It’s a nice story, but it’s just that. Just a story.
from Snatch, written by Guy Richie
You may have noticed that there is a multi-part Netflix miniseries called “The Playlist” that is based on this book:
“The Spotify Play: How CEO and Founder Daniel Ek Beat Apple, Google and Amazon in the race for audio dominance” is an English translation of Spotify Inifrån, the Swedish book that all of this is based on, which I understand is loosely translated as “Spotify Untold” or as the inside story of Spotify. How it got from “Spotify Untold” to a title straight out of a corporate comms department of failed English majors is anyone’s guess. But notice that the book has now been refocused on the really important story–ahem–of how Daniel Ek crushed the competition and secured his monopoly on global music, or as he calls it “audio”.
For these authors to refer to music as “audio” is very much in line with the story of Spotify’s business model that Daniel Ek tells to Wall Street (which is, in all likelihood, the important audience for all this from Spotify’s perspective). Listen to any Spotify earnings call and you’ll hear what I mean.
The somewhat maniacal focus on global dominance is also interesting when you think about the fact that Daniel Ek uses the 10:1 voting stock he retains to be in global control of music streaming which may explain why Spotify’s algorithms always seem to say “Bieber.” He might want to be a bit careful about the “dominance” word.
Just in time for the Netflix debut, Spotify’s stock has tanked. Which begs the question of why Spotify was ever a public company to begin with. But that’s a story for another day. Here’s what “beating” Apple, Google and Amazon looks like (the straight red line across the bottom of the chart is where Spotify closed on its first day of trading):
You’ll notice that this chart is the relative growth on a percentage basis of all these stocks measured over the same time period. Spotify briefly outperformed the others during COVID, but now is easy to find because it is the one with the minus sign in front of its growth rate.
The authors display more enthusiasm toward Ek than readers are likely to have (they call frequent lies in his personal life “entrepreneurial hustle,” and spend pages writing about the “headaches” behind his multimillion-dollar homes), and let some of his surprising claims slide as quirks, as with an account of Ek insisting Steve Jobs was calling him to breathe over the phone and intimidate him.
I think if you do the timeline of this Steve Jobs anecdote, you will find it particularly odd because Steve was kind of busy at that time. He was busy dying. Which makes the anecdote both troubling and kind of sick.
I happened to have a chat with a Hollywood film executive–let’s call him/her “Bubba”–about the Netflix miniseries and the odd way that a book in Swedish was set up for production at Netflix at lightning speed without ever being on a best seller list or gaining an audience.
“Smell that?” said Bubba, doing an impression of Robert Duvall in Apocalypse Now. “Nothing else in the world smalls like that. Smells like…astroturf.”
Really? I said. Which part?
“All of it,” Bubba said. “But look, it’s just a story. A bunch of workers got paid to tell a story that some rich guy wanted told a certain way. Those workers may go on to do something important like send their kid to college or write the next Citizen Kane or Chinatown. Or Dirty Harry for that matter. But this month they could pay for gas and their mortgage. Just another day in Hollywood. Let’s get the steak tartare.”
So lots of questions about how this book came to be written and miniseries came to be made. The solution is likely the same as it is for radio payola–disclosure.
Look at Spotify’s “Global Top 50” playlist on any day and the world’s biggest music service will show all or nearly all English language songs. With few exceptions these songs are performed by Anglo-American artists released by major record companies.
These “enterprise” playlists largely take the place of broadcast radio for many users where Spotify operates and Spotify competes with local radio for advertising revenue on the free version of Spotify.
However, Spotify has not been subject to any local content protections that would be in place for local radio broadcasters. Enterprise playlists that exclude local music contributes to the destruction of music economies, including performers. Local performers struggle even more to compete with Anglo-American repertoire, even in their own countries.
Due to this phenomenon, local artists are forced to compete for “shelf space” with everyone in their local language and then the Anglo-American artists and their record companies. This also means that local artists compete for a diminishing share of the payable royalties. The “big pool” revenue share method of royalty compensation is designed to overcompensate the English-language big names and reduce payments to artists performing in other languages in their own country.
Local Content Rules
Many countries implement local content broadcast rules that require broadcasters to play a certain number of recordings performed by local artists or indigenous people, songs written by local songwriters in local languages, or recordings that are released by locally-owned record companies.
Because streaming playlists, especially Spotify enterprise playlists or algorithmically selected recordings, are an equivalent to broadcast radio, there is a question as to whether national governments should regulate streaming services operating in their countries to require local content rules. Implementing such rules could benefit local performers and songwriters in an otherwise unsustainable enviornment.
The Fallacy of Infinite Shelf Space
Because Spotify adds recordings at a rate of 60,000 tracks daily (now reports of 100,000 tracks daily) and never deletes recordings, there is a marked competitive difference between a record store and Spotify. In the record store model, artists had to compete with recordings that were in current release; in the Spotify model, artists have to compete will all recordings ever released.
Adding the dominant influence of Anglo-American recordings on Spotify, the “infinite shelf space” simply compounds the competitive problems for non-English recordings.
Streaming RemunerationHelps Solve the Sustainability Crisis
The streaming remuneration model requires streaming services—not record companies—to pay additional compensation to nonfeatured and featured performers. Streaming remuneration would be created under national law and is compensatory in nature, not monies in exchange for a license. Existing licenses (statutory or contractual) would not be affected and remuneration payments could not be offset by streamers against label payments or by labels against artist payments.
Each country would determine the amount to be paid to performers by streaming services and the payment periods. Payments would be made to local CMOs or the equivalent depending on the infrastructure in the particular country.
European Corporate Dominance
It must also be said that the two founders of Spotify hold a 10:1 voting control over the company through special stock issued only to them. This means that these two Caucasian Europeans control 100% of the dominant music streaming company in the world. For comparison, Google and Facebook have a similar model, while Apple has a 1 share 1 vote structure as does Amazon (although Jeff Bezos owns a controlling interest in Amazon).
The net effect is that the entire global streaming music industry is controlled by six Caucasian males of European descent. This demography also argues for local content rules to protect local performers from these influences that have produced an English-only Global Top 50 playlist.
Local governments could consider whether companies with the 10:1 voting stock (so-called “dual class” or “supervoting” shares) should be allowed to operate locally.
Countries Can Respond to Streaming’s Homogenized Algorithmic Playlist Culture
Many national cultural protection laws have a history of sustaining local culture and musicians in the face of the Anglo-American Top 40 juggernaut. There is no reason to think that these agencies are not up for the task of protecting their citizens in the face of algorithms and neuromarketing.
Emmanuel Legrand prepared an excellent and important study for the European Grouping of Societies of Authors and Composers (GESAC) that identifies crucial effects of streaming on culture, creatives and especially songwriters. The study highlights the cultural effects of streaming on the European markets, but it would be easy to extend these harms globally as Emmanuel observes.
For example, consider the core pitch of streaming services that started long ago with the commercial Napster 2.0 pitch of “Own Nothing, Have Everything”. This call-to-serfdom slogan may sound good but having infinite shelf space with no cutouts or localized offering creates its own cultural imperative. And that’s even if you accept the premise the algorithmically programed enterprise playlists on streaming services should not be subject to the same cultural protections for performers and songwriters as broadcast radio–its main competitor.
[This] massive availability of content on [streaming] platforms is overshadowed by the fact that these services are under no positive obligations to ensure visibility and discoverability of more diverse repertoires, particularly European works….[plus] the initial individual subscription fee of 9.99 (in Euros, US dollars, or British pound) set in 2006, has never increased, despite the exponential growth in the quality, amount of songs, and user-friendliness of music streaming services.
Artists working new recordings, especially in a language other than English, are forced to fight for “shelf space” and “mindshare”–that is, recognition–against every recording ever released. While this was always true theoretically; you never had that same fight the same way at Tower Records.
This is not theoretically true on streaming platforms–it is actually true because these tens of millions of historical recordings are the competition on streaming services. When you look at the global 100 charts for streaming services, almost all of the titles are in English and are largely Anglo-American releases. Yes, we know–Bad Bunny. But this year’s exception proves the rule.
And then Emmanuel notes that it is the back room algorithms–the terribly modern version of the $50 handshake–that support various payola schemes:
The use of algorithms, as well as bottleneck represented by the most popular playlists, exacerbates this. Furthermore, long-standing flaws in the operations of music streaming platforms, such as “streaming fraud”, “ghost/fake artists”, “payola schemes”, “royalty free content” and other coercive practices [not to mention YouTube withholding access to Content ID] worsen the impact on many professional creators….
This report suggests solutions to bring greater transparency in the use of algorithms and invites stakeholders to undertake a review of the economic models of streaming services and evaluate how they currently affect cultural diversity which should be promoted in its various forms — music genres, languages, origin of performers and songwriters, in particular through policy actions.
MTS readers will recall my extensive dives into the hyperefficient market share distribution of streaming royalties known as the “big pool” compared to my “ethical pool” proposal and the “user centric” alternative. As Emmanuel points out, the big pool royalty model belies a cultural imperative–if you are counting streams on a market share basis that results in the rich getting richer based on “stream share” that same stream share almost guarantees that Anglo American repertoire will dominate in every market the big streamers operate.
Emmanuel uses French-Canadian repertoire as an example (a subject I know a fair amount about since I performed and recorded with many vedettes before Quebecoise was cool).
A lot of research has been made in Canada with regards to discoverability, in particular in the context of French-Canadian music, which is subject to quotas for over the air broadcasters which however do not apply to music streaming services. The research shows that while the lists of new releases from Québec studied are present in a large proportion on streaming platforms, they are “not very visible and very little recommended.”
It further shows that the situation is even worse when it is not about new releases, including hit music, when the presence of titles “drops radically.” It is not very difficult to imagine that if we were to swap Québec in the above sentence with the name of any country from the European Union [or any non-Anglo American country], and even with music from the European Union as a whole, we could find similar results.
In other words, there may be aggregators with repertoire in languages other than English that deliver tracks to streamers in their countries, but–absent localized airplay rules–a Spotify user might never know the tracks were there unless the user already knew about the recording, artist or songwriter. (Speaking of Canada, check the MAPL system.)
This is a prime example of why Professor Feijoo and I proposed streaming remuneration in our WIPO study to allow performers to capture the uncompensated capital markets value to the enterprise driven by these performers. Because of the market share royalty system, revenues and royalties do not compensate all performers, particularly regional or non-featured performers (i.e., session players and singers) who essentially get zero compensation for streaming.
Emmanuel also comments on the imbalance in song royalty payments and invites a re-look at how the streaming system biases against songwriters. I would encourage everyone to stop thinking of a pie to be shared or that Johnny has more apples–when the services refuse to raise prices in order to tell a growth story to Wall Street or The City, measuring royalties by a share of some mythical royalty pie is not ever going to get it done. It will just perpetuate a discriminatory system that fails to value the very people on whose backs it was built be they songwriters or session players.
MusicTechPolicy readers will have seen my post about the interest rate paid by the MLC on the rather sizable black box of “unmatched” funds sitting at a bank account (rumored to be City National Bank in Nashville).
That rate was modernized in the Music Modernization Act to be a floating rate: The Federal short term interest rate essentially set by the Federal Reserve. In fact, that particular federal rate is one of the lowest interest rates set by the Federal government and is the kind of interest rate you would want to be obligated pay–very low–if you knew you’d be in the business of holding large sums of money that you wanted to earn interest on yourself and make money on the spread, often called “the float.” (The black box is usually free money, so it’s actually an improvement.). For example, the bank prime loan rate is currently 5.5% that may be a good indicator of what you could get in the way of relatively risk free interest for a big lump sum–if not better for a really big lump sum, say $500,000,000.
The MLC is not, after all, the government, however much that fact might be lost on them. Why should the lowball government rate apply to the MLC instead of a competitive bank rate? Particularly when it comes to the substantial unmatched funds that songwriters and publishers are forced by the government to allow the MLC to hold and for which they control distribution–a bit of the old moral hazard there.
Indeed, you could also express that rate of involuntary saving as “prime plus x” where “x” is an additional money factor like 1%, so the rate floats upward to the songwriters’ advantage. Get some inspiration for this by looking at your credit card interest rate.
You probably have heard that the Federal Reserve is increasing the federal funds rate, and therefore all interest rates that are a function of the federal funds rate including the short term rate that the MLC is required by law to pay on the black box. The Federal Reserve is expecting to keep making significant increases in the federal interest rates in an effort to get inflation under control, which means that the MLC’s black box interest rate will also continue to increase significantly.
A quick recap: The MLC’s short term interest rate was 0.44% in January in keeping with then-prevailing Zero Interest Rate Policy (or the “lower bound”) of the Fed for the easy money years since the crash of 2008. But in August 2022 (that is, now) the MLC’s rate has increased to 2.84% monthly. The modern black box holding period in the Music Modernization Act is pretty clear:
Also recall that the black box is to be held for an arbitrarily modern period of time while the MLC attempts to locate the rightful recipients as is their statutory burden under the MMA. Different numbers are thrown around for this holding period, but a three year holding period seems to be popular and has the benefit of having been modernized in the Music Modernization Act itself (see above). Bear in mind that the first tranche of “historical” black box (“historical” means “late” in this context) was $424,384,787 and was paid in February of 2021–nearly 18 months ago.
Also recall that we were not given any information that I am aware of as to when the services paying this rather large sum of other people’s money first accrued the black box. People who line up on the shorter holding period side of the argument generally favor rapid market share distributions which tends to help the majors; people on the longer holding period of time generally favor redoubled efforts to find the people who are actually owed the money.
The third group is that the MLC should simply find who is owed the money, have the money being held earn the highest rate of risk-free interest possible, and pay all of the interest money to the correct people when found and not have this cutesy limitation on the money factor paid out for holding OPM. Their argument goes something like your government takes away my right to negotiate my own rates, tells me how much I can charge, then makes it difficult to find me but easy to use my song and now you also want to take away the money you say I’m owed and give it to rich people I don’t know before I’ve had a change to claim it and pay yourselves to not do your jobs?
So we are at the midpoint of the three year statutory holding period. Although remember that this is a two pronged holding period of the earlier of 3 years after the MLC got the cash or 3 years after the date the service started holding the money that it subsequently transferred–a different holding period which would likely end sooner than the date the money was transferred to the MLC.
Although we know the date that the money was transferred in the aggregate to the MLC we may not know exactly when the money was accrued without auditing (although you would think that the MLC would release those dates since the timing of the accrual is relevant to the MMA calculation).
According to my reading of the statute, the modernized interest rate would likely attach from the time the money was accrued by the service, so should have been transferred to the MLC with accrued interest, if any. This may be in lieu of or in addition to a late fee. Very modern.
This leaves us with a couple questions. Remember that after the holding period, the black box is to be transferred on a market share basis to all the copyright owners who could be identified based on usage, which includes usage under voluntary licenses that are not administered by the MLC.
So this raises some questions:
Why should the black box be divided up amongst copyright owners who have voluntary licenses and who are not administered by the MLC? They presumably have the most accurate books and statements and may have already had a chance to recover.
What happens to the accrued interest at the time of distribution? Why should the market share distribution include interest on money that didn’t belong to the recipients?
The statute takes the position that the MLC must pay the interest rate but is silent on how much interest the MLC can earn from the bank holding the substantial deposit of the unmatched monies. There’s nothing that requires the MLC to pay over all earned interest.
Here’s a rough justice calculation of 3 years compound interest at current rates with steadily increasing black box. While the holding period started at the .44% rate, I ran the numbers at the 2.84% rate because it was easier–but also left out an estimate of the increase in rates that is surely to come. Since we are at the midpoint of the holding period already, this gives you an idea:
The Securities and Exchange Commission is formalizing ESG disclosures for public companies like Spotify, stating that “[a]s investor demand for climate and other environmental, social and governance (ESG) information soars, the SEC is responding with an all-agency approach” and has taken many actions to require ESG disclosures. It was only a short step for the government to turn disclosure into violations and then turn violations into enforcement:
The Securities and Exchange Commission today announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The task force will be led by Kelly L. Gibson, the Acting Deputy Director of Enforcement, who will oversee a Division-wide effort, with 22 members drawn from the SEC’s headquarters, regional offices, and Enforcement specialized units.
Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations.
So how does streaming music score on the ESG scale? Let’s take Spotify as an example. (This post brings together several others that readers will recognize.). How bad is Spotify’s ESG competence? Seems pretty bad to me, but probably nothing that Spotify bankers at Goldman Sachs and Spotify’s never ending team of revolving door lobbyists and toadies in the Imperial City can’t get them out of with the right amount of campaign contributions.
Spotify has an ESG problem, and a closer look may offer insights into a wider problem in the tech industry as a whole or at least the streaming business that Spotify dominates. (Another 14% of market share and Spotify will hit that Herfindahl-Hirschman Index sweet spot for those keeping score at home–assuming there’s no change in the number of their competitors.)
If the Spotify decade of destroying artist and songwriter revenues isn’t enough to get your attention, maybe the Neil Young and Joe Rogan imbroglio will. But a minute’s analysis shows you that Spotify was already an ESG fail well before Neil Young’s ultimatum. They give a lot of happy talk about “net zero admissions” and their public messaging is full-on Davos as one would expect from a globalist like Daniel Ek, but streaming is their core business and streaming will only get so green. (It’s unlikely that the FAANG companies (Facebook, Apple, Amazon, Netflix and Google) will allow too much to be made out of the dirty data issue because it blows back directly on them. Neither will Senator Ron Wyden from Oregon the data center concierge–wonder why?)
Streaming is an Environmental Fail
I first began posting about streaming as an environmental fail years ago in the YouTube and Google world. While not as existential as Google’s streaming problems, Spotify is equally sanctimonious about how wonderful Spotify is.
It all comes down to this: The Internet in general and streaming in particular are huge electricity hogs.
Like so many other ways that the BIg Tech PR machine glosses over their dependence on cheap energy right through their supply chain from electric cars to cat videos, YouTube did not want to discuss the company as a climate disaster zone. To hear them tell it, YouTube, and indeed the entire Google megalopolis right down to the Google Street View surveillance team was powered by magic elves dancing on appropriate golden flywheels with suitable work rules. Or other culturally appropriate spin from Google’s ham handed PR teams.
In 2011, Microsoft’s top environmental and sustainability executive, Rob Bernard, asked the company’s risk-assessment team to evaluate the firm’s exposure. It soon concluded that evolving carbon regulations and fluctuating energy costs and availability were significant sources of risk. In response, Microsoft formed a centralized senior energy team to address this newly elevated strategic issue and develop a comprehensive plan to mitigate risk. The team, comprising 14 experts in electricity markets, renewable energy, battery storage, and local generation (or “distributed energy”), was charged by corporate senior leadership with developing and executing the firm’s energy strategy. “Energy has become a C-suite issue,” Bernard says. “The CFO and president are now actively involved in our energy road map.”
If environment is a C-suite issue at Spotify, there’s no real evidence of it in Spotify’s annual report (but then there isn’t at the Mechanical Licensing Collective, either). “Environment” word search reveals that at Spotify, the environment is “economic”, “credit”, and above all “rapidly changing.” Not “dirty”–or “clean” for that matter.
The fact appears to be that Spotify isn’t doing anything special and nobody seems to want to talk about it. But wait, you say–what about the sainted Music Climate Pact? Guess who hasn’t signed up to the MCP? Any streaming service. There is a “Standard Commitment Letter” that participants are supposed to sign up to but I wasn’t able to read it. Want to guess why?
That’s right. You know who wants to know what you’re up to because they are damn sure not signing up.
Spotify’s ESG Fail: Social
I started to write this post in the pre-Neil Young era and I almost feel like I could stop with the title. But there’s a lot more to it, so let’s look at the many ways Spotify is a fail on the Social part of ESG.
Before Spotify’s Joe Rogan problem, Spotify had both an ethical supply chain problem and a “fair wage” problem on the music side of its business, which for this post we will limit to fair compensation to its ultimate vendors being artists and songwriters. In fact, Spotify is an example to music-tech entrepreneurs of how not to conduct their business.
Treatment of Songwriters
On the songwriter side of the house, let’s not fall into the mudslinging that is going on over the appeal by Spotify (among others) of the Copyright Royalty Board’s ruling in the mechanical royalty rate setting proceeding known as Phonorecords III. Yes, it’s true that streaming screws songwriters even worse that artists, but not only because Spotify exercised its right of appeal of the Phonorecords III case that was pending during the extensive negotiations of Title I of the Music Modernization Act. (Title I is the whole debacle of the Mechanical Licensing Collective and the retroactive copyright infringement safe harbor currently being litigated on Constitutional grounds.)
The main reason that Spotify had the right to appeal available to it after passing the MMA was because the negotiators of Title I didn’t get all of the services to give up their appeal right (called a “waiver”) as a condition of getting the substantial giveaways in the MMA. A waiver would have been entirely appropriate given all the goodies that songwriters gave away in the MMA. When did Noah build the Ark? Before the rain. The negotiators might have gotten that message if they had opened the negotiations to a broader group, but they didn’t so now they’ve got the hot potato no matter how much whinging they do.
Having said that, you will notice that Apple took pity on this egregious oversight and did not appeal the Phonorecords III ruling. You don’t always have to take advantage of your vendor’s negotiating failures, particularly when you are printing money and when being generous would help your vendor keep providing songs. And Mom always told me not to mock the afflicted. Plus it’s good business–take Walmart as an example. Walmart drives a hard bargain, but they leave the vendor enough margin to keep making goods, otherwise the vendor will go under soon or run a business solely to service debt only to go under later. And realize that the decision to be generous is pretty much entirely up to Walmart. Spotify could do the same.
Is being cheap unethical? Is leveraging stupidity unethical? Is trying to recover the costs of the MLC by heavily litigating streaming mechanicals unethical (or unexpected)? Maybe. A great man once said failing to be generous is the most expensive mistake you’ll ever make. So yes, I do think it is unethical although that’s a debatable point. Spotify has not made themselves many friends by taking that course. But what is not debatable is Spotify’s unethical treatment of artists.
Dissatisfaction with the market centric model has led to a discussion of the “user-centric” model as an alternative so that fans don’t pay for music they don’t listen to. But it’s also possible that there is no solution to the streaming model because everybody whose getting rich (essentially all Spotify employees and owners of big catalogs) has no intention of changing anything voluntarily.
It would be easy to say “fair is where we end up” and write off Ek’s Law as just a function of the free market. But the market centric model was designed to reward a small number of artists and big catalog owners without letting consumers know what was happening to the money they thought they spent to support the music they loved. As Glenn Peoples wrote last year (Fare Play: Could SoundCloud’s User-Centric Streaming Payouts Catch On?,
When Spotify first negotiated its initial licensing deals with labels in the late 2000s, both sides focused more on how much money the service would take in than the best way to divide it. The idea they settled on, which divides artist payouts based on the overall popularity of recordings, regardless of how they map to individuals’ listening habits, was ‘the simplest system to put together at the time,’ recalls Thomas Hesse, a former Sony Music executive who was involved in those conversations.
In other words, the market centric model was designed behind closed doors and then presented to the world’s artists and musicians as a take it or leave it with an overhyped helping of FOMO.
As we wrote in the WIPO study, the market centric model excludes nonfeatured musicians altogether. These studio musicians and vocalists are cut out of the Spotify streaming riches made off their backs except in two countries and then only because their unions fought like dogs to enforce national laws that require streaming platforms to pay nonfeatured performers.
The other Spotify problem is its global dominance and imposition of largely Anglo-American repertoire in other countries. The company does this for one big reason–they tell a growth story to Wall Street to juice their stock price. In fact, Daniel Ek just did this last week on his Groundhog Day earnings call with stock analysts. For example he said:
The number one thing that we’re stretched for at the moment is more inventory. And that’s why you see us introducing things such as fan and other things. And then long-term with a little bit more horizon, it’s obviously international.
Both user-centric and market-centric are focused on allocating a theoretical revenue “pie” which is so tiny for any one artist (or songwriter) who is not in the top 1 or 5 percent this week that it’s obvious the entire model is bankrupt until it includes the value that makes Daniel Ek into a digital munitions investor–the stock.
Debt and Stock Buybacks
Spotify has taken on substantial levels of debt for a company that makes a profit so infrequently you can say Spotify is unprofitable–which it is on a fully diluted basis in any event. According to its most recent balance sheet, Spotify owes approximately $1.3 billion in long term–secured–debt.
You might ask how a company that has never made a profit qualifies to borrow $1.3 billion and you’d have a point there. But understand this: If Spotify should ever go bankrupt, which in their case would probably be a reorganization bankruptcy, those lenders are going to stand in the secured creditors line and they will get paid in full or nearly in full well before Spotify meets any of its obligations to artists, songwriters, labels and music publishers, aka unsecured creditors.
Did Title I of the Music Modernization Act take care of this exposure for songwriters who are forced to license but have virtually no recourse if the licensee fails to pay and goes bankrupt? Apparently not–but then the lobbyists would say if they’d insisted on actual protection and reform there would have been no bill (pka no bonus).
Right. Because “modernization” (whatever that means).
But to our question here–is it ethical for a company that is totally dependent on creator output to be able to take on debt that pushes the royalties owed to those creators to the back of the bankruptcy lines? I think the answer is no.
Spotify has also engaged in a practice that has become increasingly popular in the era of zero interest rates (or lower bound rates anyway) and quantitative easing: stock buy backs.
Stock buy backs were illegal until the Securities and Exchange Commission changed the law in 1982 with the safe harbor Rule 10b-18. (A prime example of unelected bureaucrats creating major changes in the economy, but that’s a story for another day.)
Stock buy backs are when a company uses the shareholders money to buy outstanding shares of their company and reduce the number of shares trading (aka “the float”). Stock buy backs can be accomplished a few ways such as through a tender offer (a public announcement that the company will buy back x shares at $y for z period of time); open market purchases on the exchange; or buying the shares through direct negotiations, usually with holders of larger blocks of stock.
A stock buyback is basically a secondary offering in reverse — instead of selling new shares of stock to the public to put more cash on the corporate balance sheet, a cash-rich company expends some of its own funds on buying shares of stock from the public.
Why do companies buy back their own stock? To juice their financials by artificially increasing earnings per share.
Share Repurchase Program On August 20, 2021, [Spotify] announced that the board of directors [controlled by Daniel Ek] had approved a program to repurchase up to $1.0 billion of the Company’s ordinary shares. Repurchases of up to 10,000,000 of the Company’s ordinary shares were authorized at the Company’s general meeting of shareholders on April 21, 2021. The repurchase program will expire on April 21, 2026. The timing and actual number of shares repurchased depends on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program is executed consistent with the Company’s capital allocation strategy of prioritizing investment to grow the business over the long term. The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. The Company uses current cash and cash equivalents and the cash flow it generates from operations to fund the share repurchase program.
The authorization of the previous share repurchase program, announced on November 5, 2018, expired on April 21, 2021. The total aggregate amount of repurchased shares under that program was 4,366,427 for a total of approximately $572 million.
Is it ethical to take a billion dollars and buy back shares to juice the stock price while fighting over royalties every chance they get and crying poor?
I think not.
Spotify’s ESG Fail: Governance
Spotify has one big governance problem that permeates its governance like a putrid miasma in the abattoir: “Dual-class stock” sometimes referred to as “supervoting” stock. If you’ve never heard the term, buckle up. I wrote an extensive post on this subject for the New York Daily News that you may find interesting.
Dual class stock allows the holders of those shares–invariably the founders of the public company when it was a private company–to control all votes and control all board seats. Frequently this is accomplished by giving the founders a special class of stock that provides 10 votes for every share or something along those lines. The intention is to give the founders dead hand control over their startup in a kind of corporate reproductive right so that no one can interfere with their vision as envoys of innovation sent by the Gods of the Transhuman Singularity. You know, because technology.
Google was one of the first Silicon Valley startups to adopt this capitalization structure and it is consistent with the Silicon Valley venture capital investor belief in infitilism and the Peter Pan syndrome so that the little children may guide us. The problem is that supervoting stock is forever, well after the founders are bald and porky despite their at-home beach volleyball courts and warmed bidets.
Spotify, Facebook and Google each have a problem with “dual class” stock capitalizations. Because regulators allow these companies to operate with this structure favoring insiders, the already concentrated streaming music industry is largely controlled by Daniel Ek, Sergey Brin, Larry Page and Mark Zuckerberg. (While Amazon and Apple lack the dual class stock structure, Jeff Bezos has an outsized influence over both streaming and physical carriers. Apple’s influence is far more muted given their refusal to implement payola-driven algorithmic enterprise playlist placement for selection and rotation of music and their concentration on music playback hardware.)
The voting power of Ek, Brin, Page and Zuckerberg in their respective companies makes shareholder votes candidates for the least suspenseful events in commercial history. However, based on market share, Spotify essentially controls the music streaming business. Let’s consider some of the implications for competition of this disfavored capitalization technique.
Commissioner Robert Jackson, formerly of the U.S. Securities and Exchange Commission, summed up the problem:
“[D]ual class” voting typically involves capitalization structures that contain two or more classes of shares—one of which has significantly more voting power than the other. That’s distinct from the more common single-class structure, which gives shareholders equal equity and voting power. In a dual-class structure, public shareholders receive shares with one vote per share, while insiders receive shares that empower them with multiple votes. And some firms [Snap, Inc. and Google Class B shares] have recently issued shares that give ordinary public investors no vote at all.
For most of the modern history of American equity markets, the New York Stock Exchange did not list companies with dual-class voting. That’s because the Exchange’s commitment to corporate democracy and accountability dates back to before the Great Depression. But in the midst of the takeover battles of the 1980s, corporate insiders “who saw their firms as being vulnerable to takeovers began lobbying [the exchanges] to liberalize their rules on shareholder voting rights.” Facing pressure from corporate management and fellow exchanges, the NYSE reversed course, and today permits firms to go public with structures that were once prohibited.
Spotify is the dominant streaming firm and the voting power of Spotify stockholders is concentrated in two men: Daniel Ek and Martin Lorentzon. Transitively, those two men literally control the music streaming sector through their voting shares, are extending their horizontal reach into the rapidly consolidating podcasting business and aspire soon to enter the audiobooks vertical. Where do they get the money is a question on every artists lips after hearing the Spotify poormouthing and seeing their royalty statements.
The effects of that control may be subtle; for example, Spotify engages in multi-billion dollar stock buybacks and debt offerings, but has yet makes ever more spectacular losses while refusing to exercise pricing power.
So yes, Spotify is starting to look like the kind of Potemkin Village that investment bankers love because they see oodles of the one thing that matters: Fees.
On the political side, let’s see what the company’s campaign contributions tell us:
Spotify has also made a habit out of hiring away government regulators like Regan Smith, the former General Counsel and Associate Register of the US Copyright Office who joined Spotify as head of US public policy (a euphemism for bag person) after drafting all of the regulations for the Mechanical Licensing Collective;
Whether this is enough to trip Spotify up on the abuse of political contributions I don’t know, but the revolving door part certainly does call into question Spotify’s ethics.
It does seem that these are the kinds of facts that should be taken into account when determining Spotify’s ESG score.
What about the SEC investigation?
I suppose time will tell how the SEC handles its announced investigations into ESG “violations” whatever those might be (particularly in light of the SCOTUS West Virginia v. EPA holding and other “major questions” rulings recently).
When I made the soft call for impending stagflation last October I had no idea that that it would hit the US economy with such force and speed. The trends were, frankly, obvious and the signs unmistakable. But it’s the speed with which stagflation struck that I didn’t expect. We have seen each step of stagflation’s three point play undeniably demonstrated in real life and the result is inflation as far as the eye can see.
The return of 1970s style stagflation and the now-confirmed recession along with Federal Reserve “quantitative tightening” could mean policymakers recognize the need to end the easy money policy that has been in place since “quantitative easing” began around 2008. Arguably, the global economy has been in a post-Big Short bubble ever since, with the inevitable growth in the money supply that provided “too much money” that was chasing “too few goods.”
A recession and stagflation call is mitigated by the unemployment rate (which was about triple current rates during the 1970s), which itself is mitigated by the labor participation rate. A ten year view shows that the labor participation rate is still below pre-pandemnic levels even though the unemployment rate has been steady in the recent past. Yet even Y Combinator (that famously wanted to “Kill Hollywood” starting with the unions) warns of investment drying up for startups, but we’re not quite at the point of limited partners refusing to show up for capital calls at major VCs.
Inflation has, of course, been inevitable as has been the commensurate rot of inflation on the buying power of consumers. There is little doubt that inflation has been a long-term trend in the U.S. for quite some time and is likely to be with us for a good long while longer. For songwriters, if you’ve been following the rate increase confirmed in Phonorecords III, imagine what the rates would have been had the rates been indexed in this inflationary environment. We can understand how they missed indexing on Phonorecords III, but they cannot miss it on Phonorecords IV–or give it away as a bargaining chip.
Realize that one accepted method of extinguishing inflation is the “Taylor Rule” implemented by Federal Reserve Chairman Paul Volker in the 1970s for which Presidents Carter and Reagan took tremendous political heat–raise interest rates OVER the inflation rate. (Which is why there was a 21% prime rate–think on that.).
It was a different country then–America was a creditor nation. No longer true. Of course that’s not likely to happen today because of all the government borrowing during the easy money era. If the government had to pay a rate over the current 8.7% inflation rate, the government would collapse. It is likely that high inflation will be with us for a long time to come.
Being aware of the inflationary economic environment is a critical issue for songwriters in the US who are in the middle of a government rate setting proceeding before the Copyright Royalty Judges at the Copyright Royalty Board in Washington, DC. Songwriters at least have the opportunity to include a cost of living adjustment in the government’s rate and have asked for it in the streaming proceeding. Remember, there are two rate proceedings underway: One for physical mechanicals and downloads and the other for streaming. Songwriters, publishers and labels are in the physical and downloads proceeding. Songwriters, publishers and Big Tech are in the streaming proceeding soon to go to trial.
Credit where credit is due, Universal, Sony and Warner labels have included an annual CPI adjustment (or “indexing”) for songwriters in their voluntary agreement to raise the previously frozen mechanical rate for physical and downloads. The Copyright Royalty Judges also included indexing in the rate for webcasting of sound recordings that they recently decided (Web V). Many of the same Big Tech services were parties to Web V but are now arguing against CPI for songwriters in Phonorecords IV. Different hearings, true, but a lot of overlap in the parties and their smug little straight faces.
In our stagflationary economy, an agreed-upon inflation adjustment is a fairness making term that doesn’t make songwriters eat all of the inflationary rot from cost increases for “food at home” and force them to predict those price changes five years in advance. Indexing helps to fix that guess work in what is already a process of educated guessing in the non-existent willing buyer/willing seller folie à deux.
An inflation index is a particularly crucial tool when songwriters are prevented from stepping away from a deal because the government forced a deal upon them, like any statutory rate or in countries where there is a tariff or other compelled agreement.
Failing to use indexing makes the fairly controversial assumption that economically rational songwriters would charge a fixed price regardless of the fluctuations of the cost of energy, food and rent. By using the government to impose a non-indexed rate, there is a government-mandated implied discount that accrues to the benefit of the services, aka the largest companies in commercial history who just can’t bring themselves to treat songwriters fairly.
But want to bet these failures will have no impact on the services’ ESG scores on Wall Street?
Take Google for example, flatly rejecting indexing on the streaming side of the CRB proceedings:
“None of Google’s agreements with music publishers contain CPI adjustments for the [Per Subscriber Minimums] contained in those agreements. The Copyright Owners’ proposed CPI adjustment to PSMs is simply unsupported by marketplace evidence.” https://app.crb.gov/document/download/26528
Google is, as usual, full of it and is gaslighting the CRB with inapt arguments. Google is in a rate proceeding where the government—not Google—sets the terms. I know that line gets a little blurry for Googlers given how much strangulation Google sustains over government through its vast network of lobbyists, revolving door men and women, consultants and on and on and on.
I also know that Google would love nothing more than to dictate the terms to the government because Google has not-unjustified delusions of grandeur in this regard due to their mind-blowing level of brazen influence peddling. It’s not just Google, it’s all of the Big Tech oligarchs, the latter day Xerxes who seek to overwhelm creators through lawfare—songwriters are just low hanging fruit because of the ancient compulsory license—Section 115 of the Copyright Act—that is ready made for Big Tech’s copyright abuse.
But Google is not the government. It is the Congress and not Google that created Section 115 to interfere with private contracts and more importantly interfere with the right to privately contract. That’s a big deal in the US.
So, the issue isn’t what Google may have done in contracts with a totality of vastly different terms in a completely unrelated setting. It’s whether the government is paying just compensation for taking away rights under the Constitution of the United States. More specifically the 5th Amendment “takings” clause.
And the government’s compensation to songwriters is not just. It never has been.
Remember that at the heart of this process, the Judges are required to set a price for songs that the Judges believe reflects what a willing buyer would pay a willing seller in a transaction that has been devoid of willing buyers and sellers for over 100 years.
Google and other Big Tech DSPs in the CRB present the Judges with benchmarks based on prices that are not only distorted by years of abuse to begin with but are permanently disfigured. Remember, the government set the mechanical rate at 2¢ from 1909 to 1978 and had raised it very slowly ever since while at the same time pretending that the distortion of the 2¢ rate did not exist.
This deep 2¢ hole that songwriters are digging out of may not be the only reason songwriters are so poorly compensated, but this “tuppence” era definitely is a contributing factor. So whatever value-based rate increase that songwriters can claw out of the Big Tech services must be supported by a cost of living adjustment measured by the CPI just to tread water.
Price is truth if prices are truthful. And undistorted.
Otherwise, it’s just frozen mechanicals by another name, and Big Tech is simply free riding on the government’s license due to their outsized lobbying influence and government capture. (Need we name names?)
The songwriter is simply subsidizing the biggest corporations in commercial history.
Really great news, the largest union organization in the US has joined the fight for fairness for the world’s recording artists and session performers!
MusicFirst leader Joe Crowley said:
We applaud the AFL-CIO for standing by artists and music creators and lending the strength of its 12.5 million members to fight for passage of the American Music Fairness Act.
This legislation will benefit artists across the country – including the tens of thousands who are members of SAG-AFTRA, the American Federation of Musicians and other AFL-CIO unions – by correcting a decades-long injustice fueled by corporate greed that has left artists uncompensated for their use of their songs on AM/FM radio.
It looks like the statutory rate for songs on compact discs and vinyl is finally going to get a significant increase starting January 1, 2023 (assuming the Copyright Royalty Board approves the settlement proposed by the major labels and the publishers). We have to acknowledge that there are many independent record companies that have never had to deal with an increase in the mechanical rate–the old 9.1¢ rate has been in effect since 2006. If a label was founded any time after 2006 the issue just hasn’t come up before.
The new rate (which may well change every year of the 2003-2007 rate period due the cost-of-living indexing) will require labels to check their royalty accounting programs to make sure they change the rates as required. It will also become an audit point for artist audits by artist/songwriters or producer audits by producer/songwriters, and of course publisher audits as well.
But there’s also a question of how to address what I call the “controlled comp squeeze” caused by the collision of rate fixing dates with the new rate as applied to outside writers. (I’ve posted a bunch on these topics, so if you don’t immediately recognize what I’m getting at, I refer you to those posts.)
In addition to the controlled comp squeeze, the conversation should include what to do about the entire controlled compositions concept, a contract clause that only applies to the US and Canada and a concept that is anathema to ex-US and Canada songwriters and collecting societies. Because digital recordings are typically paid at the full statutory rate (or should be), controlled compositions clauses are really a feature of physical configurations.
There’s a feeling out there that the entire concept of controlled compositions should be abandoned. Since record companies have come to rely on certain economics when they decide to keep titles in print and not to cut them out, i.e., stop making them available to retailers, it is important to understand what effect that trying to force labels to pay every song at full rate will have on the music economy, especially for independent labels that sell a disproportionate number of vinyl units. Sudden increases in royalty costs could have dire consequences for the people who frequently are the main investors in certain genres of music and have the least ability to lobby for their interests, so we should tread prudent in rebalancing the songwriter economy.
One intermediate step might be to take a cue from a business practice in Canada called the “Mechanical License Agreement” that has worked very well for many years. The “MLA” offers protections from the worst terms of the controlled compositions clause and was a voluntary agreement between the labels and the CMRRA (Canada”s mechanical collecting society).
The MLA originated with David Basskin, the former head of CMRRA, and David negotiated the MLA with the major and independent labels in Canada. You can listen to my 2011 interview with David on SoundCloud.
The principal terms of the MLA cover the rate (which was no less than 3/4 rate but that dog won’t hunt anymore, plus after 1988 Canada did not have a statutory rate like the US does), free goods limited to 15%, no reduction for outside writers paid at full rate.
1. Full Rate: Songs should be paid at the full applicable rate and should be paid on standard sales plan LP free goods (a common give if the artist/writer is signed to a publisher affiliated with the record company);
2. Cap: Rather than a contract rate of 10 or 11, the MLA pegs the cap at 12;
3. No Rate Fixing Date: The rate not only is full, it also floats so there is no concept of a rate fixing date and should apply retroactively and prospectively; and
4. Floor: The application of the cap cannot result in any song being paid less than 50% of the full rate (which could happen on multiple disc or box sets).
There are other bells and whistles, but these are the main points.
While I understand that a record company would want to cap their mechanical royalty expense, any one of these terms would further that commercial goal. It is the application of all of the controlled comp terms that make the clause so onerous.
While the Copyright Royalty Board can set the rates, I doubt that they have the jurisdiction to address private contracts. Congress could pass legislation, but I think that would be a bitter struggle and I’m not so sure I want Congress to be micromanaging the music business any more than they already do with statutory rates and rate courts.
But there’s nothing stopping a voluntary agreement.
One of the sure signs of a bubble is when those invested in the bubble narrative deny the obvious. Southern California real estate is replete with examples. Another sign is when there are too many people invested in the narrative. The British corporate raider and financier Sir James Goldsmith was asked why he got into all cash the summer before the 1987 stock market crash. The apocryphal story is that it was because he got a stock tip from his barber. Facts, dear readers, facts are stubborn things.
One such fact surfaced this week–the Obamas are exiting their exclusive podcast deal with Spotify according to Yahoo News (citing Bloomberg). Now let us accept as a given that the Obamas as a brand are still one of the strongest personal brands in the world–in a brand shoot out with fellow podcasters on the Big Stream it ain’t even close. Meghan and Harry? Please.
But get a load of the reasons given. First there’s this one:
The former first couple’s media production company, Higher Ground, will split with Spotify after the streaming giant declined to make an offer to renew their deal, Bloomberg reported on Thursday, citing people familiar with negotiations.
Huh? “Declined to make an offer”? The thing about talent is that it doesn’t come around twice. If you were lucky enough to get into business with real stars, you hang on for dear life. Granted that statement sounds a bit like press release BS to keep the Obamas from looking greedy, but it’s not greedy to want the next deal point–it’s just creativity and smart business to keep that talent feeling ike the best place in the universe to work on that creativity is in your house.
High Ground’s departure follows a number of disagreements with Spotify, such as how frequently the Obamas would feature in output, and over exclusivity of shows, including the former president’s podcast with Bruce Springsteen, according to Bloomberg.
Say what? How often do the Obamas “feature in output”? As many times as they want. If you’ll pay $100 million for Joe Rogan (or whatever the 9 figure number actually is), you will understand that the deal is basically about freedom, like this:
The first show under the Obamas’ Spotify deal, “The Michelle Obama Podcast,” was among the platform’s most popular podcasts during its exclusive run, though Spotify later made it available on rival podcast apps. Barack Obama also hosted his own Spotify show called “Renegades: Born in the USA,” alongside musician Bruce Springsteen.
So let’s get this straight–the Spot will pay big bucks for Rogan and the naming rights to the Barcelona football club and their Camp Nou stadium, but turn around and be cheap and petty with Barack and Michelle Obama.
As I told the UK Competition and Markets Authority, do not mistake muscle for genius. Spoxit is on the move.
Netflix stock tanked to the tune of a loss of $50 billion in market cap. What does that mean–if anything–for streaming as a technology?
If you compare Tesla and Netflix, one big difference difference is marketing spend. Tesla doesn’t exactly let the car sell itself, but kinda. Not so with Netflix. Tesla puts the marketing spend into the product. Still a car company selling cars, but not a streaming company thinking it’s in the ooh-la-la of production. Kind of like Spotify getting into podcast production and the ooh-la-la of having your name plastered on a football stadium.
Most of the promoters of streaming, the true Chamber of Commerce hoorah crowd, have an answer for whatever signal the market may be sending about growth in streaming.
But ask yourself this–do you really think that streaming will go on forever as the configuration of choice for consumers? Has that ever happened before? Not really.
Netflix has actually run its business very well and managed its subscription prices, and yet…
After shares tanked earlier this year because of concerns over its subscriber growth, the streaming leader said that it lost subscribers when it reported first quarter earnings on Tuesday.
Netflix (NFLX) now has 221.6 million subscribers globally. It shed 200,000 subscribers in the first quarter of 2022, the company reported on Tuesday, adding that it expects to lose another two million in the second quarter. The service was expected to add 2.5 million subscribersin the first three months of the year.
Is it too early to tell if streaming as a configuration is just in a “gully”? Maybe, but it’s time to start drilling down at greater unit economic depth on companies like Spotify than we’ve probably ever seen. Spotify has its own problems and may have already had its Netflix moment as measured by stock performance.
Is it time for everyone feeding at the streaming abattoir to start asking themselves whether they should be thinking about the Next Big Thing? Why is it that Spotify still can’t be profitable yet their top executives are beyond rich? Why do artists and songwriters despise the company so much? Why are there government investigations into the entire streaming ecosystem? How long will Spotify be able to get away with payola before there’s a full blown government investigation into that? And how much longer will TikTok be used to feed underage drivers to cartels in the border states who can barely drive to school much less survive a high speed chase with law enforcement–but the platform bears no responsibility?
There may come a day when artist say they want no part of Silicon Valley’s addiction capitalism and turn to something far more organic as their configuration of choice. Arguably that’s happening right now with vinyl.