[ARW readers could probably guess that I’m not a fan of George Soros–a man who for reasons of his own has financed most of the anti-artist front groups around the world. But when he’s right, he’s right and in this op-ed from the Financial Times, he’s definitely right and Blackrock is definitely wrong.]
The crackdown by the Chinese government is real. Unnoticed by the financial markets, the Chinese government quietly took a stake and a board seat in TikTok owner ByteDance in April. The move gives Beijing one seat on a three-person board of directors and first-hand access to the inner workings of a company that has one of the world’s largest troves of personal data.
The market is more aware that the Chinese government is taking influential stakes in Alibaba and its subsidiaries. Xi does not understand how markets operate. As a consequence, the sell-off was allowed to go too far. It began to hurt China’s objectives in the world.
Recognising this, Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally. But that is a deception. Xi regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening. That includes not only those investors who are conscious of what they are doing, but also a much larger number of people who have exposure via pension funds and other retirement savings.
Spotify announced a second billion dollar stock buy back last week which means they have $1 billion in free cash that they will spend, not for paying artists, not for paying songwriters, but to juice their stock price and make Spotify insiders and senior employees richer still. Remember that Spotify already did this once before in the pre-pandemic. Just like they lavish the artists’ money on their fancy World Trade Center offices and buying the Arsenal Football Club, a second billion dollar stock buy back means more of the same while they pay artists a pittance, songwriters even less and session performers not at all.
Every Spotify employee should understand that the income disparity between their monopoly business practices and the creators who drive the fans to their platform that Spotify monetizes out the back door has never been so dire.
Why do you care? A few reasons. First, it demonstrates that Spotify has plenty of cash laying around despite its continued loss making–which confirms the “get big fast” and devil take the hindmost strategy that has driven the company to make its insiders extraordinarily rich. So when Spotify tell you (and the UK Parliament) that they can’t pay a fair royalty because they’re struggling so much, here’s more evidence that those claims really are as much bunk as they sound like.
Second, it highlights the value transfer from featured artists who barely get paid at all and non-featured artists who really don’t get paid at all. The real value to the music that Spotify pays at a hundredths of a penny is reflected in the share price and market value, not the revenue which they refuse to increase as they pursue their growth strategy. This failure to allow the creators that make their company to capture value through higher royalties is the subject of a study I co-wrote for the World Intellectual Property Organization and is underlying the Spotify royalty crisis.
But perhaps most importantly it’s yet another tone deaf move by Spotify that ignores both the Congressional payola inquiry into Spotify’s business practices as well as the streaming income inequality that’s argued every day as the walls close in on songwriters trying to make a living and artists trying to tour in a life threatening environment. As Senators Bernie Sanders and Chuck Schumer wrote in a New York Times op-ed, stock buybacks should not come at the expense of workers, which I would argue includes artists and songwriters in Spotify’s case. For a deeper dive, see Profits Without Prosperity by the economist William Lazonick in the Harvard Business Review.
Professor Lazonick tells us:
Though corporate profits are high, and the stock market is booming, most Americans are not sharing in the economic recovery. While the top 0.1% of income recipients reap almost all the income gains, good jobs keep disappearing, and new ones tend to be insecure and underpaid.
One of the major causes: Instead of investing their profits in growth opportunities, corporations are using them for stock repurchases. Take the 449 firms in the S&P 500 that were publicly listed from 2003 through 2012. During that period, they used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock. Dividends absorbed an extra 37% of their earnings. That left little to fund productive capabilities or better incomes for workers.
Why are such massive resources dedicated to stock buybacks? Because stock-based instruments make up the majority of executives’ pay, and buybacks drive up short-term stock prices.
Spotify Technology S.A. (NYSE: SPOT) (the “Company”) today announced that it will commence a stock repurchase program beginning in the third quarter of 2021. Repurchases of up to 10,000,000 of the Company’s ordinary shares have been authorized by the Company’s general meeting of shareholders, and the Board of Directors approved such repurchases up to the amount of $1.0 billion. The authorization to repurchase will expire on April 21, 2026. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The repurchase program will be executed consistent with the Company’s capital allocation strategy, which will continue to prioritize aggressive investments to grow the business.
“This announcement demonstrates our confidence in Spotify’s business and the growth opportunities we see over the long term,” said Paul Vogel, Chief Financial Officer at Spotify. “We believe this is an attractive use of capital, and based on the strength of our balance sheet, we continue to see ample opportunity to invest and grow our business.”
Under the repurchase program, repurchases can be made from time to time using a variety of methods, including open market purchases, all in compliance with the rules of the United States Securities and Exchange Commission and other applicable legal requirements.
The repurchase program does not obligate the Company to acquire any particular amount of ordinary shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.
What are they not telling you? Well, first of all I’m not so sure how strong the Spotify balance sheet really is, with all due respect to Mr. Vogel (who is no doubt pitching a stock buyback that he probably personally benefits from as a shareholder). Without grinding through details, let’s say that Spotify’s stock is down 30% from its COVID-induced highs so there’s that. Someone else seems to think the balance sheet isn’t all that.
Why do I say that Spotify’s stock buy back juices the share price and earnings per share? It’s simple–you keep the financial metrics like revenue and earnings separate and constant. The share price and earnings per share is a function of market capitalization, a ratio based on the number of shares outstanding. And here’s the key: By reducing the number of outstanding shares alone, you can increase the stock price and the earnings per share without actually changing anything about the company’s financial performance (kind of like a reverse stock split).
Stock repurchases are usually funded through hitting an account called “retained earnings” and buying the shares in the open market at a fixed price, sometimes through a tender offer. If there is insufficient retained earnings, the company can take on debt. Spotify doesn’t mention in its press release exactly how this particular buyback will be financed, but it’s usually one or the other, and otherwise in compliance with the SEC Rule 10b-18 safe harbor for issue repurchases for those reading along at home.
The key takeaways:
Spotify is a monopolist and has plenty of money
Spotify is doing a stock repurchase to juice the share price and make it look higher than it is, fooling no one on Wall Street
The major beneficiaries are Spotify insiders like Daniel Ek who control the company, the board and all shareholder votes.
Spotify have the money to compensate featured artists, nonfeatured performers (musicians and vocalists) and songwriters but choose to spend it on themselves.
Remember record clubs? 20 CDs by hit artists for 1¢? These were the absurd organizations run by some of the smarmiest of the smarmy in our business that could not wait to get their greedy paws on your records by your artist who you busted your hump to help find an audience, often at the peak of their popularity. Front line labels were under tremendous pressure to hand over our precious cargo to them at the earliest opportunity so the clubs, too, could snarf up the hit gravy train while giving the artists and especially the songwriter a truly raw deal.
Thus arose the “club holdback” a contractual provision that required a fixed period of time to pass before the record went to the club abattoir. The standard give was 90 days from LP release, but that really wasn’t long enough. It takes time to find an audience and 90 days isn’t nearly long enough. So true to form, successful artists or competitive signings could get a longer holdback, sometimes as long as 12 months. Another trick was that at least one of the clubs refused to pay full statutory or even the full 3/4 rate, so the tricksie label lawyer could also get rid of the 3/4 of 3/4 rate that the clubs would expect you to get because that was forever. Extend that holdback to 12 months and eliminate the reduced rate mechanical, and you could legitimately say “wish I could help, but you know, the contract. We fought like dogs and I had to give them something…so I gave them your money.”
As any artist or particularly nonfeatured artist (aka session player) will tell you, streaming cannibalizes higher margin physical sales. That’s a fact. Streaming also throws off significant’ profits to the streaming distributor in both revenue and market valuation. (I co-wrote a whole paper about this with Professor Claudio Feijoo for the World Intellectual Property Organization.) So it should be no surprise that in the finest tradition of the record clubs that the film studios have discovered a new way to rip off their featured and nonfeatured talent. And the best evidence is Scarlett Johansson’s lawsuit against Marvel and Disney for the way Disney bungled the artist relations issues surrounding the release of Black Widow.
David Dayan at The American Prospect nails the real labor relations issues underlying this pivotal lawsuit in his must-read post The Implications of Scarlett Johansson’s Marvel Lawsuit. David is one of the only journalists out there today who takes the time to understand the true implications of streaming. I highly commend this post to you and every talent lawyer and union negotiator.
We should all rally around Ms. Johansson for taking on what is sure to be a grinding knockdown dragout lawsuit, but we can already learn a few things from the Happiest Place on Earth.
Yes, they will screw you no matter how big you are, even if the result is you’ll never work for them again.
Streaming is probably the most corrosive technology to hit the entertainment industry in history.
Holdbacks (or “windowing”) is a real thing but it’s only as real as the downside for the inevitable breach. Whether that is a lawsuit or a liquidated damages clause that requires the studio to pay as if the windowed event had not occurred remains to be seen. (Example, I get 10x up front and 1000X cash bonus on the backend if theatrical is wildly successful plus studio agrees not to stream in the first 100 days. If studio breaches and streams, I get my 1000x cash bonus regardless of how theatrical window performs, plus whatever else I would get from the streaming release.)
The days of backend-loaded deals may be drawing to a close which will cost the studios more money up front for fewer actors.
Streaming platforms should be paying residuals and bonus payments to all workers on a film, including below the line union workers.
The Happiest Place on Earth is headed for a strike, the likes of which we have never seen before and if it weren’t for COVID it would already have happened.
It’s a very important case that tells a really sad story. And it’s probably the first of many.
Mansplaining, anyone? If you remember Spotify’s 2014 messaging debacle with Taylor Swift, we always suspected that the Spotify culture actually believed that artists should be grateful for whatever table scraps that Spotify’s ad-supported big pool model threw out to artists. They were only begrudgingly interested in converting free users to paid subscribers, which still pays artists nothing due to the big pool’s hyper-efficient market share revenue distribution model.
And then there was another one of Spotify’s artist and label relations debacles with Epidemic Sound–Spotify’s answer to George Orwell’s “versificator” in the Music Department that produced “countless similar songs published for the benefit of the proles by a sub-section of the Music Department.”
The common threads of most of Spotify’s crazy wrong turns–and they are legion–is what they indicate: An incredible heartless arrogance and an utter failure to understand the business they are in. A business that ultimately turns on the artists and the songwriters. As long as there is an Apple Music and the other music streaming platforms, artists can simply walk across the street–which is why Taylor Swift could make Daniel Ek grovel like a little…well, let’s just leave it at grovel.
Why are ostensibly smart people given to such arrogance? Mostly because they are rich and believe their own hype. But never has that reality been on such public display in all its putridness than in a truly unbelievable exchange at the Sync Summit in 2019 in New York between home town independent artist Ashley Jana and former Spotify engineer Jim Anderson who was being interviewed by Mark Freiser who runs that conference who doesn’t exactly come off like a prize puppy either.
Ashley recorded the entire exchange in (what else) a YouTube video and Digital Music News reported on it recently. Here’s part of the exchange between Ashely and Mr. Anderson after Ashely had the temerity to bring up…money!
Jana: We’re not making any money off of the streams. And I know that you know this, and I’m not trying to put you on the spot. I’m just saying, one cent is really not even that much money if you add 2 million times .01, it’s still not that much. And if you would just consider —
Anderson: Oh, I’m going to go down this road, you know that.
Interviewer (Mark Frieser): This is really not a road we’ve talked about before, but I’m gonna let him do this —
Jana: Thank you again.
Anderson: Do you want me to go down this road? I’m gonna go down this road.
Frieser: Well, if you need to.
Anderson: Wait, do I go down the entitlement road now, or do I wait a minute?
Frieser: Well, you know what, I think you should do what you need to do.
Anderson: Should we do it now?
Frieser: Yeah, whatever you feel you need to do.
Anderson: So maybe I should go down the entitlement road now? Or should I wait a few minutes?
Frieser: Do you want to wait a few minutes? Maybe take another question or two?
Anderson: [to the audience] Do you guys want to talk about entitlement now? Or do we talk about —
[Crowd voices interest in hearing the answer from Anderson]
Jana: I don’t think it’s entitlement to ask for normal rates, like before.
Anderson: Normal rates?
Jana: No, the idea is to make it a win-win situation for all parties.
Anderson: Okay, okay. So we should talk about entitlement. I mean, I have an issue with Taylor Swift’s comments. I have this issue with it, and we’ll call it entitlement. I mean, I consider myself an artist because I’m an inventor, okay? Now, I freely give away my patents for nothing. I never collect royalties on anything.
I think Taylor Swift doesn’t need .00001 more a stream. The problem is this: Spotify was created to solve a problem. The problem was this: piracy and music distribution. The problem was to get artists’ music out there. The problem was not to pay people money.
You really should listen to the entire video to really comprehend the arrogance dripping off of Mr. Anderson’s condescension.
One potential solution to the crisis with performer compensation from streaming is an expanded remuneration right paid directly to performers and featured artists by streaming platforms. Remember–the session musicians and vocalists you hear on streaming platforms get nothing and all but a handful of featured artists get next to nothing.
Endless babble about how streaming saved music industry is unmoored from reality. And revenue has demonstrably resulted in lower pay to music workers.
Thanks to the support of the American Federation of Musicians and the International Federation of Musicians, the World Intellectual Property Organization commissioned a policy study on this subject for consideration by WIPO’s Standing Committee on Copyright and Related Rights that I co-authored with the noted economist, Professor Claudio Feijoo. (The study is available here.) WIPO has never before commissioned a study on the economic effects of streaming on performers, and I think we should all be appreciative of WIPO’s response.
I was pleased to see the study quoted in the recent letter to UK Prime Minister Boris Johnson from the Rolling Stones, Sir Tom Jones and many others calling on the PM to support streaming remuneration according to the BBC.
We considered the pros and cons of a number of potential solutions, which are summarized in this table from the study. Streaming remuneration paid by platforms was the main recommendation for a number of reasons:
–streaming remuneration helps to balance the extraordinary growth in share price by companies like Spotify. (Apple is approaching a $2 trillion market capitalization and still pays session players nothing for streams on Apple Music).
–enterprise playlists are increasingly a substitute for radio by Spotify’s own admission yet pay nothing to non-featured performers.
–streaming remuneration does not expand the compulsory license and leaves private contracts in place.
Streaming Remuneration Paid By Platforms Through CMOs
Does not require additional transaction cost as matching and payment information already exists at CMOs; does not require renegotiation of licensing agreements or disrupt current licensing practices; platforms are already paying similar royalties in certain territories; recognizes value transfer from all performers to platforms; helps to preserve local culture by compensating both featured and nonfeatured performers
Platforms may seek to offset streaming remuneration payments against catalog license revenues; platforms may seek to expand compulsory licenses; additional operating cost for platforms;
Flexible solution that Member States may elect to implement. Benefits both featured and nonfeatured performers. Mandate may exclude deduction from existing licenses and may make payments non-waivable.
Status Quo—continue market-centric model unchanged with voluntary experiments in fairness-making royalty methods (SoundCloud and Apple, for instance)
No disruption to streaming ecosystem, locks in market-centric royalty model, allows market forces to drive change (e.g., SoundCloud fan powered royalties and Apple messaging pro-artist royalty rates)
Favors major labels and their featured performers, nonfeatured performers paid zero, does not respond to grassroots campaigns by featured and nonfeatured performers; burdens local repertoire and local culture (see concerns about streaming music raised by Heritage Canada and Canadian Parliament in current consideration of Bill C-10)
Do not change and allow market forces to impact royalty rates through grassroots protests against streaming royalties like #BrokenRecord and #IRespectMusic campaigns and potentially litigation
Voluntary change in label streaming rate policy and Beggars (for instance) style forgiveness of unrecouped balances
Fairness making move so that producer unilaterally updates all legacy contracts to current rates. Simple to pay more than contract requires, can be implemented quickly, low transaction costs. Forgiveness of unrecouped balance occurs after a fixed period of time. (Beggars model forgives 25% after 15 years).
Does not change the underlying payments to featured performers, does not compensate nonfeatured performers. Might be arbitrary and subject to sudden changes.
Labels should consider before legislation requires a change in response to grassroots protests (see DCMS Inquiry). Nonfeatured performers are not benefited. Compatible with other models.
Mandate review of royalty statements and systems by independent accountants or “special masters”
Biggest point of failure in royalty reporting is at the platform, so review of systems by independent accountants and experts would increase transparency and help to reduce third party fraud. Expert review would be in addition to SSAE 16 type review. At a minimum, public accounting firms should be required to publicly disclose systems reviews undertaken as part of audited financials.
Biggest negative would be cost, but in the long run would potentially reduce the cost and increase the efficiency of individual audits. Might be accomplished through disclosure and rebalancing of duties of public accounting firms.
Member States may consider legislating transparency. Nonfeatured performers are not benefited. Compatible with other models.
Adjust corporate governance at streaming companies to make them more responsive to shareholders (such as eliminating dual class stock in publicly traded companies)
Allows shareholders a meaningful voice in corporate governance denied by “supervoting” shares such as Spotify’s 10:1 insider shares, allows fans or users an opportunity to be heard by board of directors
Does not by itself change underlying payment issues for either featured or nonfeatured performers
Member States may consider as a general matter depending on existing corporate governance laws and exchange rules. Nonfeatured performers may not be benefited. Compatible with other models.
Voluntary User Centric Share of Revenue Royalty methods
Likely to allow users to have transparency as to where their money goes; perceived greater fairness for featured performers
Costly to implement due to transaction costs of renegotiating all licenses. May just reallocate revenue without increasing the pie; does not recognize the value transfer from performers to platforms in market valuation and share price. Does not compensate nonfeatured performers.
Allow platforms to experiment with different models. Nonfeatured performers are not benefited under models tried to date.
Fan-to-performer Direct Digital Gifts
Does not require changing licensing agreements for services and producers; payments to performers can be made directly outside of recording or distribution agreements; if broadly established, could include both featured and nonfeatured performers.
Excludes producers from compensation scheme; requires performers to sign up to accept payment; some services take a cut some do (like Tencent) and some (like Apple) do not take a cut if true gift and not disguised in-app purchase
Allow platforms to experiment with different models. Nonfeatured performers could be benefited. Member States may consider legislation to curtail platforms taking a cut of digital gifts.
Extended collective licensing of the exclusive right of making available on demand
Rebalance relations between stakeholders; guarantee a remuneration for all categories of performers through collective management
Limited protection for performers when opt-out is possible; needs conclusion of new licensing agreements; will affect the perimeter of licensing agreements concluded between labels and platforms
Would conflict with existing contracts, increasing litigation with uncertain results; non-retroactive application with limited effects
Compulsory collective management of the exclusive right of making available on demand
Rebalances relations between stakeholders; guarantees a remuneration for all categories of performers through collective management; protects all performers from unbalanced transfer of right
Needs conclusion of new licensing agreements; will affect the perimeter of licensing agreements concluded between labels and platforms; deprives featured performers of their direct capacity to negotiate with labels through individual contracts
Would conflict with existing contracts, increasing litigation with uncertain results; non-retroactive application with limited effects