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.
Pandora and Spotify (among others) have made a big deal out of providing “data” and “analytics” about streaming uses to artists–and particularly managers–about how the artist is performing on their respective services. The “artist data” meme is also offered up as a value add to counter complaints of low royalties. There is a real question of how useful this “artist data” is and a recent CNBC article calls into question just how accurate it really is in the first place.
Of course the most valuable piece of “artist data” that services could at least help the artist acquire–the fan’s email address–they won’t touch. Obviously, I’m not suggesting that the service hand over the fan’s email address to the artist without the fan’s consent, so let’s not go down that rabbit hole, a favorite of the services trying to avoid this issue.
What I am suggesting is that the service provide the fan with an opportunity to sign up for the artist’s own email list. This could be as simple as a link that would take the fan outside of the service momentarily to the artist’s email list sign up page. That way I don’t believe there are any privacy law issues for the service as there would be if the service just handed over the email address.
I have raised this with senior executives at Apple and Spotify and it went nowhere. The Spotify person rejected the idea outright because it would take the Spotify user (aka the artist’s fan) outside of Spotify. Strange, because the fan would be offered a choice. You know–the fan of the artist who most likely was driven to the service by the artist they are streaming. (This would produce another interesting metric based on the number of email list sign ups by service, but I digress.)
Aside from whether the type of information being provided is even useful to artists, there’s another question of whether the “artist data” is even accurate in the first place. And how would you even know.
CNBC did a little fact checking on streaming data provided by iHeart Radio analyzing the recent Grammy nominees. This isn’t exactly the same as the “artist data” being hawked by streaming services, but it is perhaps a good proxy (since it’s hard for artists to see each others artist data results).
iHeartRadio (owned by Clear Channel) gave CNBC the “artist data” for the most popular tracks on Clear Channel’s massive streaming operations. But CNBC discovered by using simple logic–aka sequential thought–that Clear Channel’s “artist data” was wrong. Because CNBC concerned itself only with massive hits, data checking was relatively simple (which of course makes the Clear Channel screw ups look even more idiotic).
Keep in mind as you read this that if you’re an artist using the “artist data” for its recommended purpose–discovering nuances about the service’s listening audience–it will almost certainly be more difficult if you’re not Ed Sheeran or Taylor Swift.
In a blog post based on the original (aka wrong) data, iHeartRadio said Ed Sheeran took home the honor of “most-thumbed up” track of 2015 with “Thinking Out Loud.” Taylor Swift’s three big songs relegated her to second, third, and eighth place. (Update: the original iHeartRadio blog post was taken down. The link above is a cached version.)
More impressive in the original data was that Drake’s “Hotline Bling” was the most-thumbed up track in 26 states in 2015. That would be amazing because the song only came out in July and didn’t really catch on until the colorful video was released in October. Here is exactly what the blog post said about Drake:
Although the track didn’t premiere until mid-2015, with the unforgettable music video coming out just weeks ago, the last-minute addition of Drake’s “Hotline Bling” surprised and delighted the ears of listeners across the country, leading it to become the No. 1 most thumbed song of 2015 across more than 20 states!
But this didn’t make sense to us. Sure Drake’s song was popular, but how could it be the top song in half of all states even though it was only hot at the very end of the year?
More weirdly: how could Drake’s song be No. 1 in half of the states but not appear anywhere in the top 10 songs nationally.
CNBC pointed this out to Clear Channel, who admitted their mistake and “corrected” their bad data. Yet that “corrected” data was FUBAR also according to CNBC:
The new data included the actual number of “thumbs up” and “thumbs down” by state. Of note is that Ed Sheeran’s “Thinking Out Loud” is the “most thumbed up” track in only one state — Hawaii. We find it is extremely unlikely that his track was actually the top track in the nation overall. IHeartRadio has not yet responded with further clarifications about the rest of its data set. We can’t check that against its original report, but we’re hoping to find out soon.
Of course, the new data set only included raw “thumbed” numbers for the top track in each state, so it’s possible that “Thinking Out Loud” had enough second-ranked “thumbs” to overcome Taylor Swift’s “Style,” but that seems unlikely.
So the thumbs didn’t have it after all? Clear Channel miscounted? Hard to say because we are entirely dependent on Clear Channel to provide the data backing up their work product. But we know there was some kind of screw up because CNBC had to provide a link to a cached copy of the original Clear Channel blog post with the bad data. If there’s no agenda here, why would Clear Channel try to hide their mistake from artists?
But good work by CNBC–except for one thing. They continued the streaming service meme that somehow talent buyers and concert promoters care about how many thumbs you get when deciding to book a gig.
[C]oncert planners and promoters depend on data like this to create touring routes.
No, no, a thousand times no. Clearly CNBC have never met a talent buyer. This is just simply not true.
Nonetheless, this CNBC post is a great example of how unreliable this “artist data” can be and just how hard it is to verify. So hard that it may well be simply misleading to ask artists to take a lower royalty rate for what is most likely some species of snake oil.
They can keep their thumbs. I’ll just settle for asking the fan to sign up on the artist’s site, thank you very much.
Ain’t Too Proud to Beg: Did President Obama Just Endorse Spotify During an FTC Investigation of Apple Music?
The White House now has a Spotify account. You would know this if you happened to run across the 500 or so stories about President Obama’s Spotify playlist in the news. Is this a particularly remarkable occurrence? Not really–except for one thing. Something you won’t find in any of the earned media.
Spotify is behind an antitrust investigation into Apple Music by the Federal Trade Commission. That would be the Federal Trade Commission that reports to…President Obama. In the middle of a serious investigation into Apple, the White House–that is the “people’s house”–endorses Spotify.
So how might this have come to pass–now. Curious timing, wouldn’t you say? Maybe not. Aside from the fact that Kara Swisher of Re/Code reported that Google’s head business executive Omid Kordestani is on the Spotify board and ex-Google employees are in leadership roles at the White House (starting with Megan Smith, the Chief Technology Officer of the United States and former vice president of business development at Google), Spotify hired Jonathan M. Prince, the Obama Administration revolving doorman and Clintonista.
Jonathan Prince Employment Timeline–Open Secrets
One of Mr. Prince’s duties appears to be running Spotify’s brand new in-house shillery as reported by Tech Times:
Spotify recently hired four outside lobbying groups who have been privately questioning Apple’s practices in meetings with politicians. Specifically, Spotify has been alleging that Apple took advantage of its size and power in creating unfair deals with various record labels. Spotify is also raising the issue of Apple’s standard 30% fee on all subscriptions purchased through its App Store, the fee which Spotify recently notified its users they could cut by cancelling and resubscribing.
Spotify’s global head of communications and public policy, Jonathan Prince, described the company’s political intentions as a more general effort to keep lawmakers up to date on the latest developments in the area.
Right…just keeping “lawmakers up to date”.
Given Mr. Prince’s easy access to the White House, you have to wonder if keeping “lawmakers up to date” included coordinating an announcement and press event around the White House adopting Spotify, starting with President Obama’s playlist.
And it won’t just be President Obama–according to the official U.S. Government blog on whitehouse.gov, there’s going to be more to come. As the White House tells us–subscribe! Of course, you can only “subscribe” if you already have a Spotify account. So what the White House is actually saying is “get a Spotify account!”
How many press releases do you think Spotify is going to milk out of this one?
Not to mention fawning coverage like this from the L.A. Times:
The world’s most popular streaming service revealed on Friday that the world’s most powerful man, President Obama, and his administration have launched an official channel on Spotify, and will be contributing playlists to the service.
Maybe this was some kind of coded message to the FTC? Is that phrase “the world’s most popular streaming service” a dog whistle for “slam these monopolists”?
What do you think?
Or do you think that this smacks of..whatchamacallit…crony capitalism?
According to the Spotify press release:
Over the years, the White House has continued to grow its social media presences and find new ways to connect with people all over the country through a range of platforms. On Spotify, you can expect to see the White House share playlists created by administration officials, as well as playlists curated around events and issues to engage the public and acquaint them with the people working in the administration.
Maybe we’ll see a playlists created by FTC commissioners?
No? Oh, why ever not?
Do you think that the White House is participating in Spotify’s chest beating about being better than Apple Music? That would be the Apple Music that scored 11 million subscribers in less than 2 months, nearly half of what it has taken Spotify 6 years to convert?
Don’t get sidetracked on this–this is not a political issue. It’s also not a matter of whether President Obama or other White House folk use Spotify. We all use a host of products. Not all of us have a platform like the White House from which to endorse a product.
The point is that it appears that Spotify is using its lobbying muscle to (A) go after Apple Music at the FTC rather than just meeting Apple in the channel with their big boy pants, and (B) get the boss of the FTC to pick a winner.
Spotify definitely ain’t too proud to beg. It smacks of real desperation, and however much artists may be flattered to be on the President’s playlist, I doubt they’ll be that flattered when they realize their music is being leveraged in the name of crony capitalism.
It stinks. If they’re going to get the President of the United States to endorse their product, they could at least have the White House encourage subscriptions.
But then–he is the leader of the free world.
Though this be madness, yet there is method in it.
Hamlet, by William Shakespeare
Power Transition in Business
When a relatively unequal competitor is about to overtake a dominant competitor, lawfare is most likely to break out when the less dominant competitor perceives their opportunity to replace that hegemon. At this point in the power relationship, the less dominant competitor may seek interlocking relationships with other less dominant competitors in the relevant market in order to attack the hegemon by reducing competition with each other and coordinating lawfare operations against the hegemon.
These interlocking boards or corporate relationships may work well when there is something in it for the allied less dominant competitors that helps each of them in ways that do not harm each of them. For example, in an alliance of two less dominant competitors G and S against hegemon A, this will be particularly true if company G has discrete goals with hegemon A that only tangentially affect company S. If lawfare against hegemon A would greatly benefit company G and would not harm company S, S may find an alliance with G for lawfare against A to be beneficial.
This may be particularly true if A is competing directly with S in a related market and (with apologies to Professor Kugler) at a moment when A is temporarily weaker than S, but S perceives A as about to overtake S. In other words, lawfare is not most likely to break out when A in fact overtakes S, but rather at the moment when S perceives A as about to overtake S. It is at that moment that an interlocking alliance with G may be most desirable to S so that the two companies can bring their collective power to bear on A by making lawfare on A. (This is a version of the “power transition” theory of international relations.)
In the world of corporate realpolitik, such alliances may form well in advance of an anticipated move by A that threatens both S and G.
Spotify’s Dominant Market Position
On May 12, 2014, Spotify’s director of economics Will Page gave a presentation at the Music Biz Conference in Nashville (hosted by the Google-dominated Music Business Association, formerly known as NARM in a soon to be forgotten day). As reported by Billboard, Will Page gave the audience a good deal of evidence of Spotify’s domination of the online music market:
Spotify claims to have represented one out of every ten dollars record labels earned in the first quarter….Page’s claim shows the speed at which subscription services are gaining share of the U.S. market. According to IFPI data, all subscription services accounted for 10.2 percent of U.S. recorded music revenue in 2014. If Spotify had a 10-percent share in the first quarter, it’s safe to say the overall subscription share is well above the 10.2 percent registered last year.
These numbers suggest that while Spotify may have a significant share of overall U.S. recorded music revenue, Spotify is clearly dominant in the global subscription market with its now 20 million subscribers and probably is dominant in the U.S. music subscription market.
Yet it is Spotify’s failure to convert users of the Spotify ad supported service (with ads served by Google) to the Spotify subscription service that is at the heart of objections to continuing to license the ad supported service. Not to mention the bait and switch aspect.
The Return of the Interlocking Board
While Spotify may have enjoyed global domination in music subscriptions, it did so with an eye over the shoulder at the much anticipated and inevitable launch of the a subscription service by Apple, which also happens to be Google’s main competition in the smartphone market. Not surprisingly, we saw this July 21, 2014 story in Re/Code by the highly credible tech journalist Kara Swisher a few weeks after Page’s presentation:
Omid Kordestani, who has just temporarily replaced Nikesh Arora as chief business officer of Google, 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 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.
In any case, Google is still planning on launching a long-delayed YouTube subscription music service this year that would compete with Spotify. If it actually does get going, it will be the second such offering from the company.
That YouTube subscription service is now even longer delayed. In fact, I’m beginning to wonder if it will launch at all.
Ms. Swisher revisited that July 21 story on July 22 to clarify the reference to Google’s potential purchase of Spotify–only. She wrote:
…Spotify co-founder and CEO Daniel Ek has indeed met with Google execs about various and substantive commercial deals at YouTube, Google Play and Android.
“There has not been a single conversation about Google’s interest between the two,” said one source, reflecting many others. “There was never a price, never a negotiation, never anything.”
Ms. Swisher followed up that July 21 story with a post on September 11, 2014:
As Re/code previously reported it would do, Spotify has officially added Google’s business head, Omid Kordenstani, to its board.
And thus the interlocking alliance was formed.
Google’s Shady History With Apple
Recall for a moment that the Federal Trade Commission pressured Google Executive Chairman (and then-CEO) Eric Schmidt to resign from the Apple board of directors. This after Google launched a series of products that directly compete with Apple and is so coincidental as to call into question whether Schmidt violated his fiduciary duty as an Apple director (Droid, Google Tablet, AdMob, Google TV, and what was then called Google Music).
So what about that resignation? According to Engadget, Steve Jobs said:
“Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest.”
According to Reuters, on July 9, 2009 the Federal Trade Commission announced that it would continue investigating Schmidt:
The U.S. Federal Trade Commission said it will continue to investigate the relationship between the boards of Apple Inc and Google Inc, after Google’s chief quit Apple’s board on Monday.
Richard Feinstein, director of the FTC’s bureau of competition, commended both companies for recognizing that sharing directors raises competitive issues, in light of the resignation of Google Chief Executive Eric Schmidt from Apple’s board.
Feinstein said regulators have been investigating the Google-Apple tie for “some time,” even as the two companies increasingly compete with each other in markets such as smartphones and operating systems.
“We will continue to investigate remaining interlocking directorates between the companies [for violations of the Clayton Act],” Feinstein said.
Well, that 2009 investigation seems to have trailed off and gone nowhere. 2009, 2009, what else happened in 2009?
It can safely be said that Google’s war on Apple is long standing and there is no love lost there. It should not come as a surprise that Spotify would view Google as a valuable ally in its own competition with Apple. Not only was Spotify’s dominant position in the music subscription market directly threatened by the launch of Apple Music, but Apple’s gifted executive Eddie Cue delivered further humiliation to Daniel Ek involving Ek’s bête noire, Taylor Swift.
Artist relations problems need to be solved quickly and generously (and frankly if an issue get to become an artist relations problem, it’s your own damn fault). Mr. Cue quickly solved an artist relations problem around Apple’s proposed 90 day royalty free launch by his deft handling of criticism from Taylor. Mr. Cue’s successful handling of Taylor’s criticism solved his company’s artist relations problem. Whether Mr. Ek knows it or not, this was a further humiliation to him after Spotify’s brand damage from his widely-reported collision with the Taylor juggernaut.
The Washington Hackathon Continues Apace
In September 2014, Spotify announced a hire that was largely overlooked at the time. Taking “hackathon” to a whole new level, Spotify announced that it had hired Washington lobbyist and Clintonista Jonathan M. Prince as its corporate communications revolving doorman.
Jonathan M. Prince Revolving Door Profile from OpenSecrets.org
Now why do you suppose this person was brought on?
Compounding the urge to merge was the announced policy change at Sony and Universal demonstrating an increasingly skeptical view of the ad supported services like Spotify and YouTube, also broken by Re/Code in a March 8, 2015 interview by the outstanding journalist Dawn Chmielewski (who has written extensively on the music business for many years) with Universal’s Lucian Grainge. This was followed shortly by a statement from Sony’s Doug Morris indicating dissatisfaction with the free content model that is at the heart of Spotify and Google’s business (“In general, free is death.”)
I seriously doubt that these relatively simultaneous statements by Lucian and Doug came as a total surprise to either Spotify or Google, but the public nature of the statements combined with personnel changes probably put a fine edge on reality for Spotify and Google. Lawfare was now in order.
Not only did Spotify and Google have interlocking interests in preserving the ad supported model, but each brought complimentary skill sets to the lawfare ready room. Spotify is able to play the role of plucky startup victimized by the big bad Apple and the smaller but badder major labels that are conspiring to take free music away from consumers. Google is able to hang out in the shadows and bring its investment in Washington, DC agency capture and vast experience being on the wrong end of antitrust investigations around the world. And in particular, Google’s stunning influence over the U.S. government through the Obama Administration including the Federal Trade Commission.
Just a quick reminder of Google’s dominance of the U.S. government:
President’s Council of Advisors on Science and Technology and Obama Campaign Volunteer: Eric Schmidt (call sign “Uncle Sugar”)
Google Lobbyist: Katherine Oyama (former Associate Counsel to Vice President Joseph Biden)
Counselor to the Chairman, Federal Communications Commission: Gigi Sohn, formerly CEO of Google Shill Lister Public Knowledge.
Special Assistant to Chairman, Federal Communications Commission: Sagar Doshi (Google Product Specialist)
Chief Digital Officer, Office of Management and Budget and Featured Revolver at OpenSecrets.org‘s Revolving Door Site: Jason Goldman, formerly Product Manager at Google.
Director of Google Ideas (and co-author with Uncle Sugar of The New Digital Age): Jared Cohen (formerly a member of the Secretary of State’s Policy Planning Staff and as an advisor to Condoleezza Rice and later Hillary Clinton).
Director of United States Patent and Trademark Office: Michelle Lee (formerly Google’s Head of Patents and Patent Strategy)
U.S. Chief Technology Officer: Megan Smith (formerly at Google[x])
Deputy U.S. Chief Technology Officer: Alexander Macgillivray (formerly Google’s point man on orphan works)
Director of Google Advanced Technology and Projects Group: Regina Dugan (former director of DARPA)
Director of U.S. Digital Service aka savior of Healthcare.gov (in case you couldn’t tell): Mikey Dickerson (former Site Reliability Manager at Google)
YouTube Global Communications and Public Affairs Manager: Chelsea Maugham (former U.S. State Dept. Chief of Staff)
Google Head of Global Development Initiatives: Sonal Shah (Advisory Board Member, Obama-Biden Transition Project)
Deputy U.S. Chief Technology Officer (White House): Nicole Wong (former Google Vice President & Deputy General Counsel)
And then there are dozens if not hundreds of former Hill staffers now working for Google’s DC shillery.
Not to mention FTC Commissioners Joshua Wright and Edith Ramirez, Julie Brill and Maureen K. Ohlhausen.
Timing is Everything
In yet another case of curious timing involving a Google relationship, the day that Apple Music launched the New York Attorney General announced an investigation into whether Universal–remember, the same Universal that had announced it was going to take a relook at its ad supported deals of the kind it had with Spotify and YouTube–and Apple Music had somehow colluded to undermine Spotify and YouTube. As NPR’s Laura Sydell reported:
The investigation centers on whether Apple may have urged [Sony and Universal] to drop support for free, ad-supported streaming services such as Spotify and Google’s YouTube. Such a move could be seen as anti-competitive.
That investigation was later dropped by the New York AG (who also signed the amicus brief supporting Mississippi Attorney General Jim Hood against Google). Why was it dropped? Well, possibly because there are solid commercial reasons for deciding that the experiment with ad supported music was a disaster? Possibly because it became apparent that Spotify’s story about converting free users to subscribers was not borne out by the…you know…results?
How do you suppose that this investigation got started? Just a coincidence?
I think not.
Guess what also happened right around the same time?
Yes, those Washington lobbyists don’t have to use a scientific calculator to add up what Spotify pays them!
The NY complaint was a skirmish before the main attack. And here’s where the real lawfare gets interesting. Remember, Google has been fighting Apple for years and Eric Schmidt left the Apple board under a cloud (no pun intended). Independently of Spotify, I think it’s pretty safe to say that if Google could find a way to jack with Apple they would jump on it.
Also remember that Google has been bashing apps for quite a while and it takes no great genius to suspect that the reason is because they can’t stalk you inside of apps very easily. So if Google could find a way to attack Apple’s apps, don’t you think they’d jump on it?
And what better way for Google to attack Apple than to go after Apple’s pricing model in the App Store? (Apple takes 30% of “digital consumables” sold by developers through the App Store, including most subscriptions.)
Of course if Google itself went after Apple’s App Store pricing that might be a little transparent, so that won’t do. What to do, oh what to do?
Things That Go Bump in the Night
According to the Radio and Internet Newsletter’s July 9, 2015 reporting:
Spotify has sent an email to Apple iOS subscribers, suggesting they cancel their Spotify Premium accounts, if those subscriptions were purchased through the Spotify app, and re-subscribe on Spotify’s website.
The reason for this surprisingly suggested workaround is to save money. A Spotify Premium plan costs $13 when purchased through iTunes, and $10 when bought directly from Spotify. “The normal Premium price is only $9.99, but Apple charges 30 percent on all payments made through iTunes,” Spotify said in the subscriber email acquired by Engadget.
Here’s part of the email:
As RAIN confirmed, Apple has nothing to do with setting the price for in-app purchases. That decision lies with the developer exclusively. The developer–Spotify in this case–knows going in what the cost will be. Spotify knew that when it first put the Spotify app in the App Store years ago.
But RAIN notes the curious timing of Spotify’s misleading advertising campaign:
The timing of Spotify’s communication, soon after Apple’s launch of a competing on-demand music service, cannot be ignored. It must be particularly galling to Spotify that Apple is potentially luring users to its own service, and taking a portion of Spotify subscription payments. The risk of Spotify’s communication strategy is that subscribers will cancel their Spotify/iTunes subscriptions, as Spotify recommends, and sign up for Apple Music’s three-month trial. The advice here, for what it’s worth, is for Spotify to drop the in-app subscription price to $10, eat the loss, hand the saving to subscribers, and retain its users. Complaining isn’t aggressive business. Pricing is.
There is, of course, a long way from “galling” to “illegal.” And that’s what lawfare is all about. So it should come as no surprise that the Federal Trade Commission is now investigating Apple for deceptive trade practices.
What is so tough for regulators here — other than that they are using relatively arcane laws that probably never anticipated the innovation now going on in the tech sector — is that the streaming companies really do have a lot of ways to reach consumers. They can sell it over the Internet. And they all offer apps on Google’s store, which actually serves more customers around the world than Apple does.
So is Apple’s behavior truly anti-competitive?
“The fundamental question is if it is big enough to wield enough market power that can harm the competitive process,” said Gene Kimmelman, president of media public interest group Public Knowledge. “Music distributors would need to show that they truly need to be in the iTunes ecosystem to demonstrate a legitimate competitive concern.”
Actually–the fundamental question is whether Google is manipulating the Federal Trade Commission to conduct lawfare against Apple to preserve the shite artist royalties from ad supported services like YouTube and its interlocking relationship partner Spotify. This is not just a Nixonian fantasy.
You Won’t Have Johanna Shelton to Kick Around Anymore
After the Wall Street Journal’s release of internal FTC staff memoranda recommending that Google be prosecuted for antitrust violations (a prosecution that was squashed by political appointee FTC commissioners) Google lobbyists were caught instructing FTC commissioners to be be publicly supportive of Google according to Buzzfeed:
Johanna Shelton, a senior lobbyist at Google, emailed an official at the Federal Trade Commission with a pointed request: release a public statement that would help the search giant deal with a negative story. Two days later, the agency did just that….Google was “deeply troubled” and “puzzled” by the agency’s silence on the matter, Shelton said in the email, which emerged in response to a public records request and was obtained by BuzzFeed News. She said the inadvertently released document was being used by Google’s rivals to “sow confusion and undermine the FTC’s conclusions, especially in Europe.”
“We believe it is critical for the FTC to defend its reputation, showing that it followed a thorough process and fully took into account the Bureau of Competition staff memo, among other internal agency opinions including the Bureau of Economics,” Shelton said in the email. “A public statement standing by the FTC’s ability to make a final decision after assessing differing internal views would go far in the international space to restore the reputation of the FTC, especially on due process.”
Two days after the email was sent, and after the Wall Street Journal published another article about Google’s relationship with Washington, the FTC released a statement that provided the context Shelton had sought.
In other words, Google lobbyists said jump and the FTC’s political appointees merely asked how high.
Is Google pulling rank to get the FTC to investigate Apple on a pricing policy that has been in place for years? Is Google using its interlocking board seat with Spotify to use Spotify’s competition with Apple in the music subscription market to get the FTC to attack Apple in a way that also benefits Google in the smartphone market?
Of course now that Spotify has Jonathan Prince on board, the company may be able to use Prince’s easy access to senior White House staff to sick the FTC on Apple all by themselves. But either way, the motives are oddly aligned.
However–Digital Music News tells us that Apple Music to date has had no effect on Apple App Store downloads of the Spotify, Pandora or YouTube iOS apps. I wonder what the FTC thinks of that stat?
Let’s remember that Spotify is a music service. It’s not in as many business lines as Google. The only reason why Spotify is able to spend hundreds of thousands on lobbying (probably soon to be millions at this run rate) is because they get cheap deals on music. Those deals have an end point.
The most meaningful statistic of all, though, is the number of subscribers to Apple Music. Apple reached 10 million subscribers in about 45 days. Spotify reached 20 million subscribers in seven years. If Apple Music continues on anything like this run rate, it is going to be very difficult for company S to overtake hegemon A. Apple Music provides market confirmation that free music is not necessary to get users to subscribe to a music service.
And that is not good for company G or company S. Not to mention that lawfare can backfire. What they have to worry about is that in their effort to stop Apple by manipulating the FTC, Google and Spotify will have demonstrated that something is really rotten in Washington, DC. And Mountain View. Not to mention Sweden.
David Lowery’s recent post on the Trichordist reveals the disclosure by an apparent whistleblower that the Music Managers Forum and to some extent the Feature Artist Coalition have each been taking undisclosed money from Google and Spotify. (Given the context, I assume the whistleblower is referring to the MMF chapter in the UK.) Why is this important? Because when confronted with the artist rights grass roots movement that Lowery personifies, we can expect Google to do what they always do–try to co-opt it one way or another.
Want evidence? If you’ve had a look at the Public Citizen report “Mission Creep-y“, Google’s technique of buying their way into issues or industries and increasing their dominance in their ownership and influence through control of resources should come as no surprise. The venerable good government group provides extensive documentation of Google’s massive investment in indirect lobbying through funding a host of academic institutions (who can forget the millions Google paid for Lawrence Lessig’s enterprises at Stanford), organizations like Creative Commons, the Electronic Frontier Foundation, Public Knowledge, the Center for Democracy and Technology, and a host of others.
What’s the Spotify connection? The distinction between Google and Spotify is more blurred after Spotify let Google onto their board of directors last year. I find it hard to believe that Google got a Spotify board seat without a Google investment in Spotify which would be typical of how you get a seat on private company boards of directors most of the time.
In addition to any ownership stake that Google may have, what unites Spotify and Google is advertising supported, i.e., “free”, music. For which Google sells the ads, of course. Or as they might say, “content,” which has implications for everyone from visual artists, to movie makers, to journalists, to artists and songwriters.
As Spotify’s billionaire investor Sean Parker told CNN’s Poppy Harlow, the most important aspect of Spotify’s business success is the ability to offer music at scale–or as Thom Yorke said more accurately, the ability to commoditize music. Commoditizing music is also exactly what Google’s goal is with the YouTube data honeypot, for example, as scale makes scraping the data from YouTube users more profitable.
For these reasons, I think Lowery is on to something with the whistleblower disclosures. I would agree with David that artists would want to know if their manager is participating in this co-opting exercise. It’s all entirely believable to me as it is a 100% fit with Google’s modus operandi that I have observed.
How far does this influence penetrate the many MMF chapters? And what about the International Music Managers Forum umbrella association?
Strange Bedfellows for the IMMF
The mission statement of the International Music Managers Forum says:
The IMMF is an international umbrella organisation comprising of regional associations of music managers from +30 countries from five continents, which currently represent +1.200 artist managers. It’s the IMMF’s mission is to defend the economic and legal interests of artists on an international scale with the vision to create Transparency and Fairness. This shall be accomplished by three core activities: training and education, networking and lobbying.
Sounds good, right? So why is the IMMF part of a lobbying astroturf group based in Brussels (to lobby the European Commission) called “Copyright 4 Creativity“? The group features on its home page the IMMF’s “Open Letter on Record Label and Music Publishing Deals” as a tool to accomplish some lobbying goal. That’s the letter that was written after the mysterious leak of the Spotify/Sony agreement. So if the group is going to use that letter as a lobbying tool we would expect that the other members of Copyright 4 Creativity would be in line with the IMMF’s mission statement, right?
Wrong. For starters, the Computer and Communications Industry Association (Google is a member), the Center for Democracy and Technology and the Electronic Frontier Foundation (Google provides support) are all backed by Google. Google was forced to disclose that connection in its litigation with Oracle on a filing that has become known as the “Google Shill List.” These groups are also included in Public Citizen’s “Mission Creep-y” lists.
There are some other names on that list that seem odd bedfellows for the IMMF that purports to represent artists but in which artists have an indirect voice at best. This is a prime example of why artists who take individual action can be so effective (I’m especially thinking of David Lowery and Blake Morgan).
For example, Google and the Computer and Communications Industry Association are also members of the MIC Coalition, a massive lobbying effort organized to continue the practice of denying artist pay for radio play in the US. I think it’s fair to say that the CCIA has opposed every effort by artists and songwriters to improve their lives.
Using IMMF positions to lobby for the goals of these other groups seems antithetical to an artist rights organization that the IMMF purports to be. It’s certainly something deserving of a vote by artists.
While Google itself is not a member of Copyright 4 Creativity, the organization is run by a long-time Brussels lobbyist whose firm represents Google, and even a cursory look at the Copyright 4 Creativity materials reveals some of the same rhetoric we have heard for years from the Google-funded anti-artist crowd. This, of course, is how the astroturf game is played.
Here’s the real problem–artists have never confronted a multinational media corporation that is willing to spend millions and millions to undermine copyright and artist rights on a worldwide basis. Through lobbying and strategic investments in academics, astroturf groups and competitors, Google is doing just that while at the same time trying to pass itself off as your best friend. So the question is how many of the members of Copyright 4 Creativity get money from Google and is IMMF in that position?
There may be explanations for how MMF-UK and IMMF have ended up in this situation, and I’d love to hear what it is. We owe them a fair hearing, but I think they owe artists an explanation and an opportunity to be heard. That’s a fundamental aspect of the legitimacy of representation.
Sony Contract Leak: The Bright and Shiny Object
Regardless of who you believe actually leaked Spotify’s contract with Sony Music, Spotify’s CEO Daniel Ek certainly is trying to capitalize on the leak. (“Spotify CEO says middlemen gobble cash“) It sounds like this is just another indication of how badly a defiant Spotify has broken trust with its label “partners” and their artists.
The spin from Mr. Ek is that he wants you to believe that the reason that artists think Spotify’s royalties are low is not because of Spotify, it’s because of the greedy major labels. More accurately–with the benefit of the contract leak–any label that has MFN treatment with Sony Music. (Because if you’re leaking contracts, you can’t really leak all the contracts, but you don’t need to if you can leak a single MFN contract from which terms can be extrapolated due to the MFN treatment.) Because I don’t know all the labels with “most favored nation” treatment, I’ll refer to those labels as “MFN labels” rather than major labels (partly because the MFN definition in the Sony Music contract is not limited to other major labels).
Of course any labels or distributors licensing to Spotify get a share of the royalty payments, like they do any other service. (Even if a distributor covers its downside risk with a flat fee payment instead of sharing the risk with its artists, there’s still an imputed share of Spotify royalties which could be massive or tiny depending on how the artist does.)
How much labels take is not well known and varies from label to label and artist to artist. This makes a label’s share of royalties ripe for conspiracy theories that Mr. Ek appears to be fomenting. And is a great “bright and shiny object” to deflect attention away from a simple truth: Spotify loses money hand over fist, pays terrible royalties, and is cannibalizing higher margin sales. Its valuation is driven solely by venture capitalists with liquidation preferences that make a down round unthinkable and a compliant press that in some cases is in the streaming business themselves.
The Empirical Check
So how would you know whether Spotify’s artist royalties are low regardless of the label’s share? Easy. Look at the royalty Spotify pays to an independent artist who does not share their royalties with a record label. This won’t tell you what the MFN labels get, but it will tell you that the MFN labels should get no less than the independent artist collecting 100% of the Spotify revenue. You can also assume that Spotify’s independent royalties are a cram down of lower per-stream rates than what Spotify pays the MFN labels. Why? Because they can.
Of course, the argument could easily be made that if Spotify’s goal is fairness in all things and world peace, Spotify would actually pay independent artists more than the MFN labels because Spotify doesn’t have to pay all the extras–starting with an advance and equity–to the independent artists. (Whether services ought to pay extras is a whole other conversation.) Even so, if Spotify’s royalties are as great at Mr. Ek would have you believe, you should see that uptick in the “source” Spotify royalty paid to an artist who collects 100% of the royalty and not just the artist share under an MFN label contract.
Last week, Zoë Keating courageously published her most recent royalty statement from Spotify. As usual, Zoë makes an outstanding contribution to the knowledge of all artists grappling with life in the Age of the Internet. Zoë’s Spotify statement gives a great example of the true royalty rate that Spotify pays to record labels–without the big advances and other financial incentives paid under the MFN label deals as seen with the leaked Sony Music contract. Not to mention the cost of the detailed reporting required under the Sony Music contract. A couple things jump out.
First, it’s not really sound to speak of a global “per stream” rate for Spotify except in the most generic sense. As you’ll see from Zoë’s statement, there are many, many different rates. I would guess that these rates vary based on some high level variables and rule sets such as ad-supported or subscription and mobile or desktop. The statement doesn’t break this out and just refers to “streams”. Not all streams produce the same value as the statement reveals.
Then there are different rates for each country where Spotify operates, just like on a record company royalty statement.
As you will see in her statement, Zoë’s per-stream royalties ranged from $0.0000013284 to approximately $0.01 per stream, except for 3 streams in “CH” (presumably Switzerland) that broke $0.02. I would guess that the lowest royalty rates are from ad supported streams and the higher rates are likely from subscriptions.
Remember–this is 100% of the Spotify royalty, not shared with a label. So Mr. Ek would have you believe that if it just weren’t for the greedy middlemen, artists would find Spotify profitable, because, after all, Spotify pays millions to superstars–the superstars whose labels spend millions marketing their records and driving traffic to Spotify. Low royalties are not Spotify’s fault, it’s the greedy middlemen. (This rhetoric also resonates with the Google and Pandora-backed “McCoalition” that is running those tired 1999isms to try to divide our community.)
Mr. Ek points to the leaked Sony Music contract to justify his position, and I point to Zoë’s statement to ask who in their right mind would think that Spotify royalties (or streaming royalties in general) are worth the trouble.
And don’t forget that Mr. Ek is quick to point out that streaming revenue is a growing share of overall digital revenues and displacing downloads. Yes, that’s right. In a race to the bottom, micro-margin streams are replacing high margin downloads. Correct, it’s called cannibalization.
That cannibalization is happening across the board, too, not just to major labels. “CD release parties” that used to generate a significant contribution toward recording costs for local independent artists now are a rapidly vanishing share of artist revenues (right alongside cover charge).
So Mr. Ek’s misdirection doesn’t work when you look at the numbers. Evidently, Spotify hopes you won’t.
More is Less: Why Do Artist Revenues Increase at a Lower Rate than Artist Streams?
But here’s another interesting metric. Zoë’s spreadsheet shows that in 2015, Zoë had 1.4 million streams and $4,821.07 in royalties or an average of $0.003 per stream. I’m using a per stream average as a way to compare per-stream value over time because the spreadsheet also shows Zoë’s royalties from 2013 and 2014. I don’t recommend using a per stream average for any other purpose because it tends to overstate the ad-supported royalty and understate the subscription royalty.
Zoë’s per stream average from 2013 was $0.0042, in 2014 it was $0.0040 and was $0.0032 in 2015. So even though Zoë’s own total streams increased from 416,112 to 1,487,584 during the 2013-2015 period, her average per stream royalty declined from $0.0042 to $0.0032.
Given that a simple per stream average tends to understate the subscription revenue, wouldn’t you think that a 350% increase in streams would result in a higher per stream average? Particularly because Spotify wants you to believe that it is growing its subscription business as well as its business in general, hence its massive investment valuation. Even if you consider the difference in Zoë’s gross revenue, her total royalty payment increased by 271%, much less than the increase in her overall streams.
Maybe there are anomalies that explain this, maybe there are specific attributes of Zoë’s fans that explain that difference, but it seems very, very odd.
Who Are the Real Greedy Middlemen?
Face it, the streaming business is a horrible business. Everyone in it loses money based on cash flow and the only people who make bank are the executive teams who get stock in the enterprise. Remember, Spotify has a bigger valuation than the entire music business. If that’s not a bubble, I don’t know what is.
It’s only a matter of time before Spotify does exactly what Pandora is doing–comes to the government and tries to force a lower royalty down our throats so Spotify can stay in business. Spotify will likely do it through manipulating the antitrust law (notwithstanding Spotify’s own self-admitted monopoly on music subscription services.) There’s only one thing such people fear more than an artist who publishes their royalty statement.
That’s a venture capitalist collecting a preference on a down round–so the valuation has to constantly increase even if it is not connected to reality. And if reality ever catches up to Mr. Ek, all he’ll do is flip the keys to the first bum on the street after he cashes out–and destroys our business.
Remember–he’s not in the music business. If Spotify fails, Mr. Ek will just go into some other “disruptive” tech company that preys on people like child data profiling.
Thanks to Zoë Keating, we once again can see that Spotify gives truth the back of the hand in its rush to IPO riches. As long as the VCs keep rewarding fast buck artists like Mr. Ek and governments turn a blind eye toward Bit Torrent, the race to the bottom will continue and artist innovators will keep being punished.
MTP: And none of them think that Spotify would just lie, right? Like that royalty rate that Spotify released. It’s frequently cited as “Spotify says” not “Spotify says and I asked these four artists who all said it was bullshit.”