@musicbizworld: THE GREAT BIG SPOTIFY SCAM: DID A BULGARIAN PLAYLISTER SWINDLE THEIR WAY TO A FORTUNE ON STREAMING SERVICE?

[Tim Ingham tells a story of a Spotify royalty scam run by a “Bulgarian playlister” (…stop right there and go no further…who was running what are obviously scam playlists of snippets by manipulating Spotify subscription accounts.  As Tim notes, the fact that the “Bulgarian playlister” was able to manipulate a large number of “paying” subscription accounts, raises yet more important questions about Spotify’s subscriber numbers.  This is obviously of vital importance to potential buyers of Spotify’s stock–what subscriber numbers are real.  Perhaps the Securities and Exchange Commission will question the man behind the curtain.]

A Bulgarian playlist-maker scammed the Spotify payout system for months last year – and could well have made themselves a millionaire off Daniel Ek’s platform.

That’s the shock claim being made by multiple high-level industry sources to MBW this week.

Music Business Worldwide can today reveal details of the alleged shakedown, which reached its height at the end of last summer.

The evidence we’ve gathered strongly suggests that one party sucked a vast amount of money – as much as $1 million-plus – out of the Spotify royalty pool, and away from legitimate artists and labels.

And the best/worst part of all? They probably didn’t break any laws in the process….

Spotify tells us it’s now “improving methods of detection and removal”. But the big question remains: are the scammers out there improving their methods too?

Are there others, like our Bulgarian friend, purchasing multiple premium Spotify accounts and rinsing playlists stuffed with cheap music to which they own the rights?

If so, how many of these Spotify scammers exist – and how much money are they generating?

Are they operating at a lower commercial level than The Bulgarian and, therefore, not outing themselves by appearing on weekly top global playlist charts?

Crucially: what does all of this mean for the solidity of valuations for music’s biggest companies?

And even more crucially… what does it mean for the veracity of Spotify’s paying audience as the company begins its high-stakes escalation towards the New York Stock Exchange?

Read the post on Music Business Worldwide

 

@Maureenmfarrell: Private Trades in Spotify Shares to Play Key Role in Upcoming Debut

[Recall that Spotify is not doing a traditional IPO, but something called a “direct listing.”  The difference between the two is a bit down in the weeds, but is crucial.  In a traditional IPO (sometimes called a “full commitment underwriting”) a group of investment banks or the equivalent form an “underwriting syndicate” that buys new shares from the company at a valuation set by the underwriters.  Hence the “pricing” concept for IPOs–you will hear that right before a new company starts trading.  If the path to an IPO has been managed correctly, the underwriters’ valuation is higher than the last private valuation of the company’s last sale of its preferred shares to private investors.

The underwriters want to price in a range that they can resell to retail investors, so they wouldn’t ever price at $1,000 for a stock that is to sell in the open market.  Think about it–how long did it take Amazon and Google to get to $1,000 in the open market?  They didn’t start there.

Another reason–which I suspect is the true reason–that Spotify is not going the underwritten IPO route is because they can’t get the valuation they want.  This may have something to do with another aspect I believe to be true–Spotify is not cracked up to be a public company.

Chris O’Brien in Venture Beat has a really insightful post on Spotify’s problems with valuations:

The reality is that by taking this route Spotify is pursuing a risky strategy. And it’s likely only doing so because it was backed into a corner by its investors and by private fundraising that led to a dangerously high valuation of $19 billion.

“This is not a story of problems in the IPO market,” according to Kathleen Smith, a principal at Renaissance Capital and manager of IPO ETFs. “It’s a problem with Spotify’s valuation.”

So let’s be honest–the reason why Spotify wants to trade publicly has a lot more to do with Daniel Ek’s misplaced ego than it does with any intrinsic value of his company.   And don’t forget–when the dust settles, it is his company and this was his idea.  Genius or goat, he will get the credit.

But of course Spotify’s “public or bust” approach is really designed to allow existing stockholders to cash out.  And here’s the twist–if you’re going to sell, someone has to buy.  And if you don’t have underwriters standing behind a price point, then there is no floor to the stock price if the sellers start running for the exits.

So–Spotify is trying to look to existing private market sales–very limited and nothing like public market sales–for guidance on its stock price.  (Private markets are sometimes called “secondary markets” where you can buy private company shares.)  Maureen Farrell in The Wall Street Journal has some reporting on this which is both murky and enlightening coverage of who Spotify is “managing” (some might say “manipulating”) its stock price already.  And if you wonder what running for the exits looks like, check out the VIX crash.]

Spotify AB is counting on its surging private-market value to bolster the music-streaming service’s appeal to investors in an unorthodox public debut that could be the biggest since SnapInc.’s $20 billion IPO last year.

The listing, expected as soon as the end of March, isn’t an initial public offering, in which underwriters set a price and place shares with chosen investors before trading. Instead, the Swedish company will simply float the shares on the New York Stock Exchange and let the market find a price, in what is known as a direct listing.

While Spotify and its advisers are still determining how exactly the process will work, the company and its banks are expected to have a role in helping guide the market to a price and connecting buyers and sellers initially, people familiar with the matter said. A suggested price range is expected to be relayed to the market before trading starts, but the price will ultimately be set by what buyers are willing to pay and the price at which sellers part with their shares.

Private trading is expected to be a key part of the company’s effort to guide the market to a price, people familiar with the matter said.

The so-called secondary markets in private technology stocks are typically an afterthought in an IPO, in part because trading tends to be thin and not always a reliable indicator of value. But Spotify and its advisers at Goldman Sachs GroupInc.,Morgan Stanley and Allen & Co. are closely watching trades among private investors and have taken steps to spur volume, the people said. The company recently informed existing investors that it waived its right to buy shares before they are offered to others.

Read the post on the Wall Street Journal

@andy_mc_donald: YouTube to roll out Red to 100 countries

As James Brindle recently posted, “Someone or something or some combination of people and things is using YouTube to systematically frighten, traumatise, and abuse children, automatically and at scale, and it forces me to question my own beliefs about the internet, at every level.”

But great news–now YouTube is delivering its dreck to 100 countries in a subscription package.  Here’s a few more fish stories from Susan Wojcicki:

susan-wojcicki

YouTube plans to roll out its subscription offering YouTube Red to around 100 countries this year, according to CEO Susan Wojcicki.  Speaking at the Code Media conference in California, Wojcicki described Red as “really a music service,” which it now plans to expand into many more markets after agreeing music licensing deals.

The service lets users watch or listen to YouTube content ad free, offline and in the background on mobile devices. Over the past two years YouTube has also invested in around 50 original series for Red.

Wojcicki explained that while YouTube started out by working with popular YouTubers on YouTube Red originals, it is now doing more around music, drama and other shows – adding this as a complement to what it now sees as fundamentally a music-focused offering.

Asked whether YouTube needs to buy a big company like Netflix or Spotify to up its content ambitions, Wojcicki said: “I think our goal is to continue to increase what we’re doing.”

“We are building that muscle of creating content; we’ll continue to do more and more and we’ll see what’s successful, we’ll see what our users respond to, what’s driving subscriptions, what’s being watched. I think one of the really amazing things about YouTube is the platform and the data that we have.”

Read the post on Digital TV Europe

Meet the New Boss, Worse Than the Old Boss: YouTube says “All Your Video Are Belong to Us”

Exposure Bucks

Hypebot reports that:

YouTube has yet again raised the threshold that a creators and musicians must meet to make any money on the videos they post. YouTube says that the changes are designed to “prevent bad actors from harming the inspiring and original creators around the world who make their living on YouTube.” [Yes, just looking out for your best interests.] But the result is that it will take musicians and creators a lot longer to make a dime on the video service.

Starting today, YouTube is changing its eligibility requirement for monetization to 4,000 hours of watch time within the past 12 months and 1,000 subscribers per channel.

As YouTube’s public policy flack told the U.S. Senate today:

At YouTube, we believe the world is a better place when we listen, share, and build community through our stories. Our mission is to give everyone a voice and show them the world. With this comes many benefits to society — unparalleled access to art and culture, news and entertainment, and educational materials.

Yes, that’s right.  That’s what she said.  She left out the data scraping part.

So if you’re a new artist, enjoy those exposure bucks.  Might cover the cost of DMCA notices.

 

Is it Time for the Inspector General to Review the Copyright Office’s Administration of Address Unknown NOIs?

If you haven’t been following the address unknown NOI debacle, you can get up to speed with my recent article on the subject for the American Bar Association Entertainment & Sports Lawyer.  If you have been following, you’ll know that the Copyright Office has accepted millions upon millions of address unknown NOIs that implicate repertoire from all over the world.

The punchline–if all a digital music service needs to do in order to claim they have a licene to reproduce and distribute a song is send a notice to the Copyright Office is send a notice saying they can’t find the song copyright owner, how hard do you think they’ll look?  Particularly if they know that the Copyright Office won’t check?

And that is where the Inspector General comes in.  Formed by the Inspector General Act of 1978, there are 73 Inspectors General in the US government, including the Library of Congress (which is where the Copyright Office is currently housed).  There are also inspector generals for the Department of Commerce and the Department of Justice, two other branches where the Copyright Office might end up some day.

If there were ever a situation that cried out for review and investigation by the Inspector General, it is the address unknown NOI filings where Big Tech is running roughshod over songwriters.

For example, we did some spot checking on the NOI filings.  Remember, the address unknown NOI is only available if the copyright owner is not identifiable in the public records of the Copyright Office, notwithstanding the CO’s own position by regulation (for service of termination notices) that a search of the Copyright Office records and the ASCAP, BMI, GMR or SESAC databases would also suffice.

For example, here is an address unknown from Google for Sting’s song “Fragile” which supposedly was not identifiable in the public records of the Copyright Office:

Sting Fragile Google NOI

and here is the registration for “Fragile” in the public records of the Copyright Office:

Fragile Song Registration

Not only has the NOI for “Fragile” been served improperly, it raises the question of just how many other of the address unknown NOIs have been improperly served.  Even if we were to assume a 1% error rate (and I for one firmly believe it is much, much higher), that is 550,000 songs that have been improperly served.  While the assumption might be that only the obscure works would be included in these filings, the Sting example suggests that is not the case.

But–because no one is checking to confirm proper notice, that means that there is no protection against moral hazard and loophole seeking behavior by some of the biggest corporations in the world, including monopolists like Google and Spotify.  Since the Copyright Office refuses to do this work by fiat (see 37 C.F.R. § 201.18(g)), it logically falls to the Inspector General to determine both if the Copyright Office has behaved properly and also if the law is being properly administered to allow 55,000,000 (plus) songs to be exploited without compensation.

 

What’s Up With HuffPo’s CEO and his Spotify History?

As ARW readers will know, the Huffington Post censored my friend and whistleblower Blake Morgan who posted his story from a few years ago about a particularly teachable moment involving his encounter with Spotify’s tone deaf executive class.  (A teachable moment that was reported at the time by Harley Brown at Billboard which makes HuffPo’s lame editorial excuse ring even hollower.)

As producer Michael Beinhorn noted:

My friend Blake Morgan wrote an article criticizing Spotify which was published yesterday on the Huffington Post website. This article began developing traction, but within 2 hours of posting, it was removed from the website and Blake received a vague email from someone at HuffPo as to why. It has since been republished by David Lowery on the Trichordist website, and now includes the email Blake received after HuffPo excised it from their site. One has to wonder why the Huffington Post- which represents itself as a hotbed of liberal thought and free speech, would publish- and then unpublish- something so important (and summarily/subsequently ban its author as a contributor to their website). Could this decision have anything to do with the fact that the current CEO of HuffPo is the former General Counsel and Global Head of Corporate Development at Spotify? Can you say “conflict of interest” or “a threat to my stock options”? Please read and judge for yourself….

Michael makes a very good point here.  According to The Lawyer, the HuffPo CEO, Jared Grusd, exited Spotify in 2015 after working there for four years–2011 to 2015.  While we don’t have knowledge of Mr. Grusd’s dealings with Spotify, we can infer a few likely interesting points from that situation.

First, Mr. Grusd’s tenure (2011-2015) apparently overlapped with Jonathan Prince, Spotify’s head of communications and ex-Clinton and Obama official who formally joined the company in 2014.  My assessment of Mr. Prince is that part of his job would not only be placing positive news about his employer Spotify, but would also be suppressing negative stories like Blake’s post.  To my knowledge, Mr. Prince is still at Spotify.

The particular years that Mr. Grusd was employed by Spotify would start around the time of the company’s U.S. launch and continue for four years, a customary stock option vesting period.  We don’t know what percentage of the company Mr. Grusd owns, but we can assume for the sake of argument that it’s around 1% of the then outstanding stock and that Spotify did not repurchase his shares when he left the company.  Of course, since Mr. Grusd is obviously a very important person and had two roles at Spotify, he could well own (or have the right to buy) a greater portion of the company, but probably less than 5%.  He would probably have been considered something of a late-stage founder for purposes of truing up his initial stock grant and could also have been granted further stock bonuses.

A stock option is the right to purchase stock at a fixed price, usually below market and maybe way below market.  Stock options “vest” over time as a way of incenting employees to stay in their jobs (and are often called “incentive stock options”).  You cannot exercise stock options until they vest.  It’s not uncommon for a company to grant a bunch of these incentive shares to an employee but require the employee to stay at the company for at least 12 months in order to vest at all (called a “cliff”), with monthy vesting thereafter of the remainder of the grant on a prorated basis.  These “incentive stock options” may have certain tax advantages.

So if you were to get 100 stock options on a 12 month cliff with monthly vesting, after one year of employment you’d be able to exercise 25 shares, and each month thereafter you’d be able to exercise 1/36th of the remaining shares, or 25% per year.  (Which can be one reason you see people leaving some startup jobs after four years.)  These shares are almost invariably common stock grants.

How many shares of Spotify stock Mr. Grusd owns and his exercise price will, of course, depend on the number of shares outstanding at the time he was hired and the value of the common stock at that time (leaving aside the “cheap stock” issue), but lets assume that Mr. Grusd got 500,000 shares and that he owns all of them.  But realize that he could easily own much, much more.

When a company goes public, those shares become very valuable because the exercise price of the option is almost always substantially less than the market price of shares.  (Plus, there is something called a “cashless exercise” which allows holders to avoid having to pay anything at all for their stock, “collars” which allow holders to sell their position to a third party, and other tricks of the trade that allow people like Mr. Grusd to “get liquid”.)

Also remember that Spotify’s proposed stock offering according to press reports is to be a “DPO” (a “direct public offering”) not an “IPO” (an underwritten “Initial Public Offering”), an unusual choice by the company which evidently means that there are no underwriters involved.  This move has been criticized by some but lauded by others (which may be evidence of Mr. Prince’s hand).  One feature of the DPO is that it might be easier for someone like Mr. Grusd to sell his shares immediately or at least sooner than with an IPO.  My sense is that Spotify will be under a lower transparency standard between the DPO structure and the fact that Spotify and its Chinese partner Tencent will probably be filing as a foreign issuer (on SEC Form F-1 and not the traditional S-1 for those reading along).  This remains to be seen.

However–Dr. Beinhorn has correctly put his finger on Mr. Grusd’s problem.  If Mr. Grusd has Spotify shares that he holds personally (and not through a blind trust) and as a former Spotify “insider” (for securities law purposes) he appears to have every incentive to keep the murky Spotify story as postitive as he can.  In his current role at HuffPo Mr. Grusd is uniquely positioned to suppress bad Spotify news for his personal enrichment even if Spotify hasn’t offered him anything to do so specifically.

Whether any of this happened, we can’t be sure.  But it sure looks funky.

Another thing that’s funky?  Mr. Grusd was evidently General Counsel of Spotify during the time (2011-2014) that many if not all of the licensing failures occurred that lead directly to all of Spotify’s current litigation problems.  It would be typical for a General Counsel to sign off on something as legal and as critical to the company as its licensing practices (or failures).  Whether that’s leverage for Mr. Prince to extract compliance from Mr. Grusd is something you’d have to ask them–or Spotify’s D&O insurance carrier.

Either way, potential Spotify stockholders buying shares in the public market should be able to hear the good and the bad about the company’s management or mismanagement which Blake was trying to tell them.  I don’t know if a former insider has a legal fiduciary duty to the public (or even to existing stockholders) in this regard, but at a minimum it would certainly be a better look not to suppress stories that could inform the investing public if your CEO really does have a conflict of interest.

So on balance, I think Michael Beinhorn has put his finger on something of extraordinary importance to public policy and the well-being of the investing public in general about which the HuffPo’s readership and potential investors in Spotify ought to educate themselves.

 

Developing…HuffPo CEO is Spotify’s Former Head of Corporate Development and General Counsel

ARW readers will know that my friend Blake Morgan had his Huffington Post contributor account deleted after he posted a whistleblower piece critical of Spotify’s licensing and artist relations practices.  Producer Michael Beinhorn (call sign “Eagle Eye”) has posted that Huffington Post’s CEO Jared Grusd “is the former General Counsel and Global Head of Corporate Development at Spotify.”

If true (and I assume it is true), this raises all kinds of questions of conflict of interest but would go a long way to explaining the speed with which Blake’s post was taken down and his account deleted.  Why would Spotify’s comms man (aka the old triangulator) make that call?  As Voltaire might say of Admiral Byng, “pour encourager les autres.”

We will continue to drill down on this, but thanks to Professor Beinhorn for the tip.