Month: December 2018

Postdicting the Present: Five Things Congress Could Do For Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 1: Pre-72 Sound Recordings

In 2013, I wrote 5 articles on Huffington Post titled “5 Things Congress Could Do That Wouldn’t Cost Taxpayers a Dime”. After the MMA, how did I do?

Artist Rights Watch--News for the Artist Rights Advocacy Community

[This series first appeared in the Huffington Post on July 26, 2013–lets see how I did now that music is all modern and chrome.]

In this and future posts, I will be addressing five things the Congress could do for music creators that are easy to do and that would help develop an online market for music. First up is a slightly esoteric, but important area: royalties paid by companies like SiriusXM for sound recordings made before 1972.

Many of us in the music business know that songwriters and recording artists are financially worse off under the “new boss” than they were under the “old boss.” We have watched older artists “die on the bandstand” because the royalty or residual income they had counted on to support them in their retirement began evaporating with the arrival of the Internet in their lives. We have watched younger artists and songwriters essentially…

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Ethical Props–How Streamers Can Empower Fans on the Path to Sustainability 

[This post first appeared in the MusicTechPolicy Monthly Newsletter, if you’d like future issues, subscribe to email updates for MusicTech.Solutions]

After the one-time pop of Spotify’s public stock offering cash-out, the new reality is going to be increasingly obvious–we’re stuck for at least a generation with trading high margin physical for low-to-no margin streaming royalties.  That stock-fueled sugar high created a near-total dependence on big minimum guarantees and non recoupable payments from streamers–if you could get those payments.  But the bad thing about non-recurring income is that it’s non-recurring. Spotify’s stock price is already testing lower lows near the $110 level, $7 above it’s 52 week low, but $80 below its 52 week high.

Now what?  I’ve heard a lot of discussion about my “Ethical Pool” approach to streaming royalties, but any “user-centric” model isn’t going to fix the low-to-no margin streaming royalty problem by itself.  The streaming hole is dug too deep.   
Strange as it may seem, streamer Tencent from the People’s Republic of China may have started a helpful social trend, and Apple is translating that trend into a business practice. Both companies present a teachable moment and an opportunity for the Ethical Pool’s mutual opt-in by fans and the artists they love in the form of micropayments I will call “Ethical Props”.

There’s three obvious things we know about streaming if we know nothing else:  Everyone who works for Spotify got even richer in their stock market cashout while the overwhelming majority of artists and songwriters on the service languish;  per-stream royalties are pitiful which matters if you don’t get minimum guarantees;  plus streamers lose money because they spend too much on overhead, especially salaries and rent.

There’s a less obvious problem we know but that doesn’t come up very often–streamers don’t empower fans to reward the artists they love, much less the songwriters who write the music it all starts with.  Imagine if fans could actually give money directly to their artists (and sign up for direct communications outside of the service).

But–thanks to inspiration from Tencent’s “virtual gift” feature, artists may have renewed negotiation leverage in actually getting streamers to empower fans to make direct contributions to the artists they love in the form of small “Ethical Prop” payments.  Of course, in order to be entitled to be “ethical” handle, the streaming services–including Tencent–will have to make some changes in their current business practice.

Which should be welcomed by all concerned.  As Sony Music as well as Taylor Swift and Universal Music Group recently demonstrated, ethical business is good business.  Both labels have agreed to pass through to artists a share of each label’s Spotify stock windfall on a non-recoupment basis–we’ll come back to that nonrecoupment part.

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.
That sounds like these guys read the blog!

But–how to make “music-centric social entertainment services” into the Ethical Props? First, the streamer needs to take a smaller cut and they need to do some “Artist Services” work for their share.  If you want to get paid for artist services, then serve the artist for your payment (to get all antimetabole about it).

Spotify and Apple need to create the infrastructure that invests fans with the power to directly support the artists they love.  This empowerment will become increasingly important as more and more fans get woke with the main driver of the Ethical Pool–fans discovering that the very large lion’s share of the subscription fee they pay goes to music they don’t listen to performed by artists they’d never listen to. This ought to apply to both ad-supported and subscription services.

In addition to the Ethical Prop button, services need to empower fans to connect directly with the artists they love through an email list if the artist has one.  
In the background, the service may facilitate transactions like a “Fulfilled by Amazon” service that generates a 1099K (like Kickstarter) or an Apple in-app purchase.  In fact, the Chinese 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.)

Following Apple’s lead, Ethical Props should be given at the option of the fan and 100% of the funds should go to the artist directly (but not in lieu of a royalty).  Because the payment is optional for the fan, micropayments ought not to be taken into account in any rate setting hearing or negotiation.

And here’s where the “nonecoupable” issue returns–these monies should be paid directly each artist who opts-in to the feature.  Sony and Universal learned to leave some on the table–we’ll see how far that goes.  But certainly independent creators should get the benefit of 100% of any Ethical Prop.

On the songwriter side–now that lyrics are so prevalent and even Spotify is adding songwriter credits, it should be pretty simple for the discerning fan to give an Ethical Prop to a credited songwriter if the songwriter opts in to the Ethical Props.

So like the Ethical Pool, the Ethical Prop is bilateral–both fan and artist have to opt into the transaction.  If the streamer wants to provide a service to handle any required income or sales tax reporting (although it’s likely that none of these transactions will be significant enough to trigger a 1099), then that might justify a cut.  Maybe.


Ethical Props present a win-win opportunity for services and all artists that want to break the headlock of hyper-efficient market share distributions on streaming services.  As we all know and Tencent acknowledges, sustainability requires more than a per-stream royalty that starts 2, 3 or even 4 decimal places to the right.

As the Spotify sugar high starts to crash, Ethical Props may provide an important counterpart to the Ethical Pool.

Why Will Spotify’s Stock Price Tank?

Stocks go up, stocks go down, can’t pick a top and can’t pick a bottom.

However–Spotify is a particularly interesting stock for a number of reasons, mostly having to do with the nature of the initial offering.  Remember, Spotify did not offer shares in an “initial public offering,” they used an untried method called a “direct public offering.”

The difference is crucial.  In an IPO, or as it’s more precisely known, a “full commitment underwriting,” the company (or “issuer”) actually raises money through selling new shares of stock to a group of investors, usually banks.  These investors are often called “underwriters”.  In the case of a full commitment underwriting IPO, the company sells shares to an underwriting group (or “syndicate“) and the syndicate then sells those shares to the public after the syndicate decides the valuation of the company and the price of the shares of stock.

This is completely different from the direct public offering.  There are no new shares, there is no syndicate, and the price is set (or was for Spotify) by reference to the price of shares selling in the private market immediately before the public is able to buy–and my bet is that the DPO price was a lot higher than an IPO price would have been.  (Dropbox, for example, priced at $21 and closed at $28.48 on its first day of trading.  Facebook priced at $38, Google at $85, Alibaba $68, Amazon was $18.   All had different valuations, of course.  Spotify priced at $132 using a loophole from the SEC.  And what goes up, must come down.)

So, you may ask, if the issuer doesn’t sell shares to an underwriting syndicate, where do the shares come from?

The shares come from insiders at the company and any other shareholder, employee, record company, other investors already holding shares who want to get out.  All of these insiders have an incentive to keep the share price as high as they can before they get their shares sold to the bigger fool…sorry, I mean to other investors.

According to a puff piece that Spotify’s lawyers conveniently wrote and published at a Harvard Law School meeting (wonder who paid for that), Spotify identified three goals in their DPO:

  • Offer greater liquidity for its existing shareholders [translation: existing shareholders can cash out], without raising capital itself and without the restrictions imposed by standard lock-up agreements

  • Provide unfettered access to all buyers and sellers of its shares, allowing Spotify’s existing shareholders the ability to sell their shares immediately after listing at market prices [this essentially repeats benefit #1]

  • Conduct its listing process with maximum transparency and enable market-driven price discovery

That last one is utter gibberish as the SEC takes care of the transparency through Form S-1 (or F-1 in Spotify’s case as a foreign filer) and Regulation S-K. The first point is really two related but different goals:  lockup agreements bar employees and key holders from dumping their stock for a typical 180 day period.  This is to avoid high employee turnover after a public offering the way we’ve seen at companies like…you know…Spotify.  It’s generally thought that losing key employees is bad for shareholders, so that’s why every mother’s daughter has lock up agreements. It’s also hard to recruit replacements when the insiders are selling, especially if the stock is tanking.

And one can’t help noticing that building a sustainable business model for long-term shareholder value and artist longevity is not on the list.

Anyway…if you look at the following chart, you’ll see some interesting patterns developing over the short history of Spotify’s stock.  I don’t put a lot of trust in chart analysis, but some people do and it is one of the few things we have to rely on in this case because there is so much insider activity.

You’ll notice that there’s something of a “head and shoulders” pattern emerging when the stock reached its high on July 26, 2018 of $196.28.  This pattern is often associated with a move to the downside, sometimes a sharp move to the downside.

Spot 12-17-18

Sure enough, the stock went into a sputtering dive the next day and the dive has continued ever since.  Note that at the high, volume was rising.  The low volume of Spotify stock is another one of the untold stories and is another suggestion of price management in the background.

Once the downside move became apparent, which was about October 10, downward pressure accelerated on rising volume (relatively speaking since volume is low).  A couple weeks later, more sell signals confirmed the downside move.

Spot Projection 12-17-18

One signal that I found significant was the 50 and 100 day moving averages of the stock price crossed to the downside on October 22, which also happened to be the date that the stock traded and closed at $148.54–below $149.01, the closing price on the first day of trading.

Starting with the high at the head and shoulders formation, the stock has more or less collapsed on about a 45 degree downward angle ever since.  Why is that?  Possibly because the stock was priced too high to begin with.  Some people think that SPOT is just reacting to the overall market sell-off.  I don’t think that is true as SPOT has not moved in relation to the market since inception.  SPOT was higher on the market highs and lower on the market lows, so I don’t see the coupling argument at all.

Plus, Spotify announced a $1 billion stock buy back, so the price is rapidly declining in spite of the buyback.  Perhaps if Spotify had made a tender offer for shares at a fixed price, they could have supported the stock more successfully.

Based on the stock’s recent history, it would not be surprising to see SPOT retrace some of its collapse and rise to something in the $120-$130 range by the end of the year.  Then I suspect that it will decline to approximately $95 around the end of January.

After that, we shall see.  Obviously, this is not investment advice, just speculation based on some guesses derived from the chart.  But the chart is relevant because there’s unlikely to be any real change in the company’s financial position in the next six weeks.

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, but assigns a $114.89 price based on a probability analysis.  About where it is now, in other words.  His post in Seeking Alpha (“Spotify Has A Valuation Problem”) is a must read if you’re interested in financial analysis.

Spotify closed today at $116.50, down $2.17 in after hours trading.