@midearesearch: Spotify Earnings: Growth Comes At A Cost

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[Editor Charlie sez: This day has been coming since we first ran this spoof picture of Daniel Ek–but not everyone was laughing after they got their Spotify royalty statement.  Mark Mulligan has parsed Spotify’s recently release financial statements and has some interesting admissions by Spotify–starting with a more accurate total of paid subscribers.

Remember this?

This tweet was widely reported as “50 million paid subscribers” by Spotify’s boosters in the press:

Spotify 50 Million Paid Press

But Mark Mulligan points out–as did many privately–that the correct number was much less than 50 million, although Mulligan’s analysis results in an even more generous number than the whisper number (assuming “paid user” means the same as “paid subscriber” which it might not given Spotify’s premium deals like its partnership with the New York Times):


That would be the New York Times that did not cover Spotify’s $44.3 million class action settlement with Melissa Ferrick.  Here’s an excerpt from Mr. Mulligan’s excellent post]

As Spotify nears a public listing or an acquisition by Alibaba or Tencent, it remains the benchmark for the health of the streaming economy. With the underlying fundamentals remaining largely unchanged in 2016 despite stellar growth, here are a few thoughts on how the economics of streaming might change:

An often repeated argument from record labels is that streaming services will hit profitability when they reach scale. So, when does that happen? 48 million subscribers can lay a good claim to being ‘scale’, but it isn’t driving profit. While the market establishes itself, streaming services have to overspend on product innovation and marketing (and then, later, on user retention). So, these costs will likely rise in relative terms. Meanwhile, rights are always going to remain largely in line with revenue (though the UMG and Merlin deals reward growth with some discounting, which is a welcome innovation). But even these deals will not change the fact that rights will be large enough to challenge margins and will largely scale with growth. Which means no truly meaningful scale benefits. So here are a few alternative ways in which streaming margins might be improved….

Read the post on Music Industry Blog

@scleland: Why Amazon Buying WholeFoods Will Attract Serious Antitrust Scrutiny

In proposing to buy WholeFoods for $14b, Amazon has surprisingly invited unwelcome serious antitrust investigation into, and public discussion about, Amazon’s core conflicted retail/MarketPlace business model and the many alleged predatory, discriminatory, and unfair standard Amazon business practices, that Amazon commits, not only in the grocery business segment, but in all other retail segments.

In statingthe parties expect to close the transaction in the second half of 2017,” that means Amazon expects no serious antitrust investigation of whether the transaction “substantially lessens competition,” and thus no “second request” from antitrust authorities requesting more information and questions to answer.

If a “second request” comes, which is likely, there is no way the companies can continue to “expect” the deal will be approved in 2017. That’s because such an investigative process effectively does not have any deadline for the reviewing authority, DOJ or the FTC, to either: approve, approved with conditions, or challenge the deal….

The combination of: the likely multiple alleged anticompetitive behaviors; the likely number of complaints and complainants; the online-offline complexity of investigating the complaints; the importance of this case as an online-offline antitrust merger precedent; the exceptional size, scope, reach, speed and non-transparency of Amazon’s online business; and the expected high-public profile of this transaction; all would auger for the reviewing authority to err on the side of caution and investigate the transaction fully.

Let me be clear here about what I am saying and not saying.

First, what’s obvious here is that the transaction will attract a lot of concern in private and publicly in multiple dimensions. That’s precisely because of the many serious implications this “Everything Store” proposed transaction will have for the future of competition in many markets, which in turn will delay Amazon’s transaction timetable.

…[M]ost of the antitrust concern will come with the exceptional market power that Amazon wields online, combined with the under-appreciated conflict in its business model where half of its retail revenues come directly from consumer-customers, and the other half of its retail revenues come from its MarketPlace offering where Amazon is the mall and gatekeeper for around 15 of its top 20 grocery competitor-customers, that have had to capitulate to Amazon’s market power and operate on Amazon Marketplace in order to reach all their offline customers online.

In layman’s terms, the problem Amazon’s retail intermediary model causes competitors is that it simultaneously is a direct retail competitor overall, at the same time it is the dominant online broker that has disintermediated its competitors from their customers when they are in the online world, and in that broker role, they are routinely criticized as not being an “honest broker” or as being a “non-neutral platform,” that routinely self-deals anti-competitively, because Amazon has market power to extract it with impunity, and no antitrust or regulatory accountability to speak of – to prevent it.

[T]his transaction review is the first genuine opportunity and powerful legal process for those alleging anti-competitive harm by Amazon to have antitrust authorities’ full ear in a confidential process where warranted.

Read the post on the Precursor Blog

Time to Audit? Tunecore is Getting Sold–Do Your Clients Believe?

Whoever you are, I have always depended on the kindness of strangers.

From A Streetcar Named Desire, screenplay by Tennessee Williams

Hypebot is reporting that Believe Digital is offering itself for sale:

Believe Digital is for sale and units associated with at least two of the three major label groups have expressed strong interest, sources tell Hypebot. Other possible buyers include BMG, Concord and several private equity firms.

Founded by current president Denis Ladegaillerie in 2004, Believe began an aggressive expansion in 2015, financed by $60 million from private equity firms TCV, XAnge, GP Bullhound and Ventech. TCV also led a $250 million funding round for Spotify in September 2014, and is a major investor in Vice Media.

Believe declined to comment for this story.

One source described global music executives jumping on planes to Paris to visit a “due diligence data room” set up so that they could view financial, legal and other business documents prior to the relatively tight bid deadline set by Believe. Other execs added Paris to last week’s MIDEM itinerary.

After Believe aquired TuneCore in 2015, Ladegaillerie said that the combined companies would generate more than $250 million that year, which he boasted was was “bigger than any player in the market outside of the three major labels.”

When Tunecore was acquired by Believe Digital in 2015, it was only a matter of time until Believe flipped the new company to a bigger buyer, probably a major.  While it’s hard to know how much Believe actually makes from its distribution fees, there is no evidence so far that Believe has any intention of sharing its selling price with the artists that give it value–even though Believe owns none of the catalog it distributes (as far as I know).

Here are a couple of questions for lawyers and business managers of Tunecore artists:

Contract Terms: When you made your client’s deal with Tunecore, would you have accepted the same terms from a bigger company?

Transparency:  Do you have any idea what Tunecore’s or Believe’s deals are with the digital platforms to which it distributes your client’s music?

Mechanical Royalties:  Are your clients getting paid mechanical royalties on everything they distribute through Tunecore?  (Given that executives of some licensing agencies specifically mention Tunecore artists as the source of thousands–or perhaps millions–of royalty free “address unknown” NOIs, they’re probably not.)

Has your client paid mechanical royalties on everything they record that Believe distributes?  If Believe is sold and there is a routine company-wide audit of mechanical royalties for that buyer company at a later time, are your clients prepared to pay their share of any audit settlement?

Audit Rights:  It is standard operating procedure for artists and labels to audit their distributor.  “Audit” is an industry shorthand for “royalty compliance examination”–which means that you look at the distributor’s books and make sure that what they receive matches to what you got paid under the terms of your contract.  Don’t let anyone tell you that an “audit” is unnecessary because they have “audited financials”–that’s a grand deflection based on an equivocation of the word “audit” because a “financial audit” or “audited financials” have absolutely nothing to do with a “royalty compliance examination”.  A financial audit is for the company’s investors, not for the artists it distributes.

To my knowledge, neither Believe nor Tunecore have ever been audited by an artist, and if they have they kept it very quiet.  That suggests that all Tunecore artists assume that Tunecore has paid out hundreds of millions of dollars over a 10-12 year period and never made a mistake–an assumption based on no knowledge of Tunecore’s own deals with distribution platforms like Spotify which has its own problems.

To my knowledge, Tunecore or Believe artists also have no idea whether Tunecore ever audited any of these distribution platforms ostensibly to protect the interests of their artists. Again, if they did, they kept it very quiet.

An audit of Tunecore should be a relatively simple task as its entire business model should be based on 100% pass through of all revenue it receives.

I’m not suggesting that Tunecore or Believe are making mistakes or engaging in shady practices.  I’m just suggesting that audits are routine and keep people feeling good about doing business together.

Termination Rights:  If your clients are having second thoughts about continuing on after a sale of Believe Digital, you should probably check your client’s agreement for the answer to the first question to ask before anyone signs a contract–how do I get out of this?

Form Contract:  Many digital distributors use a “take it or leave it” form contract modeled after a software shrink-wrap license.  The two are not the same, but to my knowledge the validity (or “enforceability”) of such a contract (which may rise to the level of what lawyers call a “contract of adhesion”) has never been tested in the digital distribution context.

It may be well for lawyers and business managers to consider if or how these issues affect your clients in the context of the Believe potential sale.

@davidclowery: Spotify’s $600 Million Loss, Currency Risk and What it Means for Artists

Stuart Dredge over at Music Ally is reporting Spotify’s losses widened to $600 million last year.   Read his article here.

I just wanted to point out that some significant portion of these widening losses are due to currency swings.   March 29th 2016 Spotify announced a $1 billion US denominated convertible debt deal with TPG and others.  Since that time the US dollar has risen considerably against most currencies.  A disproportionate share of Spotify’s income is NOT in US Dollars.  Therefore the vig on that convertible debt is now headed towards payday loan rates. Ouch!

This is good news and bad news for artists.

The good news is this may force Spotify to limit the free tier and convert more US subscribers to premium.  They need more US dollar income to stop the hemorrhaging from the US debt!  Remember artists’ royalties from premium subscribers are 8-10 times higher than free listeners.  More premium subscribers is a good thing for artists.

The bad news is Spotify has already indicated they want to pay lower royalties to artists because they are losing so much money.  This is completely fucked up. It’s not our fault the company is so poorly managed.

Read the post on The Trichordist

Spotify’s $600 Million Loss, Currency Risk and What it Means for Artists — The Trichordist

Stuart Dredge over at Music Ally is reporting Spotify’s losses widened to $600 million last year. Read his article here. I just wanted to point out that some significant portion of these widening losses are due to currency swings. March 29th 2016 Spotify announced a $1 billion US denominated convertible debt deal with […]

via Spotify’s $600 Million Loss, Currency Risk and What it Means for Artists — The Trichordist

@khart: [Not] Policing the power of tech giants

The world’s largest tech companies — Google, Facebook, Amazon, Microsoft and Apple — have become enormous concentrations of wealth and data, drawing the attention of economists and academics who warn they’re growing too powerful. “Platform companies have captured the economy,” said Jonathan Taplin, who argues in a new book and a recent NYT op-ed that the dominant platforms are so big that they’re undermining competition.

Our thought bubble: Despite populist promises, cracking down on Silicon Valley is not one of President Trump’s near-term priorities. Makan Delhrahim, Trump’s top antitrust enforcer at the Justice Department, has pledged to to enforce antitrust violations with respect to online platforms just as he would with any other industry, but insiders expect him to be cautious. And Maureen Ohlhausen, acting FTC chair, said in a recent speech that the agency has no intention of meddling in the way tech companies use algorithms and data.

Read the post on Axios