Tag: Spotify

The Digital End-Cap: How Spotify’s Discovery Mode Turned Payola into Personalization

The streaming economy’s most controversial feature revives the old record-store co-op ad model—only now, the shelf space is algorithmic, the payments are disguised as royalty discounts, and the audience has no idea.

From End-Caps to Algorithms: The Disappearing Line Between Marketing and Curation

In the record-store era, everyone in the business knew that end-caps, dump bins, window clings, and in-store listening stations weren’t “organic” discoveries—they were paid placements. Labels bought the best shelf space, sponsored posters, and underwrote the music piped through the store’s speakers because visibility sold records.

Spotify’s Discovery Mode is that same co-op advertising model reborn in code: a system where royalty discounts buy algorithmic shelf space rather than retail real estate. Yet unlike the physical store, today’s paid promotion is hidden behind the language of personalization. Users are told that playlists and AI DJs are “made just for you,” when in fact those recommendations are shaped by the same financial incentives that once determined which CD got the end-cap.

On Spotify, nothing is truly organic; Discovery Mode simply digitizes the old pay-for-placement economy, blending advertising with algorithmic curation while erasing the transparency that once separated marketing from editorial judgment.

Spotify’s Discovery Mode: The “Inverted Payola”

The problem for Spotify is that it has never positioned itself like a retailer. It has always positioned itself as a substitute for radio, and buying radio is a dangerous occupation. That’s called payola.

Spotify’s controversial “Discovery Mode” is a kind of inverted payola which makes it seem like it smells less than it actually does. Remember, artists don’t get paid for broadcast radio airplay in the US so the incentive always was for labels to bribe DJs because that’s the only way that money entered the transaction. (At one point, that could have included publishers, too, back when publishers tried to break artists who recorded their songs.)

What’s different about Spotify is that streaming services do pay for their equivalent of airplay. When Discovery Mode pays less in return for playing certain songs more, that’s essentially the same as getting paid for playing certain songs more. It’s just a more genteel digital transaction in the darkness of ones and zeros instead of the tackier $50 handshake. The discount is every bit as much a “thing of value” as a $50 bill, with the possible exception that it goes to benefit Spotify stockholders and employees unlike the $50 that an old-school DJ probably just put in his pocket in one of those gigantic money rolls. (For games to play on a rainy day, try betting a DJ he has less than $10,000 in his pocket.)

Music Business Worldwide gave Spotify’s side of the story (which is carefully worded flack talk so pay close attention):Spotify rejected the allegations, telling AllHipHop: 

“The allegations in this complaint are nonsense. Not only do they misrepresent what Discovery Mode is and how it works, but they are riddled with misunderstandings and inaccuracies.”

The company explained that Discovery Mode affects only Radio, Autoplay and certain Mixes, not flagship playlists like Discover Weekly or the AI DJ that the lawsuit references.Spotify added: “The complaint even gets basic facts wrong: Discovery Mode isn’t used in all algorithmic playlists, or even Discover Weekly or DJ, as it claims.

The Payola Deception Theory

The emerging payola deception theory against Spotify argues that Spotify’s pay-to-play Discovery Mode constitutes a form of covert payola that distorts supposedly neutral playlists and recommendation systems—including Discover Weekly and the AI DJ—even if those specific products do not directly employ the “Discovery Mode” flag.

The key to proving this theory lies in showing how a paid-for boost signal introduced in one part of Spotify’s ecosystem inevitably seeps through the data pipelines and algorithmic models that feed all the others, deceiving users about the neutrality of their listening experience. That does seem to be the value proposition—”You give us cheaper royalties, we give you more of the attention firehose.”

Spotify claims that Discovery Mode affects only Radio, Autoplay, and certain personalized mixes, not flagship products like enterprise playlists or the AI DJ. That defense rests on a narrow, literal interpretation: those surfaces do not read the Discovery Mode switch. Yet under the payola deception theory, this distinction is meaningless because Spotify’s recommendation ecosystem appears to be fully integrated.

Spotify’s own technical publications and product descriptions indicate that multiple personalized surfaces— including Discover Weekly and AI DJ—are built on shared user-interaction data, learned taste profiles, and common recommendation models, rather than each using entirely independent algorithms. It sounds like Spotify is claiming that certain surfaces like Discover Weekly and AI DJ have cabined algorithms and pristine data sets that are not affected by Discovery Mode playlists or the Discovery Mode switch.

While that may be true, it seems like maintaining that separation would be downright hairy if not expensive in terms of compute. It seems far more likely that Spotify run shared models on shared data, and when they say “Discovery Mode isn’t used in X,” they’re only talking about the literal flag—not the downstream effects of the paid boost on global engagement metrics and taste profiles.

How the Bias Spreads: Five Paths of Contamination

So let’s infer that every surface draws on the same underlying datasets, engagement metrics, and collaborative models. Once the paid boost changes user behavior, it alters the entire system’s understanding of what is popular, relevant, or representative of a listener’s taste. The result is systemic contamination: a payola-driven distortion presented to users as organic personalization. The architecture that would make their strong claim true is expensive and unnatural; the architecture that’s cheap and standard almost inevitably lets the paid boost bleed into those “neutral” surfaces in five possible ways.

The first is through popularity metrics. As much as we can tell from the outside, Discovery Mode artificially inflates a track’s exposure in the limited contexts where the switch is activated. Those extra impressions generate more streams, saves, and “likes,” which I suspect feed into Spotify’s master engagement database.

Because stream count, skip rate, and save ratio are very likely global ranking inputs, Discovery Mode’s beneficiaries appear “hotter” across the board. Even if Discover Weekly or the AI DJ ignore the Discovery Mode flag, it’s reasonable to infer that they still rely on those popularity statistics to select and order songs. Otherwise Spotify would need to maintain separate, sanitized algorithms trained only on “clean” engagement data—an implausible and inefficient architecture given Spotify’s likely integrated recommendation system and the economic logic of Discovery Mode itself which I find highly unlikely to be the case. The paid boost thus translates into higher ranking everywhere, not just in Radio or Autoplay. This is the algorithmic equivalent of laundering a bribe through the system—money buys visibility that masquerades as audience preference.

The second potential channel is through user taste profiles. Spotify’s personalization models constantly update a listener’s “taste vector” based on recent listening behavior. If Discovery Mode repeatedly serves a track in Autoplay or Radio, a listener’s history skews toward that song and its stylistic “neighbors”. The algorithm likely then concludes that the listener “likes” similar artists (even if it’s actually Discover Mode serving the track, not user free will. The algorithm likely feeds those likes into Discover Weekly, Daily Mixes, and the AI DJ’s commentary stream. The user thinks the AI is reading their mood; in reality, it is reading a taste profile that was manipulated upstream by a pay-for-placement mechanism. All roads lead to Bieber or Taylor.

A third route is collaborative filtering and embeddings aka “truthiness”. As I understand it, Spotify’s recommendation architecture relies on listening patterns—tracks played in the same sessions or saved to the same playlists become linked in multidimensional “embedding” space. When Discovery Mode injects certain tracks into more sessions, it likely artificially strengthens the connections between those promoted tracks and others around them. The output then seems far more likely to become “fans of Artist A also like Artist B.” That output becomes algorithmically more frequent and hence “truer” or “truthier”, not because listeners chose it freely, but because paid exposure engineered the correlation. Those embeddings are probably global: they shape the recommendations of Discover Weekly, the “Fans also like” carousel, and the candidate pool for the AI DJ. A commercial distortion at the periphery thus is more likely to reshape the supposedly organic map of musical similarity at the core.

Fourth, the DM boost echoes through editorial and social feedback loops. Once Discovery Mode inflates a song’s performance metrics, it begins to look like what passes for a breakout hit these days. Editors scanning dashboards see higher engagement and may playlist the track in prominent editorial contexts. Users might add it to their own playlists, creating external validation. The cumulative effect is that an artificial advantage bought through Discovery Mode converts into what appears to be organic success, further feeding into algorithmic selection for other playlists and AI-driven features. This recursive amplification makes it almost impossible to isolate the paid effect from the “natural” one, which is precisely why disclosure rules exist in traditional payola law. I say “almost impossible” reflexively—I actually think it is in fact impossible, but that’s the kind of thing you can model in a different type of “discovery” being court-ordered discovery.

Finally, there is the shared-model problem. Spotify has publicly acknowledged that the AI DJ is a “narrative layer” built on the same personalization technology that powers its other recommendation surfaces. In practice, this means one massive model (or group of shared embeddings) generates candidate tracks, while a separate module adds voice or context.

If the shared model was trained on Discovery-Mode-skewed data, then even when the DJ module does not read the Discovery flag, it inherits the distortions embedded in those weights. Turning off the switch for the DJ therefore does not remove the influence; it merely hides its provenance. Unlike AI systems designed to dampen feedback bias, Spotify’s Discovery Mode institutionalizes it—bias is the feature, not the bug. You know, garbage in, garbage out.

Proving the Case: Discovery Mode’s Chain of Causation and the Triumph of GIGO

Legally, there’s a strong argument that the deception arises not from the existence of Discovery Mode itself but from how Spotify represents its recommendation products. The company markets Discover Weekly, Release Radar, and AI DJ as personalized to your taste, not as advertising or sponsored content. When a paid-boost mechanism anywhere in the ecosystem alters what those “organic” systems serve, Spotify arguably misleads consumers and rightsholders about the independence of its curation. Under a modernized reading of payola or unfair-deceptive-practice laws, that misrepresentation can amount to a hidden commercial endorsement—precisely the kind of conduct that the Federal Communications Commission’s sponsorship-identification rules (aka payola rules) and the FTC’s endorsement guides were designed to prevent.

In fact, the same disclosure standards that govern influencers on social media should govern algorithmic influencers on streaming platforms. When Spotify accepts a royalty discount in exchange for promoting a track, that arguably constitutes a material connection under the FTC’s Endorsement Guides. Failing to disclose that connection to listeners could transform Discovery Mode from a personalization feature into a deceptive advertisement—modern payola by another name. Why piss off one law enforcement agency when you can have two of them chase you around the rugged rock?

It must also be said that Discovery Mode doesn’t just shortchange artists and mislead listeners; it quietly contaminates the sainted ad product, too. Advertisers think they’re buying access to authentic, personalized listening moments. In reality, they’re often buying attention in a feed where the music itself is being shaped by undisclosed royalty discounts — a form of algorithmic payola that bends not only playlists, but the very audience segments and performance metrics brands are paying for. Advertising agencies don’t like that kind of thing one little bit. We remember what happened when it became apparent that ads were being served to pirate sites by you know who.

Proving the payola deception theory would therefore likely involve demonstrating causation across data layers: that the presence of Discovery Mode modifies engagement statistics, that those metrics propagate into global recommendation features, and that users (and possibly advertisers) were misled to believe those recommendations were purely algorithmic or merit-based. We can infer that the structure of Spotify’s own technology likely makes that chain not only plausible but possibly inevitable.

In an interconnected system where every model learns from the outputs of every other, no paid input stays contained. The moment a single signal is bought, a strong case can be made that the neutrality of the entire recommendation network is compromised—and so is the user’s trust in what it means when Spotify says a song was “picked just for you.”

Less Than Zero: The Significance of the Per Stream Rate and Why It Matters

Spotify’s insistence that it’s “misleading” to compare services based on a derived per-stream rate reveals exactly how out of touch the company has become with the very artists whose labor fuels its stock price. Artists experience streaming one play at a time, not as an abstract revenue pool or a complex pro-rata formula. Each stream represents a listener’s decision, a moment of engagement, and a microtransaction of trust. Dismissing the per-stream metric as irrelevant is a rhetorical dodge that shields Spotify from accountability for its own value proposition. (The same applies to all streamers, but Spotify is the only one that denies the reality of the per-stream rate.)

Spotify further claims that users don’t pay per stream but for access as if that negates the artist’s per stream rate payments. It is fallacious to claim that because Spotify users pay a subscription fee for “access,” there is no connection between that payment and any one artist they stream. This argument treats music like a public utility rather than a marketplace of individual works. In reality, users subscribe because of the artists and songs they want to hear; the value of “access” is wholly derived from those choices and the fans that artists drive to the platform. Each stream represents a conscious act of consumption and engagement that justifies compensation.

Economically, the subscription fee is not paid into a vacuum — it forms a revenue pool that Spotify divides among rights holders according to streams. Thus, the distribution of user payments is directly tied to which artists are streamed, even if the payment mechanism is indirect. To say otherwise erases the causal relationship between fan behavior and artist earnings.

The “access” framing serves only to obscure accountability. It allows Spotify to argue that artists are incidental to its product when, in truth, they are the product. Without individual songs, there is nothing to access. The subscription model may bundle listening into a single fee, but it does not sever the fundamental link between listener choice and the artist’s right to be paid fairly for that choice.

Less Than Zero Effect: AI, Infinite Supply and Erasing Artist

In fact, this “access” argument may undermine Spotify’s point entirely. If subscribers pay for access, not individual plays, then there’s an even greater obligation to ensure that subscription revenue is distributed fairly across the artists who generate the listening engagement that keeps fans paying each month. The opacity of this system—where listeners have no idea how their money is allocated—protects Spotify, not artists. If fans understood how little of their monthly fee reached the musicians they actually listen to, they might demand a user-centric payout model or direct licensing alternatives. Or they might be more inclined to use a site like Bandcamp. And Spotify really doesn’t want that.

And to anticipate Spotify’s typical deflection—that low payments are the label’s fault—that’s not correct either. Spotify sets the revenue pool, defines the accounting model, and negotiates the rates. Labels may divide the scraps, but it’s Spotify that decides how small the pie is in the first place either through its distribution deals or exercising pricing power.

Three Proofs of Intention

Daniel Ek, the Spotify CEO and arms dealer, made a Dickensian statement that tells you everything you need to know about how Spotify perceives their role as the Streaming Scrooge—“Today, with the cost of creating content being close to zero, people can share an incredible amount of content”.

That statement perfectly illustrates how detached he has become from the lived reality of the people who actually make the music that powers his platform’s market capitalization (which allows him to invest in autonomous weapons). First, music is not generic “content.” It is art, labor, and identity. Reducing it to “content” flattens the creative act into background noise for an algorithmic feed. That’s not rhetoric; it’s a statement of his values. Of course in his defense, “near zero cost” to a billionaire like Ek is not the same as “near zero cost” to any artist. This disharmonious statement shows that Daniel Ek mistakes the harmony of the people for the noise of the marketplace—arming algorithms instead of artists.

Second, the notion that the cost of creating recordings is “close to zero” is absurd. Real artists pay for instruments, studios, producers, engineers, session musicians, mixing, mastering, artwork, promotion, and often the cost of simply surviving long enough to make the next record or write the next song. Even the so-called “bedroom producer” incurs real expenses—gear, software, electricity, distribution, and years of unpaid labor learning the craft. None of that is zero. As I said in the UK Parliament’s Inquiry into the Economics of Streaming, when the day comes that a soloist aspires to having their music included on a Spotify “sleep” playlist, there’s something really wrong here.

Ek’s comment reveals the Silicon Valley mindset that art is a frictionless input for data platforms, not an enterprise of human skill, sacrifice, and emotion. When the CEO of the world’s dominant streaming company trivializes the cost of creation, he’s not describing an economy—he’s erasing one.

While Spotify tries to distract from the “per-stream rate,” it conveniently ignores the reality that whatever it pays “the music industry” or “rights holders” for all the artists signed to one label still must be broken down into actual payments to the individual artists and songwriters who created the work. Labels divide their share among recording artists; publishers do the same for composers and lyricists. If Spotify refuses to engage on per-stream value, what it’s really saying is that it doesn’t want to address the people behind the music—the very creators whose livelihoods depend on those streams. In pretending the per-stream question doesn’t matter, Spotify admits the artist doesn’t matter either.

Less Than Zero or Zeroing Out: Where Do We Go from Here?

The collapse of artist revenue and the rise of AI aren’t coincidences; they’re two gears in the same machine. Streaming’s economics rewards infinite supply at near-zero unit cost which is really the nugget of truth in Daniel Ek’s statements. This is evidenced by Spotify’s dalliances with Epidemic Sound and the like. But—human-created music is finite and costly; AI music is effectively infinite and cheap. For a platform whose margins improve as payout obligations shrink, the logical endgame is obvious: keep the streams, remove the artists.

  • Two-sided market math. Platforms sell audience attention to advertisers and access to subscribers. Their largest variable cost is royalties. Every substitution of human tracks with synthetic “sound-alikes,” noise, functional audio, or AI mashup reduces royalty liability while keeping listening hours—and revenue—intact. You count the AI streams just long enough to reduce the royalty pool, then you remove them from the system, only to be replace by more AI tracks. Spotify’s security is just good enough to miss the AI tracks for at least one royalty accounting period.
  • Perpetual content glut as cover. Executives say creation costs are “near zero,” justifying lower per-stream value. That narrative licenses a race to the bottom, then invites AI to flood the catalog so the floor can fall further.
  • Training to replace, not to pay. Models ingest human catalogs to learn style and voice, then output “good enough” music that competes with the very works that trained them—without the messy line item called “artist compensation.”
  • Playlist gatekeeping. When discovery is centralized in editorial and algorithmic playlists, platforms can steer demand toward low-or-no-royalty inventory (functional audio, public-domain, in-house/commissioned AI), starving human repertoire while claiming neutrality.
  • Investor alignment. The story that scales is not “fair pay”; it’s “gross margin expansion.” AI is the lever that turns culture into a fixed cost and artists into externalities.

Where does that leave us? Both streaming and AI “work” best for Big Tech, financially, when the artist is cheap enough to ignore or easy enough to replace. AI doesn’t disrupt that model; it completes it. It also gives cover through a tortured misreading through the “national security” lens so natural for a Lord of War investor like Mr. Ek who will no doubt give fellow Swede and one of the great Lords of War, Alfred Nobel, a run for his money. (Perhaps Mr. Ek will reimagine the Peace Prize.) If we don’t hard-wire licensing, provenance, and payout floors, the platform’s optimal future is music without musicians.

Plato conceived justice as each part performing its proper function in harmony with the whole—a balance of reason, spirit, and appetite within the individual and of classes within the city. Applied to AI synthetic works like those generated by Sora 2, injustice arises when this order collapses: when technology imitates creation without acknowledging the creators whose intellect and labor made it possible. Such systems allow the “appetitive” side—profit and scale—to dominate reason and virtue. In Plato’s terms, an AI trained on human art yet denying its debt to artists enacts the very disorder that defines injustice.

What the Algocrats Want You to Believe: Spotify Crying Poor

There are five key assumptions that support the streamer narrative and we will look at them each in turn. I introduced assumption #1: Streamers are not in the music business, they are in the data business. That shouldn’t be a controversial thought. Today we’ll assess assumption #2–streamers like Spotify can’t make a profit.

Assumption #2: Spotify can’t make a profit.

Spotify commonly tells you that they pay 70% of their “revenue” to “the music business” in the “big pool” royalty method.  The assumption they want you to make is that they pay billions and if it doesn’t trickle down to artists and songwriters, it’s not their fault.

Remember The Trichordist Streaming Price Bible? If you recall, the abysmal per-stream rates that made headlines were derived by “a mid-sized indie label with an approximately 350+ album catalog now generating over 1.5b streams annually.” Those penny rates were not the artist share, they were derived at the label level. The artist share had to be even worse. And those rates were in 2020–we’ve since had five years of the expansion of the denominator without an offsetting increase in revenues.

Streamers will avoid discussing penny rates like the plague because the rates are just so awful and paupering. They do this by gaslighting–not only artists and songwriters, but also gaslighting regulators. They will tell you that they pay billions “to the music industry” and don’t pay on a per-stream basis so nothing to see here. But they omit the fact that even if they make a lump sum payment to labels or distributors, those labels or distributors have to break down that lump sum to per stream rates in order to account to their artists. So even if the streamers don’t account on a per-stream basis, there is an implied per-stream rate that is simple to derive. Which brings us full-circle to the Streaming Price Bible no matter how they gaslight that supposed 70% revenue share.

And then there’s a remaining 30% because the “revenue” share would have to sum to 100%, right?.  That’s true if you assume that the company’s actual revenue is defined the same way as the “revenue” they share with “the music business”.  Is it?  I think not.  I think the actual revenue is higher, and perhaps much higher than the “revenue” as defined in Spotify’s licensing agreements.

Crucially, Spotify’s cash benefits exceed the “revenue” definition on which they account if you don’t ignore the stock market valuation that has made Daniel Ek a billionaire and many Spotify employees into millionaires.  Spotify throws off an awful lot of cash for millionaires and billionaires for a company that can’t make a profit.

Good thing that artists and songwriters got compensated for the value their music added to Spotify’s market capitalization and the monetization of all the fans they send to Spotify, right?  

Oh yeah. They don’t.

What the Algocrats Want You to Believe

There are five key assumptions that support the streamer narrative and we will look at them each in turn. Today we’ll assess assumption #1–streamers are not in the music business but they want you to believe the opposite.

Assumption 1:  Streamers Are In the Music Business

Streamers like Spotify, TikTok and YouTube are not in the music business.  They are in the data business.  Why?  So they can monetize your fans that you drive to them.

These companies make extensive use of algorithms and artificial intelligence in their business, especially to sell targeted advertising.  This has a direct impact on your ability to compete with enterprise playlists and fake tracks–or what you might call “decoy footprints”–as identified by Liz Pelly’s exceptional journalism in her new book (did I say it’s on sale now?).

Signally, while Spotify artificially capped its subscription rates for over ten years in order to convince Wall Street of its growth story, the company definitely did not cap its advertising rates which are based on an auction model like YouTube.  Like YouTube, Spotify collects emotional data (analyzing a user social media posts), demographics (age, gender, location, geofencing), behavioral data (listening habits, interests), and contextual data (serving ads in relevant moments like breakfast, lunch, dinner).  They also use geofencing to target users by regions, cities, postal codes, and even Designated Market Areas (DMAs). My bet is that they can tell if you’re looking at men’s suits in ML Liddy’s (San Angelo or Ft. Worth).

Why the snooping? They do this to monetize your fans.  Sometimes they break the law, such as Spotify’s $5.5 million fine by Swedish authorities for violating Europe’s data protection laws.

They’ll also tell you that streamers are all up in introducing fans to new music or what they call “discovery.” The truth is that they could just as easily be introducing you to a new brand of Spam. “Discovery” is just a data application for the thousands of employees of these companies who form the algocracy who make far more money on average than any songwriter or musician does on average.  As Maria Schneider anointed the algocracy in her eponymous Pulitzer Prize finalist album, these are the Data Lords.  And I gather from Liz Pelly’s book that it’s starting to look like “discovery” is just another form of payola behind the scenes.

It also must be said that these algocrats tend to run together which makes any bright line between the companies harder to define.  For example, Spotify has phased out owning data centers and migrated its extensive data operations to the Google Cloud Platform which means Spotify is arguably entirely dependent on Google for a significant part of its data business.  Yes, the dominant music streaming platform Spotify collaborates with the adjudicated monopolist Google for its data monetization operations.  Not to mention the Meta pixel class action controversy—”It’s believed that Spotify may have installed a tracking tool on its website called the Meta pixel that can be used to gather data about website visitors and share it with Meta. Specifically, [attorneys] suspect that Spotify may have used the Meta pixel to track which videos its users have watched on Spotify.com and send that information to Meta along with each person’s Facebook ID.”

And remember, Spotify doesn’t allow AI training on the music and metadata on its platform.  

Right. That’s the good news.

Does it have an index? @LizPelly’s Must-Read Investigation in “Mood Machine” Raises Deep Questions About Spotify’s Financial Integrity

Spotify Playlist Editors

If you don’t know of Liz Pelly, I predict you soon will. I’ve been a fan for years but I really think that her latest work, Mood Machine: The Rise of Spotify and the Costs of the Perfect Playlist, coming in January by One Signal Publishers, an imprint of Atria Books at Simon & Schuster, will be one of those before and after books. Meaning the world you knew before reading the book was radically different than the world you know afterward. It is that insightful. And incriminating.

We are fortunate that Ms. Pelly has allowed Harper’s to excerpt Mood Machine in the current issue. I want to suggest that if you are a musician or care about musicians, or if you are at a record label or music publisher, or even if you are in the business of investing in music, you likely have nothing more important to do today than read this taste of the future.

The essence of what Ms. Pelly has identified is the intentional and abiding manipulation of Spotify’s corporate playlists. She explains what called her to write Mood Machine:

Spotify, the rumor had it, was filling its most popular playlists with stock music attributed to pseudonymous musicians—variously called ghost or fake artists—presumably in an effort to reduce its royalty payouts. Some even speculated that Spotify might be making the tracks itself. At a time when playlists created by the company were becoming crucial sources of revenue for independent artists and labels, this was a troubling allegation.

What you will marvel at is the elaborate means Ms. Pelly has discovered–through dogged reporting worthy of the great deadline artists–that Spotify undertook to deceive users into believing that playlists were organic. And, it must be said, to deceive investors, too. As she tells us:

For years, I referred to the names that would pop up on these playlists simply as “mystery viral artists.” Such artists often had millions of streams on Spotify and pride of place on the company’s own mood-themed playlists, which were compiled by a team of in-house curators. And they often had Spotify’s verified-artist badge. But they were clearly fake. Their “labels” were frequently listed as stock-music companies like Epidemic, and their profiles included generic, possibly AI-generated imagery, often with no artist biographies or links to websites. Google searches came up empty.

You really must read Ms. Pelly’s except in Harper’s for the story…and did I say the book itself is available for preorder now?

All this background manipulation–undisclosed and furtive manipulation by a global network of confederates–was happening while Spotify devoted substantial resources worthy of a state security operation into programming music in its own proprietary playlists. That programmed music not only was trivial and, to be kind, low brow, but also essentially at no cost to Spotify. It’s not just that it was free, it was free in a particular way. In Silicon Valley-speak, Ms. Pelly has discovered how Spotify disaggregated the musician from the value chain.

What she has uncovered has breathtaking implications, particularly with the concomitant rise of artificial intelligence and that assault on creators. The UK Parliament’s House of Commons Digital, Culture, Media & Sport Committee’s Inquiry into the Economics of Music Streaming quoted me as saying “If a highly trained soloist views getting included on a Spotify “Sleep” playlist as a career booster, something is really wrong.” That sentiment clearly resonated with the Committee, but was my feeble attempt at calling government’s attention to then-only-suspected playlist grift that was going on at Spotify. Ms. Pelly’s book is a solid indictment–there’s that word again–of Spotify’s wild-eyed, drooling greed and public deception.

Ms. Pelly’s work raises serious questions about streaming payola and its fellow-travelers in the annals of crime. The last time this happened in the music business was with Fred Dannen’s 1991 book called Hit Men that blew the lid off of radio payola. That book also sent record executives running to unfamiliar places called “book stores” but for a particular reason. They weren’t running to read the book. They already knew the story, sometimes all too well. They were running to see if their name was in the index.

Like the misguided iHeart and Pandora “steering agreements” that nobody ever investigated which preceded mainstream streaming manipulation, it’s worth investigating whether Spotify’s fakery actually rises to the level of a kind of payola or other prosecutable offense. As the noted broadcasting lawyer David Oxenford observed before the rise of Spotify:

The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves – we’ll ignore questions of whether Internet radio transmitted by wi-fi, WiMax or cellular technology might be considered a “radio” service for purposes of this statute). But that does not end the inquiry. Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute. Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage. Such statutes are in no way limited to radio, but can apply to any business. Thus, Internet radio stations would need to be concerned.

Ms. Pelly’s investigative work raises serious questions of its own about the corrosive effects of fake playlists on the music community including musicians and songwriters. She also raises equally serious questions about Spotify’s financial reporting obligations as a public company.

For example, I suspect that if Spotify were found to be using deception to boost certain recordings on its proprietary playlists without disclosing this to the public, it could potentially raise issues under securities laws, including the Sarbanes-Oxley Act (SOX). SOX requires companies to maintain accurate financial records and disclose material information that could affect investors’ decisions.

Deceptive practices that mislead investors about the company’s performance or business practices could be considered a violation of SOX. Additionally, such actions could lead to investigations by regulatory bodies like the Securities and Exchange Commission (SEC) and potential legal consequences.

Imagine that risk factor in Spotify’s next SEC filing? It might read something like this:

Risk Factor: Potential Legal and Regulatory Actions

Spotify is currently under investigation for alleged deceptive practices related to the manipulation of Spotify’s proprietary playlists. If these allegations are substantiated, Spotify could face significant legal and regulatory actions, including fines, penalties, and enforcement actions by regulatory bodies such as the Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC). Such actions could result in substantial financial liabilities, damage to our reputation, and a loss of user trust, which could adversely affect our business operations and financial performance.

On the Internet, “Partners” Don’t Hear You Scream: Daniel Ek Makes a “Bundle” From the Value He Won’t Share

Here’s a quote for the ages:

MICHAEL BURRY

One of the hallmarks of mania is the rapid rise and complexity
of the rates of fraud. And did you know they’re going up?

The Big Short, screenplay by Charles Randolph and Adam McKay, based on the book by Michael Lewis

I have often said that if screwups were Easter eggs, Daniel Ek would be the Easter bunny, hop hop hopping from one to the next. I realize that is not consistent with his press agent’s pagan iconography, but it sure seems true to many.

The Bunny’s Bundle

This week was no different. Mr. Ek evidently has a “10b5-1 agreement” in place with Spotify, a common technique for insiders, especially founders, who hold at least 10% of the company’s shares to cash out and get the real money through selling their stock. The agreement establishes predetermined trading instructions for company stock (usually a sale and not a buy so not trading the shares) consistent with SEC rules under Section 10b5 of the Securities and Exchange Act of 1934 covering when the insider can sell. Why does this exist? The rule was established in 2000 to protect Silicon Valley insiders from insider trading lawsuits. Yep, you caught it–it’s yet another safe harbor for the special people.

As MusicBusinessWorldWide reported (thank you, Tim), Mr. Ek sold $118.8 million in shares of Spotify at roughly the same time that Spotify was planning to change the way the company paid songwriters on streaming mechanicals by claiming that its recent audiobook offering made it a “bundle” for purposes of the statutory mechanical rate. That would be the same rate that was heavily negotiated in 2021-22 at great expense to all concerned, not to mention torturing the Copyright Royalty Judges. The rates are in effect for five years, but the next negotiation for new rates is coming soon (called Phonorecords V or PR V for short). We’ll get to the royalty bundle but let’s talk about the cash bundle first.

As Tim notes in MBW, Mr. Ek has had a few recent sales under his 10b5-1 agreement: “Across these four transactions (today’s included), Ek has cashed out approximately $340.5 million in Spotify shares since last summer.” Rough justice, but I would place a small wager that Ek has cashed out in personal wealth all or close to all of the money that Spotify has paid to songwriters (through their publishers) for the same period. In this sense, he is no different that the usual disproportionately compensated CEOs at say Google or Raytheon.

Don’t get me wrong, I don’t begrudge Mr. Ek the opportunity to be a billionaire. I don’t at all. But I do begrudge him the opportunity to do it when the government is his “partner” as it is with statutory mechanical royalties, he benefits from various other safe harbors, has had his lobbyists rewrite Section 115 to avoid litigation in a potentially unconstitutional reach back safe harbor, and he hired the lawyer at the Copyright Office who largely wrote the rules that he’s currently bending. Yes, I do begrudge him that stuff.

And here’s the other thing. When Daniel Ek pulls down $340.5 million as a routine matter, I really don’t want to hear any poor mouthing about how Spotify cannot make a profit because of the royalty payments it makes to artists and songwriters. (Or these days, doesn’t make to some artists.) This is, again, why revenue share calculations are just the wrong way to look at the value conferred by featured and nonfeatured artists and songwriters on the Spotify juggernaut. That’s also the point we made in some detail in the paper I co-wrote with Professor Claudio Feijoo for WIPO that came up in Spain, Hungary, France, Uruguay and other countries.

The Malthusian Algebra Strikes Again

It’s not solely Mr. Ek who is the problem child here, it’s partly the fault of industry negotiators who bought into the idea that what was important was getting a share of revenue based on a model that was almost guaranteed to cause royalties to decline over time. This would be getting a share of revenue from someone who purposely suppressed (and effectively subsidized) their subscription pricing for years and years and years. (See Robert Spencer’s Get Big Fast.). If I were a betting man, I would bet that the reason they subsidized the subscription price was to boost the share price by telling a growth story to Wall Street bankers (looking at you, Goldman Sachs) and retail traders because the subsidized subscription price increased subscribers.

Just a guess.

Now about this bundled subscription issue. One of the fundamental points that I think gets missed in the statutory mechanical licensing scheme is the scheme itself. The fact that songwriters have a compulsory license forced on them for one of their primary sources of income is a HUGE concession that songwriters have been asked to agree to since 1909. That’s right–for over 100 years. A decision that seemed reasonable 100 years ago really doesn’t seem reasonable at all today in a networked world. So start there as opposed to streaming platforms are doing us a favor by paying us at all, Daniel Ek saved the music business, and all the other iconography.

Has anyone seen them in the same room at the same time?

The problem that I have with the Spotify move to bundled subscriptions is that it can happen in the middle of a rate period and at least on the surface has the look of a colorable argument to reduce royalty payments. I think if you asked songwriters what they thought the rule was, to the extent they had focused on it at all after being bombarded with self-congratulatory hoorah, they probably thought that the deal wasn’t change rates without renegotiating or at least coming back and asking.

And they wouldn’t be wrong about that, because it is reasonable to ask that any changes get run by your, you know, “partner.” Maybe that’s where it all goes wrong. Because let me suggest and suggest strongly that it is a big mistake to think of these people as your “partner” if by “partner” you mean someone who treats you ethically and politely, reasonably and in good faith like a true fiduciary.

They are not your partner. Stop using that word.

A Compulsory License is a Rent Seeker’s Presidential Suite

But let’s also point out that what is happening with the bundle pricing is a prime example of the brittleness of the compulsory licensing system which is itself like a motel in the desolate and frozen Cyber Pass with a light blinking “Vacancy: Rent Seekers Wanted” surrounded by the bones of empires lost. Unlike the physical mechanical rate which is a fixed penny rate per transaction, the streaming mechanical is a cross between a Rube Goldberg machine and a self-licking ice cream cone.

The Spotify debacle is just the kind of IED that was bound to explode eventually when you have this level of complexity camouflaging traps for the unwary written into law. And the “written into law” part is what makes the compulsory license process so insidious. When the roadside bomb goes off, it doesn’t just hit the uparmored people before the Copyright Royalty Board–it creams everyone.

Helienne Lindvall, David Lowery and Blake Morgan tried to make this point to the Copyright Royalty Judges in Phonorecords IV. They were not confused by the royalty calculations–they understood them all too well. They were worried about fraud hiding in the calculations the same way Michael Burry was worried about fraud in The Big Short. Except there’s no default swaps for songwriters.

Here’s how the Judges responded, you decide if it’s condescending or if the songwriters were prescient knowing what we know now:

While some songwriters or copyright owners may be confused by the royalties or statements of account, the price discriminatory structure and the associated levels of rates in settlement do not appear gratuitous, but rather designed, after negotiations, to establish a structure that may expand the revenues and royalties to the benefit of copyright owners and music services alike, while also protecting copyright owners from potential revenue diminution. This approach and the resulting rate setting formula is not unreasonable. Indeed, when the market itself is complex, it is unsurprising that the regulatory provisions would resemble the complex terms in a commercial agreement negotiated in such a setting.

PR IV Final Rule at 80452 https://app.crb.gov/document/download/27410

It must be said that there never has been a “commercial agreement negotiated in such a setting” that wasn’t constrained by the compulsory license so I’m not sure what that reference even means. But if what the Judges mean is that the compulsory license approximates what would happen in a free market where the songwriters ran free and good men didn’t die like dogs, the compulsory license is nothing like a free market deal. If they are going to allow services to change their business model in midstream but essentially keep their music offering the same while offloading the cost of their audiobook royalties onto songwriters (and probably labels, too, although maybe not) through a discount in the statutory rate, then there should be some downside protection or another bite at the apple.

Unfortunately, there are neither, which almost guarantees another acrimonious, scorched earth lawyer fest in PR V coming soon to a charnel house near you.

Eject, Eject!

This is really disappointing because it was so avoidable if for no other reason. It’s a great time for someone…ahem…to step forward and head off the foreseeable collision on the billable time highway. I actually think the Judges know that the rate calculation is a farce but are dealing with people who have made too much money negotiating it to ever give it up willingly. If they are looking for a way off the theme park ride run by the evil clown, grab my hand on the next pass and I’ll try to pull you out of the centrifugal force. It won’t be easy.

This inevitable dust up means other work will suffer at the CRB. It must be said in fairness that the Judges seem to find it hard enough to get to the work they’ve committed to according to a recent SoundExchange filing in a different case (SDARS III remand from 2020) brought to my attention by Mr. George Johnson.

That’s not uncharitable–I’m merely noting that when dozens of lawyers in Phonorecords proceedings engage in what many of us feel are absurd discovery excesses, you are–frankly–distracting the Judges from doing their job by making them focus on, well, bollocks. We’ll come back to this issue in future, but I think all members of the CRB bar–the dozens and hundreds of those putting children through college at the CRB bar–need to take a breath and realize that judicial resources at the CRB are a zero sum game. This behavior isn’t fair to the Judges and it’s definitely not fair to the real parties in interest–the songwriters.

Tell the Horse to Open Wider

The answer isn’t to get the judges more money, bigger courtroom, craft services and massages, like a financial printer. Some of that would be nice but it doesn’t solve what I think is the real problem. I’d say that the answer is that the participants remember that the main this is that the main thing has to be the main thing. Ultimately, it’s not about us in the phonorecords proceedings, it’s about the songwriters. How are they served?

A compulsory license in stagflationary times is an incredibly valuable gift, and when you not only look the gift horse in the mouth but ask that it open wide so you can check the molars, don’t be surprised if one day it kicks you.

Chronology: The Week in Review: TikTok has a Napster Problem; @Helienne on Spotify’s new free goods; @MarshaBlackburn’s tour de force

When Universal withdrew from TikTok, the social media company was suddenly thrown back to its pirate-site roots, at least for the Universal catalog of all sound recordings and many, many songs. The eponymous TikTok is now on the clock to take down or mute Universal’s entire catalog. So tick tock baby.

Universal head Lucian Grainge made the case for the company’s approach to terminating its TikTok license because his negotiators were unable to reach a meeting of the minds with the other side. Pretty simple, really. This is not a big deal, it happens every day. Because in a free market capitalist system, “fair” is where we end up. Which means you have to end up somewhere, including nowhere.

Lucian made that case in an open letter to artists and songwriters as a community. There are some great nuggets in that letter, but I like this section to explain the casus belli:

The terms of our relationship with TikTok are set by contract, which expires January 31, 2024. In our contract renewal discussions, we have been pressing them on three critical issues—appropriate compensation for our artists and songwriters, protecting human artists from the harmful effects of AI, and online safety for TikTok’s users.

We have been working to address these and related issues with our other platform partners.  For example, our Artist-Centric initiative is designed to update streaming’s remuneration model and better reward artists for the value they deliver to platforms.  In the months since its inception, we’re proud that this initiative has been received so positively and taken up by a range of partners, including the largest music platform in the world.  We’ve also moved aggressively to embrace the promise of AI while fighting to ensure artists’ rights and interests are protected now and far into the future.  In addition, we’ve engaged a number of our platform partners to try to drive positive change for their users and by extension, our artists, by addressing online safety issues, and we are recognized as the industry leader in focusing on music’s broader impact on health and wellness.

With respect to the issue of artist and songwriter compensation, TikTok proposed paying our artists and songwriters at a rate that is a fraction of the rate that similarly situated major social platforms pay.  Today, as an indication of how little TikTok compensates artists and songwriters, despite its massive and growing user base, rapidly rising advertising revenue and increasing reliance on music-based content, TikTok accounts for only about 1% of our total revenue.

Let’s not forget that TikTok does not have some statutory or other legal or theoretical right to use Universal’s recordings or songs.  Their rights come from one place–their contract with Universal. No Universal contract, no Universal content. (Sorry copyright infringer apologists in the professoriate.).

Contracts have a duration, and when contracts end you negotiate an extension. If you can’t get an extension or a new agreement, remember the clock is ticking and time is running out–fair is where we end up, so one place to end up is nowhere. Stuff happens. Contracts frequently address what happens when the contract is over and the relationship must be unwound, sometimes called post-termination conditions which are just as much of a promise as anything else in the contract even if the duration (or the “term”) of the agreement is over.

The answer to what happened with Universal is simple: TikTok couldn’t close. Mr. TikTok may be a lot of things, but he’s no Blake.

Now that TikTok allowed their Universal deal to spin out of control, the termination clause(s) of their agreement no doubt become effective. If I had to guess, I would guess that TikTok must immediately stop any new uses of Universal content. Then it would not surprise me if TikTok has about 30 days to take it all down so they are on the clock…so to speak. I would also guess (or hope) that Universal has some post term conditions that will protect them from having to take TikTok’s rube deal on DMCA takedowns. The difference between a post term DMCA take down and a bald take down with no pre-existing contract should be that TikTok has a unilateral obligation to police their network for at least a period of time after termination. Failing to do so could leave them open to breach of contract for failing to satisfy post-termination conditions. Or something like that.

Let’s not forget that TikTok started out as a pirate social media site that got retroactive and prospective licenses in settlement of potential copyright infringement lawsuits. If licenses terminate, TikTok is essentially in the same position as it was before the license–at least as to the content that is covered by the terminating license. 

But of course TikTok won’t be in exactly the same position as the status quo ante, because the company is dependent on passing itself off as this inevitable legitimate company, i.e., a licensed platform. That was not the case when TikTok began licensing to avoid mammoth copyright infringement lawsuits. And therein lies the rub. 

TikTok may have a Napster problem. Once you let unlicensed material into a platform, it’s deuced hard to get it out, even if you have license. And as Judge Patel said in granting an injunction against Napster, “I’m sure that anyone as clever as the people who wrote the software in the case are clever enough, as there are plenty or those minds in Silicon Valley to do it, [to] come up with a program that will help to identify infringing items as well.”  

Thank God for the smart people.

So what happens now? Looking to recent history, Spotify was in a similar pre-IPO position when David Lowery and Melissa Ferrick sued the company for massive use of unlicensed songs. This led Spotify to go to Congress to rewrite the copyright laws in order to stop future litigation (called the “Music Modernization Act” with its probably unconstitutional retroactive reach back safe harbor). They were able to do that because of compliant lobbyists and the hunger among the elites for cash money from a Spotify IPO (or more precisely DPO). Plus Congress got to hang out with famous people and generally felt good about it because dissenting views were strangely absent in the mainstream media.

What do you think will happen if TikTok also goes to Congress to change the law to protect their cash cow and undermine artists and songwriters like Spotify did? They may send lobbyists to Capitol Hill with some walking around money, but if you haven’t picked up on it yet, at least half of the Congress despises TikTok. How does TikTok thread that needle?

TikTok’s response reads like it was written by the editorial staff at the People’s Daily:

“It is sad and disappointing that Universal Music Group has put their own greed above the interests of their artists and songwriters.

Despite Universal’s false narrative and rhetoric, the fact is they have chosen to walk away from the powerful support of a platform with well over a billion users that serves as a free promotional and discovery vehicle for their talent.

TikTok has been able to reach ‘artist-first’ agreements with every other label and publisher. Clearly, Universal’s self-serving actions are not in the best interests of artists, songwriters and fans.”

Note to Mr. TikTok and his PR bagmen, that “exposure” angle is not a winner. Not to mention that artists drive their fans to TikTok in huge numbers which is the real “free” promotion as in “uncompensated”. Also, newsflash, there is no free lunch so don’t embarrass yourself by starting the old “free promotion” okie doke. Mr. Tok needs to go home, think about his priorities and try again.

Also, don’t forget that TikTok has to do “blind check” licenses because it lacks the functionality to track and pay royalties, even the broken market centric royalty deal. Blind check licenses are the rough equivalent of an agreement not to sue TikTok rather than an industry standard royalty deal. Over time, it’s likely that the amount of the blind check must increase to compensate for the blindness.

The Universal episode is revealing, however. If TikTok thought they were going to get away with jamming artists because “exposure”, they need to go home and reconsider their life. The situation is completely out of control for one reason–TikTok underestimated Universal’s resolve. And they broke one of the cardinal rules of Business Affairs.

Never let it get to the point that you can’t just write a check.

@helienne’s Panel with Streamers and Label reps about artist centric, streaming fraud and Spotify’s new free goods

I interview Helienne Lindvall about a panel she was on in Europe with reps from Spotify, Deezer and WMG about artist centric implementation, streaming fraud and the new free goods, aka, Track Monetization Eligibility. 

How do you say “Bless your heart” in Mandarin?

If you didn’t watch the Big Tech hearing at the U.S. Senate, you should at least watch Senator Marsha Blackburn’s grilling of Mr. TikTok. Must-see TV.

Chronology: The Week in Review, Eric Schmidt Spills on his “Bait” to UK PM, Musk on AI Training and other news

Elon Musk Calls Out AI Training

We’ve all heard the drivel coming from Silicon Valley that AI training is fair use. During his interview with Andrew Ross Sorkin at the DealBook conference, Elon Musk (who ought to know given his involvement with AI) said straight up that anyone who says AI doesn’t train on copyrights is lying.

The UK Government “Took the Bait”: Eric Schmidt Says the Quiet Part Out Loud on Biden AI Executive Order and Global Governance

There are a lot of moves being made in the US, UK and Europe right now that will affect copyright policy for at least a generation. Google’s past chair Eric Schmidt has been working behind the scenes for the last two years at least to establish US artificial intelligence policy. Those efforts produced the “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence“, the longest executive order in history. That EO was signed into effect by President Biden on October 30, so it’s done. (It is very unlikely that that EO was drafted entirely at Executive Branch agencies.)

You may ask, how exactly did this sweeping Executive Order come to pass? Who was behind it, because someone always is. As you will see in his own words, Eric Schmidt, Google and unnamed senior engineers from the existing AI platforms are quickly making the rule and essentially drafted the Executive Order that President Biden signed into law on October 30. And which was presented as what Mr. Schmidt calls “bait” to the UK government–which convened a global AI safety conference convened by His Excellency Rishi Sunak (the UK’s tech bro Prime Minister) that just happened to start on November 1, the day after President Biden signed the EO, at Bletchley Park in the UK (see Alan Turing). (See “Excited schoolboy Sunak gushes as mentor Musk warns of humanoid robot catastrophe.”)

Remember, an executive order is an administrative directive from the President of the United States that addresses the operations of the federal government, particularly the vast Executive Branch. In that sense, Executive Orders are anti-majoritarian and are as close to at least a royal decree or Executive Branch legislation as we get in the United States (see Separation of Powers, Federalist 47 and Montesquieu). Executive orders are not legislation; they require no approval from Congress, and Congress cannot simply overturn them.

So you can see if the special interests wanted to slide something by the people that was difficult to undo or difficult to pass in the People’s House…and based on Eric Schmidt’s recent interview with Mike Allen at the Axios AI+ (available here), this appears to be exactly what happened with the sweeping and vastly concerning AI Executive Order. I strongly recommend that you watch Mike Allen’s “interview” with Mr. Schmidt which fortunately is the first conversation in the rather long video of the entire event. I put “interview” in scare quotes because whatever it is, it isn’t the kind of interview that prompts probing questions that might put Mr. Schmidt on the spot. That’s understandable because Axios is selling a conference and you simply won’t get senior corporate executives to attend if you put them on the spot. Not a criticism, but understand that you have to find value for your time. Mr. Schmidt’s ego provides plenty of value; it just doesn’t come from the journalists.

Crucially, Congress is not involved in issuing an executive order. Congress may refuse to fund the subject of the EO which could make it difficult to give it effect as a practical matter but Congress cannot overturn an EO. Only a sitting U.S. President may overturn an existing executive order. In Mr. Schmidt’s interview at AI+, he tells us how all this regulatory activity happened:

The tech people along with myself have been meeting for about a year. The narrative goes something like this: We are moving well past regulatory or government understanding of what is possible, we accept that. [Remember the antecedent of “we” means Schmidt and “the tech people,” or more broadly the special interests, not you, me or the American people.].

Strangely…this is the first time that the senior leaders who are engineers have basically said that they want regulation, but we want it in the following ways…which as you know never works in Washington [unless you can write an Executive Order and get the President to sign it because you are the biggest corporation in commercial history].

There is a complete agreement that there are systems and scenarios that are dangerous. [Agreement by or with whom? No one asks.]. And in all of the big [AI platforms with which] you are familiar like GPT…all of them have groups that look at the guard rails [presumably internal groups of managers] and they put constraints on [their AI platform in their silo]. They say “thou shalt not talk about death, thou shall not talk about killing”. [Anthropic, which received a $300 million investment from Google] actually trained the model with its own constitution [see “Claude’s Constitution“] which they did not just write themselves, they hired a bunch of people [actually Claude’s Constitution was crowd sourced] to design a “constitution” for an AI, so it’s an interesting idea.

The problem is none of us believe this is strong enough….Our opinion at the moment is that the best path is to build some IPCC-like environment globally that allows accurate information of what is going on to the policy makers. [This is a step toward global governance for AI (and probably the Internet) through the United Nations. IPCC is the Intergovernmental Panel on Climate Change.]

So far we are on a win, the taste of winning is there.  If you look at the UK event which I was part of, the UK government took the bait, took the ideas, decided to lead, they’re very good at this,  and they came out with very sensible guidelines.  Because the US and UK have worked really well together—there’s a group within the National Security Council here that is particularly good at this, and they got it right, and that produced this EO which is I think is the longest EO in history, that says all aspects of our government are to be organized around this.

While Mr. Schmidt may say, aw shucks dictating the rules to the government never works in Washington, but of course that’s simply not true if you’re Google. In which case it’s always true and that’s how Mr. Schmidt got his EO and will now export it to other countries.

It’s not Just Google: Microsoft Is Getting into the Act on AI and Copyright

Be sure to read Joe Bambridge (Politico’s UK editor) on Microsoft’s moves in the UK. You have to love the “don’t make life too difficult for us” line–as in respecting copyright.

Google and New Mountain Capital Buy BMI: Now what?

Careful observers of the BMI sale were not led astray by BMI’s Thanksgiving week press release that was dutifully written up as news by most of the usual suspects except for the fabulous Music Business Worldwide and…ahem…us. You may think we’re making too much out of the Google investment through it’s CapitalG side fund, but judging by how much BMI tried to hide the investment, I’d say that Google’s post-sale involvement probably varies inversely to the buried lede. Not to mention the culture clash over ageism so common at Google–if you’re a BMI employee who is over 30 and didn’t go to Carnegie Mellon, good luck.

And songwriters? Get ready to jump if you need to.

Spotify Brings the Streaming Monopoly to Uruguay

After Uruguay was the first Latin American country to pass streaming remuneration laws to protect artists, Spotify threw its toys out of the pram and threatened to go home. Can we get that in writing? A Spotify exit would probably be the best thing that ever happened to increase local competition in a Spanish language country. Also, this legislation has been characterized as “equitable remuneration” which it really isn’t. It’s its own thing, see the paper I wrote for WIPO with economist Claudio Feijoo. Complete Music Update’s Chris Cook suggested that a likely result of Spotify paying the royalty would be that they would simply do a cram down with the labels on the next round of license negotiations. If that’s not prohibited in the statute, it should be, and it’s really not “paying twice for the same music” anyway. The streaming remuneration is compensation for the streamers use of and profit from the artists’ brand (both featured and nonfeatured), e.g., as stated in the International Covenant on Economic, Social and Cultural Rights and many other human rights documents:

The Covenant recognizes everyone’s right — as a human right–to the protection and the benefits from the protection of the moral and material interests derived from any scientific, literary or artistic production of which he or she is the author. This human right itself derives from the inherent dignity and worth of all persons. 

Spotify ESG fail: Governance

[This is an extension of Spotify’s ESG Fail: Environment and Spotify’s ESG Fail: Social. “ESG” is a Wall Street acronym often attributed to Larry Finkat Blackrock that designates a company as suitable for socially conscious investing based on its “Environmental, Social and Governance” business practices. See the Upright Net Impact data model on Spotify’s sustainability score. As of this writing, the last update of Spotify’s Net Impact score was before the Neil Young scandal.]

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.