Tag: Digital Services: Spotify

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.

Dance Like Nobody’s Playing: Another call for user-centric royalties

I used to laugh off Spotify’s never ending stream of public messaging disasters–if screwups were Easter eggs, Daniel Ek would be the Easter Bunny hopping from one to another to make sure he scooped them all into his basket.  But the stark double entendre of Spotify’s latest campaign is the end of funny.  Hopefully it’s one more step on the road to user-centric royalties.

As reported in Hypebot, Spotify’s latest attempt to commoditize the value of music got artists and fans up in arms.

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This message is obviously offensive (but the underlying business practice is no doubt permitted under Spotify’s major label licenses–which raises a whole other question of how much longer does a publicly traded venture-backed money-losing company with a $25 billion market cap deserve to get special royalty free deals).

So Spotify is insulting, what else is new.  Underneath that message is another subtext, though:  Dance like nobody’s paying because nobody’s playing.  Or said another way, the machines are playing.  As Laura Kobylecky noted in a prescient post on MusicTechPolicy, the Spotify “fake artist” controversy has some ominous ancestry.

The tune had been haunting London for weeks past. It was one of countless similar songs published for the benefit of the proles by a sub-section of the Music Department.”

From1984 by George Orwell

In the dystopian world of George Orwell’s 1984, there is a machine called a “versificator.” The versificator makes what might be called “fake” music—songs that are “composed without any human intervention whatever.” In April of 2016, “A New Rembrandt” was revealed (1). The painting, like the songs of a versificator, was made by machines. In August of 2016, Music Business Worldwide (2) accused Spotify of “creating fake artists.” What is a fake artist? Can music be fake?

The world of 1984 is a grim place. Members of the “Party” have access to resources based on their rank. The rest of society are called “Proles.” The term is short for the “proletarian” and refers to the working class. The Proles make up the majority of society, and so the Party provides them with various sources of entertainment to keep them from getting too restless.

The versificator is one of the entertaining distractions made by the Party. A versificator generates songs that are “composed without any human intervention whatever.” The results range from insipid love songs like “Hopeless Fancy,” to the “savage, barking rhythm” of the “Hate Song”—designed to stir rage against political enemies.   The novel’s protagonist describes one of these songs as “dreadful rubbish.”

But the Proles like it fine. The song “Hopeless Fancy,” takes hold among them and “haunts” London for weeks. In this case, the art of the machine seems adequate for consumption.

So if you dance like nobody’s paying, realize that it’s entirely possible that nobody is paying because nobody’s playing, either.  Spotify can use either the free trial or the fake artist to drive down the royalties the company pays out to flesh-and-blood artists, particularly the ones that lack the leverage to get one of the goodie packed deals with minimum guarantees, greater of formulas, per-subscriber minima and non recoupable technology payments or breakage.  And then there’s the stock.

What would fix this is switching to user-centric royalties or what MTS readers will recall as the “ethical pool”.  No freebies, every artist is paid for every stream and fans are not deceived into believing that their monthly subscription goes to the artists they listen to rather than the ones they don’t ever stream.  If people could manage to look beyond this quarter’s results, the future is waiting.

How about “Dance like creators are paid fairly”?  Now there’s a message–it has a nice beat and you can dance to it.

 

What Does Spotify’s Billion Dollars of Debt Mean for Labels and Artists?

The Wall Street Journal reports that Spotify has raised $1 billion in convertible debt with this telling analysis:

Music-streaming site Spotify AB has raised $1 billion in convertible debt from investors, a deal that extends the money-losing company’s runway but comes with some strict guarantees, people familiar with the matter said.

Private-equity firm TPG, hedge fund Dragoneer Investment Group and clients of Goldman Sachs Group Inc. participated in the deal, which has been signed and is expected to close at the end of this week, these people said.

Tech startups are increasingly turning to convertible debt—bonds that can be exchanged for stock—as investors push back on rich valuations amid a volatile stock market and economic uncertainty.

By raising debt instead of equity, Spotify adds to its war chest without the possibility of setting a lower price for its stock, which can sap momentum and hamper recruiting.

That last paragraph is very telling.  As I have warned about before, the main reason for any privately held company to take on convertible debt, particularly large amounts of convertible debt, is to avoid a “down round”, meaning a round of investment at a lower valuation than the previous round.  This means the new investors buying in the down round pay a lower price per share, and receive certain rights and preferences that are superior to the rights of the previous rounds’ investors.

The main reason for existing stockholders (like the major labels and Merlin in Spotify’s case) to avoid a down round is to protect the preferences that the prior investors have built into their stock ownership.  Those preferences can require the company to issue more shares to protect the percentage ownership of the insiders and key executives, for example, and that can lead to washout financings and recapitalizations to incentivize investors in the down round (who often are not, as one might say, “babies”).

Down rounds are also one indicator that a bubble is about to burst but that investors have not yet capitulated.  (Down rounds are a precursor to failed capital calls, which are the real sign of a bubble bursting.)  Down rounds were very common in the dot bomb bubble burst.

An example of down round protection would be lowering (or “resetting”) the strike price of a warrant if the company issues securities at a lower price in the future–the down round.  In any event, the company must sell more shares than in the previous rounds in order to generate the new investment, so down rounds will almost inevitably dilute existing stockholders even if they give up their preferences.

So why did Spotify raise convertible debt?  To avoid a down round, which means that there is a good possibility that the company was told either that their proposed valuation that they wanted to get in their next round of finance was too high or that their last valuation (over $8 billion) was too high.

Convertible debt is secured debt.  That means holders of convertible debt will be at the head of the line in a bankruptcy.  This is almost certainly going to create a new hierarchy overnight and should start every royalty recipient thinking differently about Spotify because it introduces the concept of preferences in bankruptcy.  And if you find yourself thinking that Spotify could never go bankrupt, welcome to bubble mania.

Get what you’re owed out of the company as fast as possible.  You are now looking at a senior secured creditor who will almost certainly take the lion’s share of any recovery from a bankrupt Spotify after washing out all the equity the labels gave up in return for discounted royalty rates (which would be Daniel Ek’s last laugh on the music business).  I’m using Spotify as an example, but it could be any of them–Pandora also has a large debt financing.

Audit Early and Often:  The first thing that should happen is that instead of auditing at the “bankers hours” pace that the industry usually operates at (every three to five years), everyone who is owed royalties by Spotify should conduct a royalty compliance examination every year.  The longer you wait, the greater the chance that you will become known as an unsecured creditor.  This is true of artists, songwriters, labels, publishers, PROs, the lot.  Unions that have any residuals based on streaming?  Get in there.

Contractors, Get Your Money:  If you’re an independent contractor for Spotify, get your money paid.  Don’t wait.  Ask any independent contractor for a dot com that’s gone under and they’ll tell you–kiss that delivery payment goodbye after the whip goes down.  This especially includes lawyers–you will be the first to go.

Employees, Don’t Count on Bonuses:  Employees should take some advice on how protected they are on bonuses or deferred compensation.  And of course, your common stock will likely get washed out completely in order to protect the holders of preferred stock.

Settlements and Preferences:  Get the money, get the money and be sure you get the money.  Consult with bankruptcy counsel to determine whether you are receiving a preference that can be undone in  a later bankruptcy filing.

Fiduciary Duties of Officers and Directors:  When a company becomes insolvent, there is a point along that path where the primary fiduciary duty of officers and directors shifts from the stockholders to the creditors.  Get smart about this.