@musictechsolve: Do Spotify Stock Downgrades Go Far Enough?

On June 24th, Spotify shares (ticker: SPOT) was downgraded by Evercore analyst Kevin Rippey, who cut the stock to Underperform from In Line.  Since then, analysts are steadily looking past the loss-making Spotify’s $1 billion stock buy back plan.

Rippey says investors are overestimating Spotify’s ability to make money from podcasts and offering services to musicians and are underestimating the competition from other streaming services—particularly in countries outside the U.S. He reduced his price target to $110.

As ARW readers will recall, I have long challenged Spotify’s kvetching about high royalty rates by pointing to the its high overhead, 7 figure performance bonuses to Daniel Ek when he failed to meet the bonus criteria, and other irresponsible behavior by the board that Ek controls.

Spotify’s interest in podcasts is another comical example of Ek as the Easter Bunny of Screw Ups.  He bought a podcasting company that was unionized.  Sheer genius.  Why did he buy them?  Some people think it’s because podcasts were another form of user-generated content where people work for free in exchange for hot meals…no, in exchange for exposure bucks.

Exposure Bucks

Apple is busy paying for podcasts according to Newsmax:

Apple Inc. plans to fund original podcasts that would be exclusive to its audio service, according to people familiar with the matter, increasing its investment in the industry to keep competitors Spotify and Stitcher at bay.

Executives at the company have reached out to media companies and their representatives to discuss buying exclusive rights to podcasts, according to the people, who asked not to be identified because the conversations are preliminary. Apple has yet to outline a clear strategy, but has said it plans to pursue the kind of deals it didn’t make before.

Apple all but invented the podcasting business with the creation of a network that collects thousands of podcasts from across the internet in a feed on people’s phones, smartwatches and computers. The Apple Podcast app still accounts for anywhere from 50% to 70% of listening for most podcasts, according to industry executives.

So Spotify’s law fare against Apple in Europe should come as no surprise (for more on that subject see the “Spotify Untold” corporate bio book).  What this comes down to is that once again, Apple understands its audience and what would delight them where Spotify wants to build them a faster horse (or at least a cheaper one).

Meanwhile, Spotify is commoditizing music into a “playlist friendly” environment based on your mood rather than being artist driven.  Why?  One possible reason is the psychographic research of Michael Kosinski, whose work formed the basis for techniques honed by Cambridge Analytica and the Internet Research Agency you hear so much about (although it must be said the Kosinski did not work for either of those outfits–no he works as a professor at…you guessed it…Stanford).  See his paper The Song Is You: Preferences for Musical  Attribute Dimensions Reflect Personality, available at the Leland Stanford Google University Business School.

The more insightful analysts are represented by Mr. Rippey, who seems to have a good grasp on Spotify’s business and sees through all the bright and shiny objects they want you to focus on as reported by Barrons (emphasis mine):

Rippey says Wall Street’s expectations assume that either the company will come out way ahead in negotiations with the music labels that control the vast majority of the content that Spotify streams, or that it will make a bundle of money from services that previously accounted for almost none of its income.

Now that the sugar high of the Spotify stock has passed through the system and artists either are happy or not happy with their share of the proceeds–which will be hitting royalty statements right about September 30–labels are now faced with a  second act, and that second act likely will require a bigger royalty check–not a smaller one.

To achieve Wall Street’s targets for gross profit, Spotify would either need to take a larger cut of proceeds from each song stream [also called a lower royalty to artists and songwriters] or generate as much as $650 million from “ancillary” areas like Spotify for Artists and podcasts by 2022—areas the company doesn’t make much money on today, Rippey says. Spotify for Artists offers data for musicians to track which songs are performing well and in which areas, among other benefits. [Which is OK if Spotify for Artists is free, I guess–since we sent them the fans–but my bet is that no one is going to pay for it, certainly no one with a modicum of leverage.]  Spotify makes money from ads on podcasts it owns and has also begun to launch exclusive podcasts that listeners can only get on Spotify.  [Spotify has never had a hit that originated entirely within Spotify.  When it does, check this space.]

Given that music crosses over multiple cultures but that Spotify brings a decidedly European and Anglo/American creative viewpoint to its distribution platform, it is unlikely to be able to fight all fights in all markets and be all things to all music fans in the some 60 countries it operates in.  This is particularly true in countries that actually value their culture and creators.

Spotify is the global leader in streaming music, but Rippey thinks that Wall Street overestimates the company’s power in local markets. “In emerging markets like India, local players dominate the market,” he writes, noting that Jio and Gaana were the market leaders there in the first quarter. “This fragmentation leads to an understatement of how competitive streaming music is globally.” Similar dynamics play out in countries like Indonesia too.

Those are some good concrete reasons why Rippey’s price target is $110, which I think is still about $50 too high because of Spotify’s C team management.  And also because the other analysts are all guiding too high in the Overton Window:

Analyst Rating Price Target
Evercore/Kevin Rippey Underperform (From In Line) $110
Nomura Instanet/M. Kelly Buy $190
Stifel/John Egbert Buy $175
Credit Suisse/B. Russo Underperform $120
BOA/Jessica Reif Ehrlich Buy $230

One major factor that all the analysts overlook, like they missed the subprime crisis, is buried in the commentary that never gets picked up in the Wall Street publications–the fact that artists can’t begin to make a living from streaming the way they could from the CDs that streaming is replacing.  This sudden contraction hurts artists at all stages of development.  To put it in terms that Wall Street might understand more readily, this is a supply chain issue.  The chain will have no supply if unsustainable economics expands which it seems like it will.

There’s about 5% of the tracks that make 90% of the revenue from Spotify-type streamers.  Fans are paying subscriptions every month for music they don’t listen to performed by artists they don’t like.  When that idea starts to permeate the Federal Trade Commission and the Department of Justice, who knows what may happen.  This will be true of podcasters, too–the unionized podcasters affiliated with the Writers Guild of America.  I’m looking forward to that collective bargaining experience.

But for now, it’s only a matter of time before artists who are not in that 5% start to jump ship.  Analysts should be asking, who can encourage them to jump and what will happen to the ship they jump from if there were some disruption below decks in the royalty rates?

@RBMillado: Too much streaming content is causing viewer ‘paralysis’: Nielsen

Playlistomania?  I wonder what it is on Spotify–that’s what 50 million tracks will do for you.  If this replicates to “listener paralysis” (which seems plausible), it may help explain why the streaming revenue share model leads to declining royalty rates and greater concentration of wealth in a hyper efficient market share distribution.  (Deezer reportedly conducted a similar study in 2018 using a casual poll with findings based more on age than choice.)  Less is more, kids, less is more.

Nielsen’s new Total Audience Report found that the average TV viewer takes seven minutes just to pick what to watch….[A]mong adult subscription-video-on-demand (SVOD) users, only a third of them bother to browse the menu to find content, with 21 percent saying they simply give up watching if they’re unable to make a choice when bombarded with options.

Read the post on the NY Post

@musicindustree: Everything That’s Wrong With Streaming Music Networks

The majority of people who champion streaming are not your average artist, they are not even the top 10 per cent of artists. The advocators of the commentary we hear day to day are music industry press, mainstream press, the streaming networks themselves, aggregators and Digital Service Providers (DSPs) and of course users, who get an amazing experience of all the music in the world for 9.99.

Read the post on MusicIndustTweet

@nickconfessore @laforgia_ gabriel-j-x-dance: Facebook offered users privacy wall, then let Spotify and other tech giants around it

For years, Facebook gave some of the world’s largest technology companies more intrusive access to users’ personal data than it has disclosed, effectively exempting those business partners from its usual privacy rules, according to internal records and interviews.

The special arrangements are detailed in hundreds of pages of Facebook documents obtained by The New York Times. The records, generated in 2017 by the company’s internal system for tracking partnerships, provide the most complete picture yet of the social network’s data-sharing practices. They also underscore how personal data has become the most prized commodity of the digital age, traded on a vast scale by some of the most powerful companies in Silicon Valley and beyond.

The exchange was intended to benefit everyone. Pushing for explosive growth, Facebook got more users, lifting its advertising revenue. Partner companies acquired features to make their products more attractive. Facebook users connected with friends across different devices and websites. But Facebook also assumed extraordinary power over the personal information of its 2.2 billion users — control it has wielded with little transparency or outside oversight.

The social network allowed Microsoft’s Bing search engine to see the names of virtually all Facebook users’ friends without consent, the records show, and gave Netflix and Spotify the ability to read Facebook users’ private messages.

Read the post on the New York Times.

Barf. Just Barf. — The Trichordist

[Editor Charlie sez:  The Music Modernization Act really is the Spotify IPO Preservation Act, as we suspected!]

David Israelite of the NMPA and Mitch Glazier of the RIAA have penned an op-ed for Variety Magazine, in which they extoll the virtues of various copyright reform proposals before congress. While I agree with them about the Classics Act (fixes pre-1972 loophole) AMP act (helps producers/engineers receive royalties from digital royalty streams) every day […]

via Barf. Just Barf. — The Trichordist

@musicbizworld: SPOTIFY’S SCIENTIST: ARTIFICIAL INTELLIGENCE SHOULD BE EMBRACED, NOT FEARED, BY THE MUSIC BUSINESS

[Editor Charlie sez:  No, that’s not a headline from the National Enquirer.  Straight outta George Orwell’s 1984!  Laura Koby puts it in perspective at MTP in her post Making Fake Art: “1984”, The New Rembrandt, and The “Fake Artist”]

Pop music made by actual robots is here… and it sounds considerably better than you might think.

Hello World, released earlier this month via Flow Records, is being touted as ‘the first multi-artist commercial album created using Artificial Intelligence’.

The LP has been recorded by French collective SKYGGE, in collaboration with the likes of Canadian chart-topper Kiesza and Belgian pop star Stromae… and, of course, those all important computers.

SKYGGE is led by composer, author and producer Benoit Carré, alongside a gentlemen who is becoming increasingly well-known (and slightly fretted about?) in music business circles: François Pachet.

Pachet (pictured) is the world’s foremost scientist in the field of AI-assisted music creation. Aka: Music composed by machine minds.

Last summer (in news that got a few tongues wagging amid the service’s ‘fake artist’ controversy) Pachet joined Spotify as Director of the platform’sCreator Technology Research Lab’.

His recruitment by Daniel Ek’s company followed 20 years of service at Sony, where Pachet – a semi-professional musician in his own right – pioneered projects which resulted in the first known pop songs composed with AI.

Read the post on Music Business Worldwide

@theblakemorgan: Spotify’s Fatal Flaw Exposed: How My Closed-Door Meeting with Execs Ended in a Shouting Match

[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.