The music world continues to be exceedingly vulnerable, and there are looming questions that desperately need to be addressed. Most important: How can artists distribute and sell their work in a digital economy beholden to ruthlessly commercial and centralized interests?
Enter Spotify, a platform that is definitely not the answer. In fact, it only exacerbates such conundrums. Yet for now it has manipulated the vast majority of music industry “players” into regarding it as a saving grace. As the world’s largest streaming music company, its network of paying subscribers has risen sharply in recent years, from five million paid subscribers in 2012 to more than sixty million in 2017. Indeed, the platform has now convinced a critical mass that paying $9.99 per month for access to thirty million songs is a solid, even virtuous idea. Every song in the world for less than your shitty airport meal. What could go wrong?
Billionaires have thrown a lot of money at Spotify. As of September 2017, the platform has been valued at $16 billion by venture capitalists who see it as the next Netflix, and who have perhaps fooled themselves into trusting that this exploitative model will “save the music industry.” Spotify’s endgame, for now, is to go public. The company could be worth $20 billion by next year, when it will likely be listed on the New York Stock Exchange. According to Reuters, Spotify plans to file its intention of a public offering with U.S. regulators before the end of this calendar year and to go public in the first or second quarter of 2018. Bloomberg reports that it recently hired Goldman Sachs Group Inc., Morgan Stanley, and Allen & Co. to “assess its options.”
Make no mistake—Spotify is only interested in selling you Spotify.
On Monday, the Huffington Post’s contributor platform published a storyby #IRespectMusic founder Blake Morgan, detailing a heated exchange between him and an unidentified Spotify executive that took place in 2014. Titled “Spotify’s Fatal Flaw Exposed: How My Closed-Door Meeting with Execs Ended in a Shouting Match,” the piece was removed from the website hours after posting.
Morgan’s piece was reposted on the Trichordvist, a community blog that is, according to their website, “for those interested in contributing to the advancement of a Sustainable and Ethical Internet for the protection of Artists Rights in the Digital Age.”
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.
[Editor Charlie sez: After this post started to take off on Huffington Post, Blake Morgan was told that HuffPo was killing the link on a flimsy excuse. The Trichordist has reposted the piece along with correspondence from the HuffPo editor.]
I love streaming.
I love making playlists, I love being able to download streamed music so I can listen when I’m offline, and I love being able to bring that music with me. In short, I think it’s a great distribution method.
What I don’t love is how little musicians get paid for all that streaming. It’s not fair––not even close. What’s more, middle-class music makers are the ones who are hit hardest, whose businesses are threatened, and whose families are put at risk. So how can I be against the way streaming companies treat musicians but not be against streaming itself?
The same way I’m against the electric chair, but not against electricity.
The end of 2017 and beginning of 2018 has seen a flurry of activity as headlines reveal another $1.6 Billion Dollar Lawsuit against the tech streaming online distribution company, this time by Wixen Music Publishing, who represent compositions by Neil Young, Tom Petty, Rage Against the Machine and others.
This latest lawsuit joins nearly half a dozen other class action / lawsuits against Spotify by independent music creators and rights administrators filed in the past two years.
“The Trichordist” blog collaborator, Cracker and Camper Van Beethoven front man, David Lowery of Athens, Georgia and songwriter Melissa Ferrick successfully sued Spotify and settled with a $43.4 Million Fund for unpaid songwriter and publisher royalties last year.
Around the same time the NMPA (National Music Publishers Association) also stepped in and made their own $30 Million settlement with Spotify as reported by Robert Levine in Billboard in May of 2017.
Nashville / Texas based Bluewater Music Services Corp filed a lawsuit against Spotify in 2017, led by champion of the underdog attorney Richard S. Busch, the same lawyer who represented the victorious Marvin Gaye estate in their “Blurred Lines” infringement case, and helped Eminem successfully stand up to EMI when his rights were being squashed in the name of commerce.
The Bluewater suit and yet another Spotify lawsuit by an independent music publisher, Rob Gaudino are both detailed in this Variety article “Spotify Faces Two New Lawsuits From Music Publishers” by Janko Roettgers in July 2017.
These lawsuits highlight Spotify’s ongoing battle to do business with its suppliers, the songwriters and music publishers who are forced through federal regulation to make their material available to Spotify and other streaming companies against their will through a practice known as Compulsory Licensing, whereby the rights owners are not permitted to deny usage of their intellectual property.
What kind of negotiation can actually happen if one party cannot walk away? Not much, we are proving.
With an impending IPO finally on the horizon and copyright-infringement lawsuits worth over $1 billion stacking up, the streaming leader has plenty to deal with in the new year.
Spotify has established itself as the leader in on-demand audio, with 70 million paid subscribers worldwide. But the company now faces a series of hurdles as it barrels into 2018, with a long-awaited initial public offering on the horizon for the first quarter and several copyright-infringement lawsuits that could cost the company dearly — and hang a dark cloud of uncertainty over its head.
All indications are that Spotify wants to list in Q1, and timing of the confidential F-1 filing would support such a calendar. But yesterday came news that the company has been sued [yet again, this time] for $1.6 billion for copyright infringement. It’s unclear how the suit will affect Spotify’s direct listing plans, outside of needing to add a new risk factor to the confidential docs.