Home > Uncategorized > Follow the Money: Is Spotify Getting the Bear Hug from Google?

Follow the Money: Is Spotify Getting the Bear Hug from Google?

July 23, 2014

Every direct license has a term, that is, the period of time that the license is active.  Almost every license has an assignment clause–a covenant that allows the license to be transferred to a third party.  The identity of that third party is usually unknown at the time the license deal is closed.

Here’s an example.  You license your music to Company A, a bright eyed startup that is run by people you like.  You grant the license for, say, three years.  There is peace in the valley.  Company A pays you on time, you’re happy with the service.  Company A suddenly gets hot and then sells–or assigns its licenses and other assets (and perhaps its stock) to Company G, a multinational tech company that is dedicated to destroying copyright and makes up the law as it goes along.

When Company A sells to Company G, the lawyers for Company G will have a look at all of Company A’s licenses.  One thing the lawyers will look for is the “consent clause.”  This is an additional provision of the assignment clause that allows the licensor–you in this case–to approve any assignments.

Before you run to look at the assignment clause in your digital distribution agreements, let me save you some time.  If you have a consent right to block the assignment of your license, you would already know who you are and you’d probably be a major label.  If you are not a major label, then I would speculate that you have a 99% probability of NOT having a consent clause.

Why is that?  Because the reason that people get into the digital music service game most of the time is not because they want to be the next Ahmet, Barry, Russell, Herb and Jerry, Chris or Clarence, it’s because they want to sell their company.

Quickly.

And that’s the difference between a digital retailer today and those great record companies.  It’s not that these guys didn’t cash out, because they all did.  They just didn’t do it in a year or few.

One of the lessons I hope we’ve learned this year is that when you make a deal with one of the streaming services, you really have no idea who you’re making your deal with.  So the rest of this post is going to apply that idea.

Daniel Ek, the former CEO of uTorrent (the most popular software for distributing illegal content) and the current CEO of Spotify, recently emphasized to Yahoo News that Spotify had no intention of registering its initial public offering of the company’s common stock in the US.  In a July 16 story, Ek sought to shoot down “rumors” of an IPO.  This “rumor” was based on:

[A] job advertisement, posted on Spotify’s website and on LinkedIn, said the successful candidate – an “External Reporting Specialist” – would be required to “prepare the company for SEC filing standards. Set up all reports necessary to be SEC compliant”….adding to speculation that the Swedish start-up is preparing for a share listing, which one banker said could value the firm at as much as $8 billion.

Then on July 21, the well-known tech journalist Kara Swisher reported in Recode that one of the most senior Google execs has joined the Spotify board of directors.  (Google is famous for keeping their spokespeople anonymous.)

Omid Kordestani [Google’s chief business officer] is joining the board of Spotify, according to people with knowledge of the situation.

In addition, sources said, one of the search giant’s former execs, Shishir Mehrotra, will become a special adviser to CEO Daniel Ek and the company’s management.

The move is a fascinating one, especially since sources inside Google said that new YouTube head Susan Wojcicki [who I believe is Sergey Brin’s sister in law] has expressed interest in acquiring the popular online music service if it were for sale. It is not currently and there are no such discussions going on between the pair about such a transaction.

Thus, the new appointments appear unrelated. And, to be clear, Google’s top execs often join boards of companies, both with corporate ties to them and not.

When a venture backed company gets to the “pre-IPO” stage or near it, one of the financing moves that is not unusual is for the company to take an investment from a “strategic partner”.  This is particularly beneficial to the startup if the strategic partner also brings some technology or other business opportunity along with it, perhaps in addition to the money.

When someone joins the board of a venture backed startup, i.e., a private company, it is pretty common for that board member to represent a class of stock or to agree to vote their shares with, say, the Series B or something like that.  This is usually documented in something called a voting agreement.

Private company boards of directors are different than public company boards.  On a public company board, the company may find it advantageous to have a well-known business person, a distinguished politician or other public figure.  It’s less common that private company boards operate this way.  Not that it can’t happen, or never happens, but it doesn’t usually happen.

And if you are going to get a Spotify board seat, it seems very unlikely to me that you’d get that seat for free.  What is much more likely to me is that Google made an investment in Spotify, and if Google got a board seat in return for that investment, I would not be surprised if that was a pretty substantial investment that would further buttress the kind of valuation that Spotify wants to get when it does register its shares in an IPO.

Remember, Ms. Swisher’s reporting was that “[Spotify] is not currently [for sale] and there are no such discussions going on between [Google and Spotify] about such a transaction.”

Remember also that Beats has a user base in the 200,000 range and sold for $3 billion (subject to satisfying some closing conditions from what I hear–the price could go down).  Spotify has 40 million users with 10 million subscribers as of May 2014.  So what better way to confirm your valuation than to have an investment from Google that’s in line with the Beats valuation benchmark.  (I understand that the Beats music service was only part of the company, but still….)

If I had to guess, and it’s just a guess, I’d say that a Spotify board seat is worth about 20% of the company.  So if Spotify had an $8 billion valuation pre-Beats….

We will be keeping an eye on Google’s and Spotify’s public filings to see if anything turns up.  It could also be that Google and Spotify are doing some kind of licensing deal that will be meaningful for both companies.  Just because Google and Spotify can truthfully deny there’s an acquisition going on, doesn’t mean that there’s not a whole lot of other action.

But whatever the corporate machinations are, Spotify surely got something in return for allowing Google a vote on their future.  The current news doesn’t provide an answer to that question.

And the other thing that is true is that Google has demonstrated through its cavalier treatment of indie labels that got itself hauled in front of the European Commission–yet again–that Google is the last company you’d want to have making decisions at a company that is already despised by many artists for paying extraordinarily low royalties.  And if Google did make that investment, you have to ask where did the money go?

Google will get the full information flow about all of Spotify’s deals, all of the income, all of the license terms.  This may not seem offensive to Mr. Ek, whose last job involved distributing uTorrent software, the lifeblood of music piracy.  After all, he’s going to cash out again and leave the artists hanging.

But it seems pretty weird to me.

Consent clause.  Write that down.

 

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