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How Shareholder Lawsuits Against Spotify May Have Just Gotten Easier

February 25, 2018 2 comments
maginot-line

The Maginot Line

The Digital Media Association is as obsessed with crushing the ability of independent songwriters and small publishers to sue companies like Spotify for copyright infringement as the industry negotiators are with presenting a new safe harbor for infringers like it was a fantastic give in the Music Modernization Act.  But at least where Spotify is concerned, as a public company they may be begging for the very statutory damages they are so anxious to eliminate.

Spotify lawyers like Christopher Sprigman and his compadre Lawrence Lessig have been trying to get rid of statutory damages and bring back 1909-style copyright registration for years.  (See also Pamela Samuelson and the list goes on.)

But now that the industry has acquiesced in both of those long cherished goals of the anti-copyright crowd, songwriters will have to look elsewhere to regain the kind of punch that they got with the statutory damages stick.  Why?  Because  a benevolent and patriarchal government is taking that stick away from the little guy and giving it to the largest corporations in commercial history.  (And recording artists and record companies–you’re next and you’ll know who to thank.  See Transparency in Music Licensing and Ownership Act that is quietly adding co-sponsors.)

But you say, what could be a bigger stick than statutory damages?  It might be shareholder derivative suits.  And Sprigman’s benefactor Google is a great example of what that means.

MTP readers will recall that we have written before about Google’s “dual class shares” that created 10 for 1 supervoting stock that is owned only by insiders like Eric “Uncle Sugar” Schmidt, Larry Page and Sergey Brin.  If you’ve ever watched the video of a Google shareholder meeting, you’ll have seen David Drummond (who has his own problems) reading out the news of how any shareholder motion that was not supported by the insiders was defeated–and massively defeated due to the supervoting stock.  The only thing that’s remarkable is that the shareholders keep trying.  Because while all shareholders are equal, at Google, some shareholders are more equal than others.  Ten times more equal if they give you voting stock at all.  Google shareholders give the right to be forgotten a whole new meaning.

That’s right–Google has what I call the “you break it, you bought it” class of stock that gives the insiders total control over all aspects of their corporation.  If you’re not an insider, your role is to shut up and enjoy the ride.  Don’t get me wrong–lots of people do.

But some don’t.  Most recently, a Google shareholder tried to question the company’s top executives about their pre-#metoo opposition to the Stop Enabling Sex Traffickers Act.

If you watch the video, you’ll get the idea.  Google is comfortable with their opposition to stopping sex trafficking in favor of profitable safe harbors, so sit down, shut up and count your money.  That should demonstrate two things:  First, the Alphas are not interested in anything anyone else has to say although they will go through the motions to tolerate the poor Epsilons.  Second, these policy positions and more importantly corporate actions are solely the responsibility of the insiders in the More Equal Than You system of corporate governance.

And guess what?  Bloomberg reports that Silicon Valley mogul wanna be Daniel Ek mimicked the Google model with the supposedly egalitarian Spotify.

Chief Executive Officer Daniel Ek and Vice Chairman Martin Lorentzon own a class of stock that assures their hold on the company after the shares begin trading, said the people, who asked not to be identified because the terms aren’t public. Another class will be tradeable by investors.

That means public investors will be able to own part of the world’s largest paid music service in the next couple of months, but won’t have much say about its future. Years after going public, some of the biggest technology companies, including Google parent Alphabet Inc. and Facebook Inc., remain under the control of founders who hold shares with super-voting rights.

Company founders employ so-called dual-class structures to take advantage of the perks of being publicly traded without surrendering control. Such owners can make acquisitions that dilute their economic interest without loosing their grip.

Ek, who co-founded Spotify about a decade ago in Stockholm, has looked to such companies for direction. He invited Facebook founder Mark Zuckerberg to his wedding and has publicly praised the leadership of Snap Inc., which gave its investors no voting rights in its initial public offering last March.

If the Google shareholder meetings are any guide, it’s not that investors won’t have much say, they won’t have any say at all.  Unless they are sued by their stockholders in what is called a shareholder derivative suit.  A shareholder suit is when a shareholder sues the corporation’s officers or board of directors for a cause of action against the corporation that isn’t being brought because it would require the board of directors to sue itself.  These are often based on breach of fiduciary duty.

Case in point:  Google’s sale of advertising promoting the sale and distribution of illegal drugs.  Google signed a nonprosecution agreement with the Department of Justice, second cousin to a plea bargain, after a four year grand jury investigation, producing four million documents to the investigators and paying a $500,000,000 fine.  Walking around money for Google, but nobody was fired and according to the U.S. Attorney bringing the case, the paper trail implicated Google’s senior management including Larry Page (which disclosure resulted in an apology to Google from the DOJ and the “muzzling” of the US Attorney,)

Shareholders were pissed and a pension fund brought a derivative case (read the complaint) against the Google board including Page, Brin, Schmidt, John Doerr and Sheryl Sandberg.  (Yes, that Sheryl Sandberg.)  This case resulted in a settlement that required Google to spend over $250,000,000.

Shareholder Suite

So this is the kind of thing that stockholders bring themselves when they know that the government never will and there’s a case to be made.  Shareholder suits are kind of like the “private attorney general” laws that used to be in the Copyright Act where the government avoided the burden of actually enforcing its laws itself and instead relied on the market to do so.  How did they do this?  By giving private actors a big stick like the statutory damages and attorneys’ fees (recent precedent notwithstanding) they are now taking away from songwriters in the Music Modernization Act.

But never fear–songwriters who are also Spotify stockholders will still have the stick of shareholder derivative suits to go after malfeasance in the boardroom.  Shareholder derivative suits are in a very broad sense kind of like class actions, something Spotify is very familiar with.  The class is stockholders and the defendants are often limited to the officers and directors of the company for doing things like, oh, say, committing massive acts of willful copyright infringement that probably could be criminally prosecuted if there were any prosecutors with the chutzpah to actually enforce the copyright law.

And once Spotify sells shares to the public, the insiders may control the infringement but they can’t control who buys their stock.

Since Mr. Ek seems to want to be just like Google, maybe he’ll be just like Google in another way, too.  And remember–this is just the beginning of the disclosure of the inner workings of Spotify that will start to dribble out as its SEC disclosures become due and payable.  And these supervoting stock classes are a very good way to demonstrate that you broke it, you bought it.

You want all the control?  Well, you got it.  And having all the control means having all the responsibility, too.  Just ask Uncle Sugar.

 

So Much for Conversion: Apple Set to Pass Spotify in Subscribers

February 4, 2018 Comments off

Remember this one?

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Spotify was saving us all from piracy by giving the music for free in its ad supported tier. And if you had any doubts about that, just ask any Spotify employee, particularly circa 2011 or so.  They’d tell you in no uncertain terms that not only did you just not get it, you were failing on a cosmological level not to understand that that person you saw in the distance walking on water was not Jesus.  It was you know who.

Some of us believe that most people have an ambivalent relationship with advertising.  Some tolerate it, and of course you do hear people saying in their best automoton impression how advertising is “useful” which if it’s said just right can send a chill up the spine at the sheer Stepfordness of it all.  Many people, however, loathe advertising, which is why you constantly hear “leave it there” or “don’t move” from some on-air folk before a commercial break.  Some of those advertising loathers are themselves artists, which is why they have restrictions in their contracts about how their music can be used in advertising.

All of which went out the window with Spotify, because Spotify was going to save us all from piracy.  (We’ll leave out the Daniel Ek/U-torrent part today.)

And when Apple launched Apple Music as a subscription only service, Spotify had a meltdown–staring with Daniel Ek himself who Tweeted “Oh ok” which I guess he thought was something of a put down.

But–what about the conversion bit?  Apple is into conversion, too, but a different kind.  As of January 2018, the Apple installed base was over 1.3 billion.  Set aside what’s probably relatively minor overlap (mulitple phones on same billing account), one way or another that’s an existing customer base of over 1 billion people that already have iTunes installed, already have a billing relationship with Apple and are already predisposed to buy an Apple Music subscription.  What you might call economy of scale.

Spotify on the other hand wants you to believe that they can some how take people who have many, many commercial alternatives to theft–all of which they’ve ignored–and get them to use an advertising supported model.  A larger potential market, but people who don’t know you, don’t pay money for music online (yes, I know there’s an argument that they buy other things, which I don’t buy), and for many of them, people who don’t like us much.  Dedicated followers of Lessig in many cases.

So it should be no surprise that Anne Steele in the Wall Street Journal is reporting that if you include users who have subscribed to free or discounted subscriptions, Apple is actually ahead of Spotify in the US:

Apple Music has already passed Spotify. Including people who are still in free or deeply discounted trial periods leading up to paid subscription, Apple Music has a slight edge on Spotify in the U.S., according to one of the people familiar with the figures.

Apple Music has three to four times the number of such trial users as Spotify, according to this person, in part because it doesn’t offer a free tier. Also, all Apple Music subscribers are entered automatically into a free initial three-month period. Excluding those trial users, Spotify is ahead, but by a small amount—and that gap is closing.

And that’s kind of the point–Apple already has the billing relationship with their users so any resources they spend to convert users to subscribers is money well spent with a much higher likelihood of return.

But Anne Steele is one of the only journalists I’ve ever read who even mentions the possiblity that Spotify’s subscriber numbers are…let’s say exaggerated.   As she notes:

One question lingering in the industry is what metrics Spotify will have to disclose once it becomes a publicly traded company. The service has periodically released global subscriber totals and just last month touted a new high of 70 million.

Pop quiz–and be honest now–how many times have you thought that Spotify has 70 million paying subscribers?  Meaning users who are not on their 14th 90 day free trial?  If you look carefully you will see that Spotify itself doesn’t ever say 70 million paid subscribers.  The hoorah Spotify boosters in the press add “paid”.  But when the cold hand of the Sarbanes-Oxley truth in public company reporting law comes into Spotify’s post-IPO life like it does Apple’s, that 70 million number may get clarified–a lot.  And my bet is it will move downward or that there will start to be a greater distinction drawn by Spotify between subscribers and paying subscribers.

And that restatement of subcribers is not the kind of conversion that Spotify wants.

 

The Slippery Slope of Censorship: @HuffPost Pulls Story Critical of @Spotify Ahead of IPO — The Trichordist

January 9, 2018 Comments off

Artists Rights advocate Blake Morgan (#IRespectMusic) published a story in the Huffington Post this morning critical of Spotify. The story was rapidly gaining traction when it was suddenly deleted and Morgan received this email from the Huffington Post telling him he’d been censored From: Bryan Maygers Subject: Spotify’s Fatal Flaw Exposed Date: January 8, 2018 at 11:43:41 AM EST […]

Here’s Blake’s piece in its entirety.

Spotify’s Fatal Flaw Exposed: How My Closed-Door Meeting with Execs Ended in a Shouting Match

I love streaming.

I love making playlists, I love being able to download streamed music so I can listen when I’m offline, and I love being able to bring that music with me. In short, I think it’s a great distribution method.

What I don’t love is how little musicians get paid for all that streaming. It’s not fair––not even close. What’s more, middle-class music makers are the ones who are hit hardest, whose businesses are threatened, and whose families are put at risk. So how can I be against the way streaming companies treat musicians but not be
against streaming itself?

The same way I’m against the electric chair, but not against electricity.

Read the complete post on The Trichordist:  The Slippery Slope of Censorship: @HuffPost Pulls Story Critical of @Spotify Ahead of IPO — The Trichordist

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