitely not true in the big pool model.  Some labels have complex greater-of formulas (not to mention breakage and minimum guarantees) so while the streams may be counted the same (no bonus plays), the per play rates are definitely not identical.  That’s a big reason it takes so long to close Spotify’s label deals.  (There are two ways to juice royalties–play with the units (the plays for streaming) or play with the royalties (the micro pennies for streaming).  Streamers play with the royalties.  So far.)

I don’t underestimate the complexity in running the big pool and the true user centric models side by side under the same roof.  That is what makes it complex.  I have a solution to this challenge I call the ethical pool that is an intermediate step between the two that allows both to co-exist if the fans and the artists elect it to be so.  The problem the ethical pool seeks to solve is best summarized by a fan:  “Sick of my money funding crap”.

Mr. Hogan also makes another interesting point courtesy of ex-Spotify economist Will Page:

The biggest argument against the user-centric model is that it could be too complex. Calculating payouts based on every individual user’s listening is, inevitably, more complicated than just adding up the total and divvying up the pot. The extra administrative cost—say, figuring out what each person’s streams are worth each quarter and then distilling that into a semi-coherent pay statement—could actually leave artists with less money to go around, Page has maintained in a paper co-authored with an executive from music-licensing giant ASCAP. Changing systems wouldn’t be the right decision if it ends up hurting the people it’s supposed to help.

So it appears that Will is making a fundamental error here (presumably on behalf of Spotify).  The question is not whether Spotify will pass through its administrative costs to the artists.   Those costs come out of Spotify’s share.  I simply cannot imagine Apple or Amazon trying to pass along their costs of accurate accountings to the artists.  Google would certainly, but not the real competition for Spotify.

The question is which floor of the World Trade Center is Spotify going to sacrifice to cover these costs?

Is Spotify Stock Quietly Tanking?

Analyst Mark Hake has developed three different scenarios for where Spotify’s stock price will be in 2021:  $125.68, $61.42 and $38.39.  He assigns a $114.89 price based on a probability analysis.  About where it is at the close today, in other words.  His post in Seeking Alpha (“Spotify Has A Valuation Problem”) is a must read if you’re interested in financial analysis.

As analyst BNK Invest noted after the close last Friday (9/20):

In trading on Friday, shares of Spotify Technology SA (Symbol: SPOT) entered into oversold territory, hitting an RSI reading of 26.8, after changing hands as low as $120.63 per share. By comparison, the current RSI reading of the S&P 500 ETF (SPY) is 56.4. A bullish investor could look at SPOT’s 26.8 RSI reading today as a sign that the recent heavy selling is in the process of exhausting itself, and begin to look for entry point opportunities on the buy side.

This chart is from today’s trading and it reveals a couple interesting patterns–they may mean nothing, but then again they might.  It’s not so much that Spotify is now trading about $20 below its self-assigned private company valuation of $135.  That’s not a comfortable feeling as it says that investors would have been $20 a share better off if the company had never had its controversial direct public offering (or “DPO”) and just stayed private.

Spot 9-24
Trading on 9/24/19 only\

What’s interesting about this chart is not so much the price but rather the volume.  Spotify is a very thinly traded stock that typically has relatively low volume.  When you see larger volume around the opening and the close of trading it may indicate certain motivations of sellers.  Particularly if there are holders of large blocks of shares that want to slip out of their position when nobody is (a) noticing or (b) can do much about it.

Because of the nature of the DPO, Spotify doesn’t have the typical underwriting syndicate that helps to keep the price somewhat stable to allow the stock to establish a trading range with support levels.  Instead of the underwriters selling to the public, Spotify insiders are selling their shares to the public, which then of course can be resold.  In an underwritten public offering, insider shares are usually subject to a “lock up” period where insiders cannot sell their shares for a period of time, say 90 to 180 days after the first public offering.

Spotify had no lock up on insiders.  So who has an incentive to sell their shares relatively quickly?

It’s hard to know who is doing the selling unless you’re a transfer agent with access to the master shareholder list, and they probably wouldn’t disclose that information for anyone under certain thresholds.  But it is odd and it’s been similar patterns for a week or so.

Spot 5 days 924

A Little Context: Texas Leads 50 State Coalition Investigating Google

Google is finally getting some pushback from the nation state.  Texas Attorney General Ken Paxton is leading a broad coalition of state attorneys general into Google’s business practices starting with violations of state antitrust laws.

According to the Washington Post:

The states’ investigation is led by Texas’ Paxton and seven other attorneys general, four Democrats and four Republicans in total. Every state except Alabama and California, the home of Silicon Valley, so far has signed onto the bipartisan effort, as have Puerto Rico and the District of Columbia. A spokeswoman for California’s attorney general did not immediately respond to a request for comment.  [Gee, I wonder why?]

…Another group of 11 state attorneys general — led by New York’s Letitia James — has begun their own probe against Facebook, exploring whether it violates competition laws and mishandles consumers’ personal information.

Google also disclosed in an 8-K filing with the SEC that they’d received a “civil investigative demand” from the Department of Justice:

On August 30, 2019, Alphabet received a civil investigative demand from the DOJ requesting information and documents relating to our prior antitrust investigations in the United States and elsewhere. We expect to receive in the future similar investigative demands from state attorneys general. We continue to cooperate with the DOJ, federal and state regulators in the United States, and other regulators around the world.

Sending a CID is how these things usually start.  A CID is a discovery request that is similar to a demand for production of documents, oral testimony or answers to interrogatories.  How did this whole state AG thing evolve?  A little context.

Mississippi Attorney General Jim Hood tried a similar approach with Google in 2014 and was immediately set upon by Google’s lawyers and the “policy” groups it funds like the Electronic Frontier Foundation, R Street, Engine Advocacy and others.  While General Hood didn’t exactly win that, he didn’t really lose it either.

General Hood invited me to be on a panel he moderated at the 2013 summer conference of the National Association of Attorneys General.  The panel topic was “Intellectual Property Crimes Online: Dangerous Access to Prescription Drugs and Pirated Content”.  General Hood spoke on “Google Guiding Consumers Down Illegal Paths.”  My topic was “Protecting Consumers and Advertisers from Unfair Trade Practices,”  which was essentially a briefing on how Google played a central role in brand-sponsored piracy by duping advertisers on both pirate sites and Google’s own properties like YouTube (starting with duped advertiser #1, President Barack Obama).

I have to say that speaking to 50 AGs at the same time is a rather sobering experience.  As our panel presented the case against Google, it was probably the first time that I realized my standing joke that Google opposed the nation state actually wasn’t a joke.  At all.

After talking with some of the AGs who attended our panel, it became apparent that some of them were learning for the first time of the company’s profits from piracy and selling ads against recruitment videos on YouTube for salafi jihadism.  When Google called out all of the dogs on General Hood a few months later to get an injunction that stopped enforcement of Mississippi’s CID, the company’s antics only confirmed to the AGs that it would take a village to challenge the most powerful media company in commercial history.

That epiphany led to 40 attorneys general filing an amicus brief supporting General Hood in the appeal of the aptly titled case of Google v. Hood that crystalized the issue before the 5th Circuit:

This is a case about the authority of state Attorneys General to exercise one of their fundamental powers: the ability to investigate potential violations of state law. What should be a routine discovery dispute in Mississippi state courts, resolved under established state procedures…has instead evolved into a contrivance for a company doing business in the state of Mississippi to invoke federal jurisdiction by asserting potential affirmative defenses to claims that have never been filed.

The NAAG conference and General Hood’s efforts resonated with me, too.  Not to quote myself, but I think this 2017 post about then Missouri AG Josh Hawley’s consumer protection subpoena of Google captures what just happened:

One of Google’s worst policy nightmares is that state attorneys general will wake up to their obligation under state laws to protect both consumers and advertisers from Google’s overreach.  This would potentially force Google to answer for its actions in 51 jurisdictions–some state laws that are essentially common to all 50 states plus the federal government.  These state laws include consumer protection statutes and unfair competition or state antitrust rules that are not overriden (or “preempted”) by simultaneous federal jurisdiction.

Since General Hood got the Full Google (the only thing missing was the fake petitions and Open Media tools), there have been a few efforts by state AGs like Josh Hawley (now Senator Hawley).  While the current case may seem to come out of the blue, it is really the next step in the evolution of the response of dealing with Google as a white collar crime law enforcement matter.

Spotify Conquers Wall Street Update

Music Business Worldwide reports that the Spotify corporate biography book is now being shopped as a TV series:

Yellow Bird UK, a Banijay Group company, has optioned the screen rights for Sven Carlsson and Jonas Leijonhufvud’s tell-all novel, Spotify Untold (Spotify Inifrån).

The book is currently in development for a limited series which “will examine how a secretive start-up wooed record companies, shook the music industry to its core, and conquered Wall Street,” according to a press release.

Let’s see how the conquered are reacting today:

SPOT 8-28-19

Note that Spotify has once again conquered its 200, 100 and 50 day moving averages to the downside.  Roughly speaking, in the last 12 months of trading the SPOT stock has traded near or below its benchmark closing price on the first day of trading. about 70% of the time.  It has also traded below its private company valuation (the “reference price” in the case of a direct public offering like Spotify) about 30% of those trading days including yesterday.  If that continues, SPOT investors would have been better off staying private–except for the insiders who cashed out, of course.

And it’s still loss making and just got served with an existential copyright infringement lawsuit that may eliminate the Music Modernization Act safe harbor altogether.  Just another day in Stockholm.

All hail the conquering hero.

@musictechsolve: Vote for Creator and Startup Licensing Education at SXSW

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Click Here to Vote on Panel Picker

I have a workshop in the SXSW.edu track titled “TEACHING ARTIST ROYALTIES TO CREATORS AND STARTUPS.”  It follows my philosophy that we need smart artists and smart startups to work together if we all are to succeed.

The workshop has three purposes:

–A building block approach to teaching artists and songwriters about the principal royalty streams that sustain them.  This is targeted financial literacy which is as critical to artists and songwriters as balancing your checkbook.

–A licensing roadmap overlay for entrepreneurship studies.  It’s far too frequent that entrepreneurs spend more time developing their product roadmap and critical path than they do developing their licensing roadmap side by side with the product.  That way when a startup gets to launch there is less likelihood they will go into the terminal holding pattern or worse–launch without licenses.

–the importance of clean and stable metadata to both artists and startups (and mature companies) and how to accomplish this goal starting with the digital audio workstation.

The class description:

Royalty rates, royalty reporting and earnings are some of the least understood–yet most important–parts of a creator’s career or a startups nightmare. Understanding royalties is as important as understanding how to balance your checkbook. Starting with metadata and simple revenue streams, leading to complex calculations and government run compulsory licenses and sometimes impenetrable royalty statements, the workshop gives educators tools and building blocks to teach the subject.

I’d really appreciate your vote for the class in the SXSW Panel Picker here. To vote, you just need to sign in to PanelPicker or create a free SXSW account with your email only.

Spotify Guides Toward “Tipping” Artists on Earnings Call

MTS readers will recall my post on what I called “Ethical Props” (OK, OK, not the best moniker I’ve ever come up with, but you’ll get the idea if you read the “Ethical Pool” post).  The concept is an expansion of the micropayments that TenCent (and lots of other sites in other businesses) permits on its music platform.  The question presented was whether Spotify would adopt a similar structure and how they would treat artists. That’s a serious question, by the way.

It turns out that the issue came up on Spotify’s latest earnings call, and was foreshadowed by Daniel Ek’s interest in Facebook’s Libra currency.  Stuart Dredge at Music Ally reports that the subject did come up:

Spotify IS interested in ways for fans to tip artists

Earlier this month, Spotify’s chief premium business officer Alex Norström hinted that the company was exploring the idea of new ways for artists to make money on its service: “You can add stuff on top like micro-payments, a la carte, prepaid plans for different contexts…”

Ek was asked about direct monetisation such as tipping during the earnings call today. “It’s something that we’re overall interested in. We definitely look at it as part of the scope of the types of marketplace tools that you can expect,” he said. “You should expect us to try a lot of things… it certainly could be very interesting specifically for a lot of artists…”

First…does anyone know what a “chief premium business officer” is?  I’m not familiar with that one, although my best is that they probably office next to the “chief exposure business officer.”

Quick review–Mr. Ek’s buddies at TenCent have made quite a business of “tipping” which explains why Ek is interested:

Simply put, Tencent allows users (all users, subscription or ad-supported service) to make virtual gifts in the form of micropayments directly to artists they love.  (The feature is actually broader than cash and applies to all content creators, but let’s stay with these socially-driven micropayments to artists or songwriters.)

Tencent, of course, makes serious bank on these system-wide micropayments.  As Jim Cramer noted in “Mad Money” last week:
“Tencent Music is a major part of the micropayment ecosystem because they let you give virtual gifts,” Cramer said. “If you want to tip your favorite blogger with a song, you do it through Tencent Music. In the latest quarter we have numbers for, 9.5 million users spent money on virtual gifts, and these purchases accounted for more than 70 percent of Tencent Music’s revenue.”

And that’s real money.  Tencent actually made this into a selling point in their IPO prospectus:  “We are pioneering the way people enjoy online music and music-centric social entertainment services. We have demonstrated that users will pay for personalized, engaging and interactive music experiences. Just as we value our users, we also respect those who create music. This is why we champion copyright protection-because unless content creators are rewarded for their creative work, there won’t be a sustainable music entertainment industry in the long run. Our scale, technology and commitment to copyright protection make us a partner of choice for artists and content owners.”
How Spotify will approach the subject has a lot to do with how they perceive their artist relations problems.  The chances are good that Spotify don’t think they have an artist relations problem.
But they do.  As I often say, if screw ups were Easter eggs, Daniel Ek would be the Easter Bunny, hopping from one to another until he had picked them all up in his basket.  (A nondenominational Easter bunny, of course.)
He could either pass through 100% of the “tip” which would make it “Ethical” as we define it, or he could take a cut like TenCent which wouldn’t.
The dreaded Apple is already in the act to a degree:
[TenCent’s] micropayments reportedly influenced Apple to change its in-app purchase policies, which make a good guideline for putting the “ethical” into an Ethical Prop:
“Apps may enable individual users to give a monetary gift to another individual without using in-app purchase, provided that (a) the gift is a completely optional choice by the giver, and (b) 100% of the funds go to the receiver of the gift. However, a gift that is connected to or associated at any point in time with receiving digital content or services must use in-app purchase.”

(That’s section 3.2.1(vii) in Apple’s App Store Review Guidelines for those reading along at home.)

So watch this space–let’s see what choices they make.