It’s All About the Stock: Tone deaf Spotify Insiders Vote for Stock Buyback to Juice Their Share Price While Congress Questions Streaming Payola

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. 

Here’s the Spotify press release:

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:

  1. Spotify is a monopolist and has plenty of money
  2. 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
  3. The major beneficiaries are Spotify insiders like Daniel Ek who control the company, the board and all shareholder votes.
  4. Spotify have the money to compensate featured artists, nonfeatured performers (musicians and vocalists) and songwriters but choose to spend it on themselves.

@ashleyjanamusic’s Video Tells You All You Need to Know About Spotify’s Attitude Toward Artists

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.

But–this long history of treating artists and especially songwriters poorly is what makes it so important to preserve Apple Music as a healthy competitor to Spotify and the only thing that stops Spotify from becoming a monopolist. A fact that seems entirely lost on their boy Rep. David Cicilline’s anti-Apple bill that “seems aimed directly at Apple and has Spotify’s litigation against Apple written all over it.” (Mr. Cicilline runs virtually unopposed in his Rhode Island elections, which if you know anything about Rhode Island politics is just the way the “Crimetown” machine likes it.)

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.

Riding the Third Rails: Making the case at WIPO for performer streaming remuneration — Music Technology Policy

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. 

U.S. Recorded Music Revenues Are Still 46% Below 1999 Peaks https://t.co/wmyAiCV9iB— David C Lowery (@davidclowery) June 17, 2021

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.

SolutionProConFurther comments
Streaming Remuneration Paid By Platforms Through CMOsDoes 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 performersPlatforms 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[1])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 balancesFairness 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. 
SolutionProConRecommendation
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 directorsDoes not by itself change underlying payment issues for either featured or nonfeatured performersMember 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 methodsLikely to allow users to have transparency as to where their money goes; perceived greater fairness for featured performersCostly 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 GiftsDoes 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 demandRebalance relations between stakeholders; guarantee a remuneration for all categories of performers through collective managementLimited 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 platformsWould 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 demandRebalances relations between stakeholders; guarantees a remuneration for all categories of performers through collective management; protects all performers from unbalanced transfer of rightNeeds 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 contractsWould conflict with existing contracts, increasing litigation with uncertain results; non-retroactive application with limited effects

[1] House of Commons of Canada, House Govt. Bill C-10 (43rd Parl, 2nd Sess., Nov. 3, 2020) available at https://www.parl.ca/LegisInfo/BillDetails.aspx?Language=e&Mode=1&billId=10926636&View=1

@ajaromano: Tons of K-pop artists have been purged from Spotify. It’s part of a much bigger problem.

Spotify’s expansion into Korea featured a glaring omission: No artists distributed by Kakao M were added to the platform. A music distribution company and talent agency, Kakao M is a subsidiary of Korean tech giant and media conglomerate Kakao; it is perhaps best known for buying South Korea’s largest music streaming platform, Melon, in 2016….The purge appeared to be massive, impacting established artists, newer groups, indie artists, and everyone in between. Bill Werde, the former editorial director of Billboard, called it “red wedding territory for global K-Pop,” a reference to an infamous Game of Thrones scene involving the slaughter of multiple characters.

The outcry from fans was immediate: #SpotifyIsOverParty started trending on Twitter, and users reportedly canceled their Spotify subscriptions in droves. The streaming service took down the entire platform temporarily for maintenance, though some fans believed it was done to prevent them from canceling their accounts en masse. (Vox has reached out to Spotify for comment.) 

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