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@musictechsolve: Is Spotify Stock Quietly Tanking?

September 25, 2019 Comments off

UPDATE:  This post originally appeared on 9/24 in MusicTech.Solutions before reading that on 9/23 Wells Fargo initiated coverage of Spotify at “Underperform” with a $115 price target.  (The stock touched $115 during the trading day on 9/24).  As of this writing, the consensus price target is $159 according to NASDAQ’s Marketbeat.  And of course, streaming’s massive consumption of electricity is becoming an issue faster than you can say “data center.”

Analyst Mark Hake has developed three different scenarios for where Spotify’s stock price will be in 2021:  $125.68, $61.42 and $38.39.  He assigns a $114.89 price based on a probability analysis.  About where it is at the close today, in other words.  His post in Seeking Alpha (“Spotify Has A Valuation Problem”) is a must read if you’re interested in financial analysis.  (I predicted about a year ago the stock would retrace to the $120 to $130 range before dropping below $100 and that it would happen sooner than later.)

As analyst BNK Invest noted after the close last Friday (9/20):

In trading on Friday, shares of Spotify Technology SA (Symbol: SPOT) entered into oversold territory, hitting an RSI reading of 26.8, after changing hands as low as $120.63 per share. By comparison, the current RSI reading of the S&P 500 ETF (SPY) is 56.4. A bullish investor could look at SPOT’s 26.8 RSI reading today as a sign that the recent heavy selling is in the process of exhausting itself, and begin to look for entry point opportunities on the buy side.

This chart is from today’s trading and it reveals a couple interesting patterns–they may mean nothing, but then again they might.  It’s not so much that Spotify is now trading about $20 below its self-assigned private company valuation of $135.  That’s not a comfortable feeling as it says that investors would have been $20 a share better off if the company had never had its controversial direct public offering (or “DPO”) and just stayed private.

Spot 9-24

Intraday Trading on 9/24/19 Only

What’s interesting about this chart is not so much the price but rather the volume.  Spotify is a very thinly traded stock that typically has relatively low volume.  When you see larger volume around the opening and the close of trading it may indicate certain motivations of sellers.  Particularly if there are holders of large blocks of shares that want to slip out of their position when nobody is (a) noticing or (b) can do much about it.

Because of the nature and “rules” of the DPO, Spotify doesn’t have the typical underwriting syndicate that helps to keep the price somewhat stable to allow the stock to establish a trading range with support levels.  Instead of the underwriters selling to the public, Spotify insiders are selling their shares to the public, which then of course can be resold.  In an underwritten public offering, insider shares are usually subject to a “lock up” period where insiders cannot sell their shares for a period of time, say 90 to 180 days after the first public offering.

Spotify had no lock up on insiders.  So who has an incentive to sell their shares relatively quickly?

It’s hard to know who is doing the selling unless you’re a transfer agent with access to the master shareholder list, and they probably wouldn’t disclose that information for anyone under certain thresholds.  But it is odd and it’s been similar patterns for a week or so.

Spot 5 days 924

A Look at Christopher Sprigman’s Recent Record

July 16, 2019 Comments off
Sprigman 1

Sprigman Throws a Definition at Blake Morgan

The Spitting Image of the Modern Major General

MTP readers may remember the name Christopher Sprigman.  Most recently,  we have identified him as a counsel to Spotify in the “Nashville cases” brought against his firm’s client Spotify by four plaintiffs represented by well-known and successful artist rights attorney Richard Busch.   These were cases brought against Spotify in Nashville for claims of copyright infringement by independent publishers who opted out of both the NMPA settlement and the Lowery & Ferrick class actions.  (Just to be clear, Lowery had nothing to do with the Nashville cases.)

Sprigman PHV

Professor Sprigman also teaches at the New York University law school in New York and evidently has an of counsel relationship with the distinguished New York law firm Simpson Thatcher.  According to his law firm biography:

“Chris is a tenured faculty member and Co-Director of the Engelberg Center on Innovation Law and Policy at New York University School of Law, where he teaches intellectual property law, antitrust law, competition policy and comparative constitutional law.”

Simpson Thatcher is one of those ultra white-shoe corporate law firms, a very conservative reputation and also highly respected around the world.

Sprigman Lowery

Pot, meet kettle

Professor Sprigman has a history in copyright circles dating back to at least 2002, i.e., before he worked on Simpson Thatcher client Spotify.  His selection to represent Spotify may be explained as simply as Professor Lessig was not available, but it’s more likely that his past work informed his selection as is usually the case.  Nothing wrong with that.

Some of Sprigman’s academic writings can be found on his SSRN author profile.  At least a few of these papers (that we know of)  were co-funded by Google.  That Google connection evidently is a topic of some sensitivity with Professor Sprigman as it was that point that seems to have prompted his unprovoked and public comparison of David Lowery to Alex Jones.

Blake Alex

Aside from the depressing reliability of the Alex Jones Corollary to Godwin’s Law, this was both a shocking yet curious comparison.   Why Alex Jones, of all people?  What about Alex Jones is of relevance to David’s role in the artist rights struggle?  I am of the view that it carried with it an implied threat–Sprigman could get his buddies in Big Tech to deplatform David just like Alex Jones.  Why?   My guess is that it is because Sprigman apparently wants you to believe that David’s message was just as toxic to Twitter.   (David was not even involved in the initial Sprigman exchange at all and tells me he had no idea it was even going on.  He was on the road with Cracker and Camper Van Beethoven, you know, selling T-shirts like a good boy.)

Sprigman Lowery 2

The non denial denial

It All Starts with the Disney Fetish

Professor Sprigman has a long-term connection to Professor Lessig, beginning with a 2002 article “The Mouse the Ate the Public Domain” supporting Lessig’s losing argument in Eldred v. Ashcroft attacking the 1998 Copyright Term Extension Act.  (“Most artists, if pressed, will admit that the true mother of invention in the arts is not necessity, but theft.”  How very 1999.)

It will not be surprising to learn from the NYU alumni blog introducing Professor Sprigman that Lessig is his “mentor” (“Sprigman set a goal of writing an article within four months that he could take on the job market, if his mentor and the [Stanford Center for the Internet and Society]’s founder Lawrence Lessig deemed it satisfactory. The result was a paper that reintroduced the idea of formalities in copyright law. Its boldness won Lessig’s approval.”)  Ah, yes.  Fortune favors the “bold.”

A younger and perhaps bolder Sprigman held a 2003 fellowship at Stanford’s Center for the Internet and Society (founded by the very bold Lawrence Lessig III and later funded by the even bolder Google in 2006 with a $2 million gift).  This academic fellowship evidently produced his 2004 article “(Re)Formalizing Copyright” boldly published by Stanford and, in a nutshell, advocating a requirement of copyright registration.  (My view of this fascination that many of the Lessig crowd have with registrations is to create a giant loophole that would allow Big Tech to use “unregistered” copyrights (especially photographs) as they saw fit.  Boldly, of course.)

As a quick aside, MTP readers will recall that the “address unknown” NOI debacle makes clear that even if works are registered and readily available through searchable databases that currently exist, Google, Amazon, Spotify and some others cannot be trusted to look for the sainted registrations.  These companies appear not to have looked or not to have looked very hard before attesting that they had searched the Copyright Office records in their 70 million or so address unknown filings.  Even allocating 5 minutes per copyright for search time, it would have taken over 350,000,000 minutes (or 5,833,333 man-hours, 243,055 man-days or 665 man-years.  Roughly speaking.  Feel me?  Curiously, Apple never used the address unknown loophole.  It is unlikely that a registration-based system (which the US abandoned decades ago) would produce the promised results but would produce a substantial burden on all copyright owners, especially independents–not to mention the productivity loss to the Copyright Office itself.

This registration loophole is also a core Lessig concept that he pushed during the orphan works bills of the 2006-2008 period (see “Little Orphan Artworks”.  It is echoed in the Music Modernization Act with the requirements to register with the Mechanical Licensing Collective under Title I (at least if you want to be paid outside of the black box) and the registration requirements under Title II for pre-72 copyright owners imposed by Big Tech’s favorite senator, Ron Wyden.  Note neither requirement requires a formal copyright registration so doesn’t go as far as Lessig, Samuelson and Sprigman, but it’s headed that direction.

David Poe Woodward

Sprigman later was co-author with Lessig of the Creative Commons filing to “save” “Jewish cultural music” in 2005 orphan works consultation by Copyright Office.

creative-commons-2008-schedule-b ANNO

In 2006, Professor Sprigman was lead counsel with Lessig on the losing side in Kahle v. Ashcroft (later v. Gonzales) which unsuccessfully challenged the elimination of the renewal requirement under the 1992 Copyright Renewal Act.  He went on to write “The 99 Cent Question” in 2006 attacking iTunes pricing.

Association with Pamela Samuelson

Pamela Samuelson is another registration fan in the professoriate, so it was not unexpected that Samuelson and Sprigman would find each other.  Among his other accomplishments, Professor Sprigman was a member of Pamela Samuelson’s “Copyright Principles” project and co-authored its paper that also advocated registration (see Sec. IIIA of paper, “Reinvigorating Copyright Registration”).  (MTP readers will remember Samuelson and her husband the tech maven Robert Glushko from the Samuelson-Glushko IP units at various law schools in the US and Canada that consistently oppose artist rights.  A critic might say that the Samuelson-Glushko academic institutes are like Silicon Valley’s version of Confucius Institutes.)

The Copyright Principles Project is especially relevant to Professor Sprigman’s outburst regarding David Lowery because of what I would characterize as the utter failure of Pamela Samuelson to make an impact when she testified before the House Judiciary Committee’s IP subcommittee in 2013.  This missed opportunity was, I think, largely due to Lowery’s takedown of the “Project” that appeared in Politico hours before she testified which Chairman Goodlatte asked to be entered into the record of the hearing where it sits to this day.

Lowery Politico

It’s worth noting that there were no creator members of the Copyright Principles Project, and Samuelson was questioned sharply about this by the IP subcommittee–it sounded like staff had been fed the “Case Study for Consensus Building” without being told that an important group had been omitted from the “consensus”.  Her response was that she didn’t need any creator members on the Copyright Principles Project because she was herself an academic writer.  I think it’s fair to say that while I didn’t see any of the Members laugh out loud, her response was viewed as rather weak sauce in light of Lowery’s post in Politico.   That exchange appears to have led to Samuelson founding the “Authors Alliance” after the hearing evidently to shore up that shortcoming.  Too late for the Copyright Principles Project, however.

All Hail the Pirate King

Like his mentor Lessig, Professor Sprigman also seems to have an interest in defending the alleged benefits of piracy and apparently is a leader of the “IP without IP” movement (and co-author of the piracy apologia, The Knockoff Economy: How Imitation Sparks Innovation.)   (See also what we call the “pro-piracy” article “Let Them Eat Fake Cake: The Rational Weakness of China’s Anti-Counterfeiting Policy“.  “[M]ost of that harm [of counterfeits and piracy], at present and for the foreseeable future, falls on foreign manufacturers”–this means you, songwriters.)  He frequently writes on pro-piracy topics with Professor Kal Raustiala of the UCLA School of Law of all places.

It should come as no surprise then, that he represented Spotify in the Nashville cases.  He was co-counsel on Spotify’s papers (with Jeffrey Ostrow from Simpson Thatcher) famously making the losing argument that, in short, lead to the conclusion that there is no mechanical royalty for streaming (after the usual Lessig-esque Rube Goldberg-like logic back flips).  In Sprigman’s America, his Big Tech clients would not pay streaming mechanicals to songwriters at all, an issue that was emphatically put to rest in the Music Modernization Act.  (In a curious case of simultaneous creation, Techdirt came to almost the identically flimsy argument.)

David Poe Delete S

What Did We Ever Do to Him?

But before last week, Professor Sprigman most recently came onto the radar in his chairing of the American Law Institute’s Restatement of Copyright which many (including me) view as a political end-run around the legislative process.  Register of Copyright Karyn Temple said the Restatement of Copyright “appears to create a pseudo-version of the Copyright Act” and would establish a contrarian view of copyright under the mantle of the august American Law Institute.  It’s unclear to me who, if anyone, is financing the Restatement.  (MTP readers will recall The American Law Institute’s Restatement Scandal: The Futility of False “Unity”.)

Aside from the fact that the normal world is not waiting for the Restatement of Copyright, it is hard to understand how a person with such overtly toxic attitudes toward uppity artists like Blake Morgan, David Lowery and David Poe should–or would even want to–participate in drafting the Restatement.

Unless they had a reason.  Like providing a citable text holding that piracy is groovy, for example.  Originalists come not here.

As Kevin Madigan observed:

It’s not difficult to understand the creative community’s unease when taking a closer look at two of the projects leaders. The Restatement was originally the idea of Pamela Samuelson, a Professor of Law at UC Berkeley who is well known in the copyright academy as someone who has routinely advocated for a narrower scope of copyright protection. And while her knowledge and expertise in the field is unquestionable, her ability to take an objective approach to a project meant to influence important copyright law decisions is suspect.

While Professor Samuelson’s academic record reveals that she may not be the most suitable candidate to spearhead a restatement of copyright law, the project’s Reporters—those responsible for drafting the restatement—are led by Professor Chris Sprigman, whose work in academia and as a practicing attorney should undeniably disqualify him from this highly influential role.

Yet as of this writing, the American Law Institute still lists Professor Sprigman as the “reporter” of its Copyright Restatement project.

ALI Copyright

As one artist asked me of Sprigman, what drives him to be so consistently on the wrong side?  What did we ever do to him?

badbunny

(h/t to Fox of TO)

 

 

Guest Post: Making Fake Art: “1984”, The New Rembrandt, and The “Fake Artist”

August 4, 2017 Comments off

By Laura Kobylecky

“It was only an ‘opeless fancy.
It passed like an Ipril dye,
But a look an’ a word an’ the dreams they stirred!
They ‘ave
stolen my ‘eart awye!

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

From 1984 by George Orwell

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

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

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

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

The versificator is an element of fiction. However, “The Next Rembrandt” is real. (3) Microsoft, a participant of this project, describes it as “blurring the boundaries between art and technology” and states that the “project is intended to fuel the conversation about the relationship between art and algorithms, between data and human design.” The project used technology to make a painting that supposedly recreates Rembrandt’s style.

The portrait is a man. He has a black hat, tilted slightly. A goatee graces his face as a white ruffled collar draws the eye. His lips are slightly parted in the gesture of a half-spoken word and his eyes are inquisitive and bright. He has never lived. He is purely the manifestation of technological innovation and he exists as “a result of analysing data from Rembrandt’s body of work.”

The portrait took over 18 months. The project was based on access and study of primary data. All 346 of Rembrandt’s paintings were collected in “high resolution 3D scans and digital files.” With the art digitized, it could be studied. An algorithm searched for data points. From the data, various facial points were determined. The result was brought into the world with a 3D printer that recreated the layers and textures of paint on paper. The final product is a pleasant “painting.” It’s nice to look at, but it won’t fool the experts—yet. In the future who knows. Is it fake art? That depends on perspective.

What makes a “fake artist”? In August, 2016, Music Business Worldwide (2) accused Spotify of creating “fake artists.” However, this isn’t quite what it sounds like. Unlike “The Next Rembrandt,” these tracks are not being made by a machine—according to the post. The article states that Spotify has been “paying producers to create tracks within specific musical guidelines.” These producers get a flat fee.

So why does this bother anyone? It’s partially because of playlists. Spotify’s playlists are big money for some musicians. A “chill vibes” piano play list can be a great way to get plays for a composer. However, if Spotify chooses to drop “their records in the playlists in favor of its own masters,” that seriously shifts the balance of power and profit. Those same composers might have a reduced chance of profit and success on this platform.

There is another problem with the, hypothetical, “fake artist.” In a second article, (4) Music Business Worldwide addresses the issue of how these “fake artists” could be driving down the “per-stream income for everyone, while lowering the negotiating power of the labels/publishers/collecting societies.” The following chart illustrates that issue:

Royalty Allocation Ratio

The problem depends on the “allocation ratio,” or how people are getting paid. The bigger the “total plays” the smaller the “per play rate”. If the total pool of monthly revenue available for royalty payments is divided equally over the total number of plays, that determines the “per play” rate for that month. Each artist or songwriter would get paid for each of their plays based on that rate. (There may be complexities like minimum payments and country variations depending on negotiation power, but the basic math is pretty consistent.)

However, it doesn’t quite set right if somebody is watering down the “total plays” by including the “flat fee” folks. Flat fee artists already got their money and they aren’t getting more from the royalty pool no matter how many plays they got. Including their plays in the pool would serve no function other than to reduce the rate that the royalty artist gets per play.

It’s kind of like if you work at a restaurant and tips are your main income. You might have agreed to take a tip share. Everybody’s tips are added up and divided equally. So you make a salary, say, $2.13 an hour and expect to work for the rest in tips. But what if a co-worker has decided they’d rather not gamble on the tips. They agreed to take a flat hourly rate of maybe $11.25. Well if at the end of the day there are 6 waiters getting hourly plus tips and 4 hourlies, but the tip share is divided over ten people, things are strange. The six waiters are only getting a tenth of the total tips, but the extra money being held back from the tip share won’t be given to the hourlies. The extra money just goes to somebody else’s pockets.

Spotify has disagreed with this assertion. The Guardian quotes Spotify:

“[It’s] categorically untrue, full stop. We pay royalties – sound and publishing – for all tracks on Spotify, and for everything we playlist. We do not own rights, we’re not a label, all our music is licensed from rightsholders and we pay them – we don’t pay ourselves. We do not own this content – we license it and pay royalties just like we do on every other track….”

However, the Guardian indicates that even if the royalties are paid they might still be “much more favourable to the company than its standard deals with record labels.” A small change of fraction of a percent of Spotify’s reported $2.8 billion total royalty payout could add up to a great deal of saved money over time. Some of the same math of the above chart could still apply.

But in the end, these are still genuine human artists making the tracks, according to reports. The “fake artists” might be people with different names, but they are people nonetheless. Nobody has invented a versificator re-creating the “Next Rembrandt” of music. But could it happen?

The Next Rembrandt was based on a collection and study of data. Algorithms were used to apply the data points. So if the Rembrandt recreation took high res scans of all the Rembrandt works, then the versificator also would require a massive collection of data to work with, as well as the tools to use that data.

Spotify has made many recent acquisitions of companies that interact with data. Forbes addresses ( 5 ) some of these recent acquisitions. One of these startups that study data is Preact. The company is described “Learning everything possible about what makes subscribers happy, what they don’t like, what they’re talking about online.” Another acquisition is “Soundwave,” a startup that tracks “what songs people played on their phones and where.”

Another major purchase on the data front is The Echo Nest (6). This company “uses data analysis and machine listening to power song recommendation, audio fingerprinting and audio analysis.” Fast Company goes into further detail about The Echo Nest ( 7 ) . They describe the way that it:

“…devours data about the music, on both the “acoustic side”–tempo, key, etc. (Echo Nest’s system crunches that sort of data in about 10 seconds for a song)–and the “cultural side”–what reviewers are saying about the music for instance.”

So it seems like the Echo Nest has some capacity to study a song, the content of it, and also to study how those particular content elements affected people (the cultural side). This data is valuable. What could be done with it?

The New Rembrandt was a study of finding data in the work of Rembrandt, followed by an analysis of that data, and completed with an application of that data. It took massive amounts of data, and tools to study that data to make a genuine “fake” machine-made painting. If someone wanted to make a versificator, capable of producing genuine “fake artist,” how would they do it? Well, it might take access to a massive pool of music, tools capable of studying that data, some motivation and the financial backing to make it all come together.

This is where the science fiction side comes back.  What would motivate someone to make a versificator, one that could produce Prole-pleasing content? First, it must be examined how such a machine would affect the industry. What would a versificator do? If a machine could simulate the art of humans, with any degree of success, it would certainly shift some power in the music and tech industry. The mechanization could reduce individual bargaining power. Even the production of “filler music” could leverage negotiating power enough that major shifts occur. Who would be motivated to make this happen?

In the end, does it really matter? It’s still art maybe, just made by a machine. Does human-content have less value simply because humans didn’t make?

In 1984, the narrator watches a “Prole” prole hanging her laundry on a line. She hums “Hopeless Fancy,” a versificator song, but “the woman sang so tunefully as to turn the dreadful rubbish into an almost pleasant sound.” The song is appreciated, and it connects to this human enough for them to sing along. Is that connection enough, to elevate the product to art?

Would you listen to songs from the versificator?

 

 

REFERENCES

  1. https://www.theguardian.com/artanddesign/2016/apr/05/new-rembrandt-to-be-unveiled-in-amsterdam
  2. https://www.musicbusinessworldwide.com/spotify-is-creating-its-own-recordings-and-putting-them-on-playlists/
  3. https://news.microsoft.com/europe/features/next-rembrandt/
  4. https://www.musicbusinessworldwide.com/why-spotifys-fake-artists-issue-like-so-much-in-streaming-comes-back-to-transparency/
  5. https://www.forbes.com/sites/hughmcintyre/2016/11/15/spotify-is-ramping-up-its-acquisitions/#501eedcd40d5
  6. http://variety.com/2014/music/news/spotify-acquires-the-echo-nest-1201126850/
  7. https://www.fastcompany.com/1734773/echo-nest-makes-pandora-look-transistor-radio

 

© 2017 Laura Kobylecky, All Rights Reserved

 

Chris Castle on Artist’s Right to Streaming Exclusives

April 5, 2017 Comments off

How Accurate are Music Subscription Service Subscriber Numbers? — Music Tech Solutions

March 4, 2017 Comments off

All of you who subscribe to the New York Timesfly Quantasuse any of a number of mobile carriers or who are in the 6th month of your third Spotify 90 day free trial may be interested in this post.

According to Billboard in a story titled “Spotify Officially Hits 50 Million Paid Subscribers“, the “official” announcement came from a tweet:

I found this intriguing–how did we go from “Spotify Officially Hits 50 Million Paid Subscribers” in the headline to a tweet that doesn’t really say the same thing?

via How Accurate are Music Subscription Service Subscriber Numbers? — Music Tech Solutions

Spotify IPO Watch: Blame ≠ Profit — Music Tech Solutions

August 25, 2016 Comments off

A combination of factors have gotten Spotify where it is now. Market conditions, bad management, arrogance, stiffing songwriters and getting too big, too fast. Until all those things change to one degree or another, it’s likely that the Spotify IPO myth will remain just that.

via Spotify IPO Watch: Blame ≠ Profit — Music Tech Solutions

The Marginal Value of Infringement in the Wrong Tail

January 11, 2016 Comments off

It looks like Spotify has got hold of the wrong tail.  Spotify is doing back flips to blame others for its manifest failures to lawfully obtain mechanical licenses.  Spotify’s transgressions are currently the subject of two different class actions brought by songwriters.  According to press reports, 10% to 25% of the songs on Spotify “are not properly licensed and/or not distributing royalty payments.”  Spotify also claims to have licensed approximately 30 million recordings (of 30 million songs, give or take for covers).

Based on these assumptions, that means there are three million to 12 million songs that “are not properly licensed and/or not distributing royalty payments”.  This is not a few new releases, a 1/16th of a song for a sample, the odd songwriter who cannot be found or who is non responsive.

Millions of unlicensed songs isn’t an acceptable accident, it’s an unacceptable policy.  In fact, it’s exactly what the compulsory mechanical license was designed to prevent.

At the end of the day, the policy, i.e., the choice, to go forward without licenses, rests solely with Spotify.  The company could have complied with the compulsory license–enacted by the U.S. Congress for this exact situation–but Spotify chose not to.  Whoever Spotify hired to undertake the mechanical process of mechanical licensing, someone at Spotify decided to go forward without complying with the law and they did so on a grand scale.  It appears that the thinking was that the upside value of having “all the world’s music” was greater than the downside risk of getting caught.  The marginal value of another few million songs was greater than actually complying with the law and paying songwriters.

This decision is what is called “business risk.”  Incredible as it may seem, this decision–this willful decision–to accept the business risk of using millions of unlicensed songs was apparently driven by a belief that in order to have an effective consumer offering, Spotify had to have tens of millions of tracks available to consumers.  This policy of using millions of unlicensed songs may well have been informed by the “long tail” theory and thought experiment posited by one Chris Anderson (in case you forgot him).  You can read all about it in Anderson’s counterintuitive utopian book The Long Tail: Why the Future of Business is Selling Less of More which was based on a 2004 article in Wired.

I’d be very interested to know exactly where this consumer research is that shows the marginal value of an additional 12 million songs is so meaningful to a music service that it trumps the infringement exposure.  I frankly have never seen it–aside from Spotify’s reliance on Anderson’s version of the long tail.

Anderson goes down the wrong rabbit hole by relying on anecdotal observations of “Ben” an anonymized (or perhaps fictional) character who is a teenager from an affluent family in Silicon Valley who gets most of his music from “friends” and “Bit Torrent” (recall that Spotify’s CEO was a developer of uTorrent, a key piece of the piracy picture acquired by Bit Torrent in 2006).  So Anderson starts by analyzing a legal market with comparisons to the black market.  That obviously wasn’t going anywhere logical.  Neither is any market of what the New York Times called “pixel-size niches“.

Anderson’s long-tail thought experiment has been criticized by a number of people such as Harvard Business School Professor Anita Elberse in the Harvard Business Review and most famously in the music business by Will Page, the former economist for PRS, the UK performing rights organization.

Any record company production manager could have chimed in–and perhaps would have if it wasn’t so obvious that it did not really bear much discussion.  The corresponding transaction costs of a variety of functions including rendering royalty statements for minuscule unit sales were not worth keeping the title in the catalog.  You know, kind of like sending a royalty statement for three streams.  Preparing the statement may well cost more than the royalty even if the statement is itself digitally delivered.  Not to mention taking the phone call from the angry songwriter who got a statement for $0.19.

Record companies are no strangers to the long tail–that’s often called classical and instrumental jazz.  It is worth noting that record companies have for decades deleted titles that didn’t sell enough to justify keeping the title in the company catalog.  This is consistent with Professor Elberse’s research demonstrating that “the tail increasingly consists of titles that rarely sell and that are produced by smaller-scale players.”  Professor Elberse assumed that there were no infringement costs associated with those “titles that rarely sell” thus exponentially increasing the cost of the tail, or as this particular tail is known in some circles, the wrong tail.

Then-PRS economist Will Page reached a similar conclusion after analyzing PRS royalty payments in 2008.  Those who have had about enough sanctimony from Spotify about how it is God’s gift to fighting piracy will find this nugget of interest when wondering how much the marginal value of the last 12 million tracks that don’t sell really is worth if they are all unlicensed:

Will Page, the former economist for PRS, found in a 2008 study of PRS revenues that famously debunked Chris Anderson’s absurd “long tail” theory, the “long tail” is pretty meaningless for music services:

[PRS] found that only 20% of tracks in our sample were ‘active’, that is to say they sold at least one copy, and hence, 80% of the tracks sold nothing at all. Moreover, approximately 80% of sales revenue came from around 3% of the active tracks. Factor in the dormant tail and you’re looking at a 80/0.38% rule for all the inventory on the digital shelf.

Mr. Page now works for Spotify.  They could have just asked him before taking the business risk of failing to get compulsory licenses.

Was the marginal value of the long tail worth it for Spotify when compared to statutory damages?  Commentators often mock statutory damages, especially for willful infringement, as being over the top.  In the case of the compulsory mechanical license, you can look at this another way.

Congress did backflips to make the compulsory license easy to get.  If a well funded company like Spotify (last valuation $8 billion) chooses to ignore Congress’s efforts, then Congress wants to make sure that the marginal value of ignoring the compulsory license is always less than the statutory damages for choosing to do so.

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