@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?

Another Bad Artist Relations Week for Spotify–Music Tech Policy

Spotify released one of their groovy ad campaigns last week. This time celebrating their freebie subscription campaign. You really do have to wonder where they find the people who come up with these things. Blake Morgan, David Lowery and David Poe all laid into Spotify with their own tweets.

via Another Bad Artist Relations Week for Spotify — Music Technology Policy

@musically: Spotify CEO says Libra currency could help listeners ‘pay artists directly’

Earlier this week, Facebook announced a new blockchain-powered currency called Libra, and a digital wallet for it called Calibra. Spotify was among the companies backing the plans by becoming a founder member of the independent Libra Association.

Now Spotify CEO Daniel Ek has been talking about his hopes for Libra, including the suggestion that it could one day facilitate direct payments to musicians from fans.

“I think like cryptocurrencies and blockchain are obviously two of the biggest buzzwords you can have today. And for me, I don’t think technology in itself is that interesting· What I do think is interesting is what we can do with that technology,” said Ek, in an interview for Spotify’s own Culture: Now Streaming podcast.

“What everyone who’s a part of Libra is trying to accomplish is: it’s interesting that we have all these different currencies, all of these different ways of doing things. But the reality is, there’s several billion people around the world that don’t even have access to a bank account,” he continued….(Whatever you think of Libra, the fact that Spotify is, right up to CEO level, even thinking about direct payments from fans to artists is a significant talking point for anyone mulling how the streaming service will evolve in the coming years.)

Read the post on MusicAlly

Spotify Can’t Find Songwriters Performing at Spotify High Roller Party in Cancun

Ah, Cancun, where the elite meet and the US Consulate is located next to the jail.

According to Digital Music News:

Spotify is currently hosting a pricey offsite meeting in Cancun, Mexico, with dozens or more executives and employees participating.

Of course, Cancun isn’t usually associated with getting work done — unless that work involves repeatedly lifting rum cocktails.  But this offsite is reportedly focused on assembling content groups from various global offices.  Beyond that, we’re not sure of the exact business purpose.

One Spotify executive referred to this as a ‘Spotify Music Conference’.  Another source noted that the ‘entire content org’ at Spotify is attending the getaway.  Sounds like a lot of people.

There seems to be a strong Latin emphasis among the performers (more on that below), which makes sense given the location.  But at this stage, this looks like a broader global content and curator meet-up.

According to one source, the action is happening at the Ritz Carlton Cancun, which is surrounded on all sides by white-sand beaches and light blue waters.  According to the resort’s website, room prices start at $439 a night for an ‘Ocean View Guest Room,’ and quickly climb to $1,329 a night for the spacious ‘Club Master Suite’.

Two of the artists performing at the Spotify soiree…sorry, I mean working conference… are Nicky Jam and ChocQuibTown.  What’s strange about that is that Spotify can’t seem to find the songwriters for these two artists:

nicky jam noi

nick rivera caminero nois

chocquibtown

carlos valencia

Now Spotify can explain to these artists why their songwriters aren’t getting paid.  Good thing we have that Music Modernization Act safe harbor that will put everything right as rain.

@ tnm___: Women Artists Lose Out When Algorithms Help Book Events

[This is a really important post by Tshepo Mokoena–in a male dominated industry (streaming) that reflects another male-dominated industry (music), with playlists manipulated by men to men, the much vaunted “artist data” benefits for touring falls down both economically, artistically and ethically.  Turns out streaming is a hyperefficient way to make sure the rich keep getting richer and the bias keeps getting stronger.  Thanks, again, Spotify!]

A funny thing happens when a mixed-gender group chats in a room: people, of all genders, tend to think that the women are talking more. And they tend to think that even while the opposite is true….In translation: women have had to fight for a voice in the public sphere so much that their bare minimum participation is seen as Too Much.

I bring this up, because it’s just about that time for the annual rollout of the coming summer’s festival lineups and their inevitable gender imbalances. Welcome! You can almost draw a parallel between that academic idea – how one woman speaking a little, giving a bit of input, is perceived as her being on a par vocally with the men in the room – and the way women can still feel like a box-ticking afterthought at festivals. A 2017 BBC study found that all-male acts accounted for 80 percent of UK festival headliners. The same study also noted that a quarter of those top slots basically were taken by the same 20 acts – your Muses, Kasabians, Foo Fighters, Killers and so on.

But what about outside the traditional rock festival setup? This week, two events – Spotify’s Who We Be Live in London late this month, and Annie Mac’s AMP Lost & Found festival in Malta in May 2019 – shared news of some of their confirmed artists. Both present some pretty incredible talent, from UK rap, R&B and electronic music. Who We Be, after all, is the name of Spotify’s grime and rap-focused playlist. But, look closer and you also start to notice another trend emerge around gender balance, specifically when streaming plays as central a role in booking a live show, as it does for Who We Be. So while festivals are expanding beyond the ‘yes, let’s go see Kaiser Chiefs for the 18th time!!’ format, what space does that leave for women, in an industry that’s still traditionally dominated by men?

….In the US, Spotify’s RapCaviar, with its more than 10.5 million followers, is often cited as a star-maker. Only, hehehe, it turns out that women feature on it very rarely. When writer David Turner looked into the numbers, for Jezebel’s The Muse earlier this year, he found that women rappers accounted for about 4 percent of artists on the playlist between May 2016 and December 2017. Women overall made up 10.8 percent of RapCaviar artists over that time period.

Read the post on Noisy

Must Read: @musicbizworld Rob Stringer Interviewed by Tim Ingham

If you don’t have time for any other news this week, make sure you read Rob Stringer’s interview in Music Business Worldwide, which should be read side by side with Jody Gerson’s recent interview with Anne Marie Steele.

Rob Stringer (CEO of Sony Music Entertainment) is a long-time records man who brings that underappreciated touch to Sony.  (And since I agree with a lot of his approach, naturally I think its refreshing.)

Here’s an example.  Every now and then, a label runs across an opportunity for one of their artists that turns out to be a windfall, a true windfall.  Sometimes those are driven largely by the artist’s own reputation and creative patina like a soundtrack, sometimes the label creates the opportunity.  Either way, it’s not budgeted revenue and it’s both nonrecurring and unusually large, so there’s a strong argument for pass through treatment from time to time.  “Pass through” meaning the label collects the money but pays the artist’s share of it out regardless of the artist’s recoupment status.

This generally gives the accountants heartburn, even if done sparingly.  But in addition to being a good artist relations move, it’s also the right thing to do.  I did that with Road Rash 3DO which was the first videogame to use “real” music, i.e., licensed music, and was also the first and last to actually pay a royalty (across all platforms).  (Some games do pay a royalty, but not like the one we got.)  I also did it with a soundtrack that was one of the last truly huge soundtracks and our artist had a featured slot.  Both those instances put 6 figures into the artist’s bank accounts and we made plenty of money, too.  Moral of the story:  Leave some on the table.

The same can be said of Rob Stringer’s decision to “give back” to Sony artists on the sale of Sony’s shares in Spotify (more or less confirming that there was a tranche of shares issued to Sony as consideration for licensing the catalog):

 “We gave back to the artists which was a deliberate strategy because we wanted to say to them, [you’re] the reason we have most of these shares…”

That’s a great attitude.  And of course, is exactly right.  (Sony also bought some shares, which, of course, should be Sony’s money as it was Sony’s risk.)  I’m not so sure that someone didn’t have to…shall we say persuade…others in the company of the correctness of the sharing move, and it is an awful lot of money.  But in the end Rob Stringer got the company to do the right thing, and it’s the kind of thing a good records man would do.

He also makes another excellent point that every artist should think seriously about when considering one of these various direct deals on offer:

“I don’t think Spotify wants to be funding the entire artist development process – we have thousands of people, literally, that we can get to face in the same direction on a global basis,” said Stringer.

“Spotify doesn’t claim to have those thousands of people globally [working in artist development], they are a digital distribution platform… sometimes the lines can become blurred and, quite frankly, we’re both learning as we go along.”

When a major is actually working for you and firing on all cylinders, they really do have that ability to get everyone around the world doing the same thing at the same time in multiple time zones and through multiple distribution channels relevant to their particular market.  Or as Jody Gerson said, “[i]t takes a village to break an artist.”

Amen.