Tag: Artificial Intelligence

Chronology: The week in review, Spotify layoffs, mechanical rate increase, FTC on copyright issues in AI

What Spotify needs is a good pandemic.  

Harsh?  Not really, at least not from a share price point of view. Spotify’s all time highest share price was during the COVID pandemic.

Spotify CEO Daniel Ek and the press tells us that Spotify is cutting 1,500 jobs which works out to about 17% of Spotify employees. Which works out to a pre-layoff workforce of 8,823.  So let’s start there—that workforce number seems very high and is completely out of line with some recent data from Statista which is usually reliable.

If Statista is correct, Spotify employed 5,584 as of last year. Yet somehow Spotify’s 2023 workforce grew to 9200 according to the Guardian, fully 2/3 over that 2022 level without a commensurate and offsetting growth in revenue. That’s a governance question in and of itself.

Why the layoffs? The Guardian reports that Spotify CEO Daniel Ek is concerned about costs. He says “Despite our efforts to reduce costs this past year, our cost structure for where we need to be is too big.” Maybe I missed it, but the only time I can recall Daniel Ek being vocally concerned about Spotify’s operating costs was when it came to paying royalties. Then it was full-blown poor mouthing while signing leases for very expensive office space in 4 World Trade Center as well as other pricy real estate, executive compensation and podcasters like Harry & Meghan.

Mr. Ek announced his new, new thing:

Over the last two years, we’ve put significant emphasis on building Spotify into a truly great and sustainable business – one designed to achieve our goal of being the world’s leading audio company and one that will consistently drive profitability and growth into the future. While we’ve made worthy strides, as I’ve shared many times, we still have work to do. Economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.

Which “economic growth” is that?

But, he is definitely right about capital costs.

Still, Spotify’s job cuts are not necessarily that surprising considering the macro economy, most specifically rents and interest rates. As recently as 2018, Spotify was the second largest tenant at 4 WTC. Considering the sheer size of Spotify’s New York office space, it’s not surprising that Spotify is now subletting five floors of 4 WTC earlier this year. That’s right, the company had a spare five floors. Can that excess just be more people working at home given Mr. Ek’s decision to expand Spotify’s workforce? But why does Spotify need to be a major tenant in World Trade Center in the first place? Renting the big New York office space is the corporate equivalent of playing house. That’s an expensive game of pretend.

Remember that Spotify is one of the many companies that rose to dominance during the era of easy money in response to the financial crisis that was the hallmark of quantitative easing and the Federal Reserve’s Zero Interest Rate Policy beginning around 2008. Spotify’s bankers were able to fuel Daniel Ek’s desire to IPO and cash out in the public markets by enabling Spotify to run at a loss because money was cheap and the stock market had a higher tolerance for risky investments. When you get a negative interest rate for saving money, Spotify stock doesn’t seem like a totally insane investment by comparison. This may have contributed to two stock buy-back programs of $1 billion each, Spotify’s deal with Barcelona FC and other notorious excesses.

As a great man said, don’t confuse leverage for genius. It was only a matter of time until the harsh new world of quantitative tightening and sharply higher inflation came back to bite. For many years, Spotify told Wall Street a growth story which deflected attention away from the company’s loss making operations. A growth story pumps up the stock price until the chickens start coming home to roost. (Growth is also the reason to put off exercising pricing power over subscriptions.) Investors bought into the growth story in the absence of alternatives, not just for Spotify but for the market in general (compare Russell Growth and Value indexes from 2008-2023). Cutting costs and seeking profit is an example of what public company CEOs might do in anticipation of a rotational shift from growth to value investing that could hit their shares.

Never forget that due to Daniel Ek’s super-voting stock (itself an ESG fail), he is in control of Spotify. So there’s nowhere to hide when the iconography turns to blame. It’s not that easy or cheap to fire him, but if the board really wanted to give him the heave, they could do it.

I expect that Ek’s newly found parsimony will be even more front and center in renegotiations of Spotify’s royalty deals since he’s always blamed the labels for why Spotify can’t turn a profit. Not that WTC lease, surely. This would be a lot more tolerable from someone you thought was actually making an effort to cut all costs not just your revenue. Maybe that will happen, but even if Spotify became a lean mean machine, it will take years to recover from the 1999 levels of stupid that preceded it.

Hellooo Apple. One big thinker in music business issues calls it “Spotify drunk” which describes the tendency of record company marketers to focus entirely on Spotify and essentially ignore Apple Music as a distribution partner. If you’re in that group drinking the Spotify Kool Aid, you may want to give Apple another look. One thing that is almost certain is that that Apple will still be around in five years.

Just sayin.

Mechanicals on Physical and Downloads Get COLA Increase; Nothing for Streaming

Recall that the “Phonorecords IV” minimum mechanical royalties paid by record companies on physical and downloads increased from 9.1¢ to 12¢ with an annual cost of living adjustment each year of the PR IV rate period. The first increase was calculated by the Copyright Royalty Judges and was announced this week. That increase was from 12¢ to 12.40¢ and is automatic effective January 1, 2024.

Note that there is no COLA increase for streaming for reasons I personally do not understand. There really is no justification for not applying a COLA to a government mandated rate that blocks renegotiation to cover inflation expectations. After all, it works for Edmund Phelps.

The Federal Trade Commission on Copyright and AI

The FTC’s comment in the Copyright Office AI inquiry shows an interesting insight to the Commission’s thinking on some of the same copyright issues that bother us about AI, especially AI training. Despite Elon Musk’s refreshing candor of the obvious truth about AI training on copyrights, the usual suspects in the Copyleft (Pam Samuelson, Sy Damle, etc.) seem to have a hard time acknowledging the unfair competition aspects of AI and AI training (at p. 5):

Conduct that may violate the copyright laws––such as training an AI tool on protected expression without the creator’s consent or selling output generated from such an AI tool, including by mimicking the creator’s writing style, vocal or instrumental performance, or likeness—may also constitute an unfair method of competition or an unfair or deceptive practice, especially when the copyright violation deceives consumers, exploits a creator’s reputation or diminishes the value of her existing or future works, reveals private information, or otherwise causes substantial injury to consumers. In addition, conduct that may be consistent with the copyright laws nevertheless may violate Section 5.

We’ve seen unfair competition claims pleaded in the AI cases–maybe we should be thinking about trying to engage the FTC in prosecutions.

Does the Metaverse Have Rights? Permissionless Innovation Bias and Artificial Intelligence

As Susan Crawford told us in 2010:

I was brought up and trained in the Internet Age by people who really believed that nation states were on the verge of crumbling…and we could geek around it.  We could avoid it.  These people [and their nation states] were irrelevant.

Ms. Crawford had a key tech role in the Obama Administration and is now a law professor. She crystalized the wistful disappointment of technocrats when the Internet is confronted with generational expectations of non-technocrats (i.e., you and me). The disappointment that ownership means something, privacy means something and that permission defines a self-identity boundary that is not something to “geek around” in a quest for “permissionless innovation.”

Seeking permission recognizes humanity. Failing to do so takes these rights away from the humans and gives them to the people who own the machines–at least until the arrival of general artificial intelligence which may find us working for the machines.

These core concepts of civil society are not “irrelevant”. They define humanity. What assurance do we have that empowered AI machines won’t capture these rights?

All these concepts are at issue in the “metaverse” plan announced by Mark Zuckerberg, who has a supermajority of Facebook voting shares and has decided to devote an initial investment of $10 billion (that we know of) to expanding the metaverse. Given the addictive properties of social media and the scoring potential of social credit it is increasingly important that we acknowledge that the AI behind the metaverse (and soon almost everything else) is itself a hyper efficient implementation of the biases of those who program that AI.

AI bias and the ethics of AI are all the rage. Harvard Business Review tells us that “AI can help identify and reduce the impact of human biases, but it can also make the problem worse by baking in and deploying biases at scale in sensitive application areas.” Cathy O’Neill’s 2016 book Weapons of Math Destruction is a deep dive into how databases discriminate and exhibit the biases of those who create them.

We can all agree that insurance redlining, gender stereotyping and comparable social biases need to be dealt with. But concerns about bias don’t end there. An even deeper dive needs to be done into the more abstract biases required to geek around the nation state and fundamental human rights corrupted by the “permissionless innovation” bias that is built into major platforms like Facebook and from which its employees and kingpin enjoy unparalleled riches.

That bias will be incorporated into the Zuckerberg version of the metaverse and the AI that will power it.

Here’s an example. We know that Facebook’s architecture never contemplated a music or movie licensing process. Zuckerberg built it that way on purpose–the architecture reflected his bias against respecting copyright, user data and really any private property rights not his own. Not only does Zuckerberg take copyright and data for his own purposes, he has convinced billions of people to create free content for him and then to pay him to advertise that content to Facebook users and elsewhere. He takes great care to be sure that there is extraordinarily complex programming to maximize his profit from selling other people’s property, but he refuses to do the same when it comes to paying the people who create the content, and by extension the data he then repackages and sells.

He does this for a reason–he was allowed to get away with it. The music and movie industries failed to stop him and let him get away with it year after year until he finally agreed to make a token payment to a handful of large companies. That cash arrives with no really accurate reporting because reporting would require reversing the bias against licensing and reporting that was built into the Facebook systems to begin with.

A bias that is almost certainly going to be extended into the Facebook metaverse.

The metaverse is likely going to be a place where everything is for sale and product placements abound. The level of data collection on individuals will likely increase exponentially. Consider this Techcrunch description of “Project Cambria” the Metaverse replacement for the standard VR headset:

Cambria will include capabilities that currently aren’t possible on other VR headsets. New sensors in the device will allow your virtual avatar to maintain eye contact and reflect your facial expressions. The company says that’s something that will allow people you’re interacting with virtually to get a better sense of how you’re feeling. Another focus of the headset will be mixed-reality experiences. With the help of new sensors and reconstruction algorithms, Facebook claims Cambria will have the capability to represent objects in the physical world with a sense of depth and perspective.

If past is prologue, the Metaverse will exhibit an even greater disregard for human rights and the laws that protect us than Facebook. That anti-human bias will be baked into the architecture and the AI that supports it. The machines don’t look kindly on those pesky humans and all their petty little rights that stand in the way of the AI getting what it wants.

If you don’t think that’s true, try reading the terms of service for these platforms. Or considering why the technocrats are so interested in safe harbors where their machines can run free of liability for collateral damage. The terms of service should make clear that AI has greater rights than you. We are way beyond pronouns now.

If the only concern of AI ethics is protection against stereotypes or insurance redlining (a version of the social credit score), we will be missing huge fundamental parts of the bias problem. Should we be content if AI is allowing its owner (for so long as it has an owner) to otherwise rob you blind by taking your property or selling your data while using the right pronoun as it geeks around the nation state?