Spotify isn’t good for you

This article appeared on the Trichordist recently 30 April 2012

If you remember the old “Life” cereal ads, they featured kids who didn’t want to eat Life cereal because it was “good for you” so who would like that? Test it out on “Mikey”, the hyper critical eater—”Give it to Mikey, he hates everyhing!” And surprise, surprise, Mikey likes it.

So it is with Spotify. Mikey may eat it, Mikey may even proselytize about its wonders of valuation, but Spotify is not only not good for you, it’s actually bad for you. The good news is (maybe) there’s something every artist can do about it. Unless, of course, they listen to “Mikey”.

Here’s the proposition: From a financial point of view, Spotify’s payable royalties are neglibible–marginally better than a pirate site. (See “Streaming Price Index“) Spotify is, of course, a licensed service and it is encouraging to see investment pouring in to its coffers. Make no mistake–we’re happy it exists. The unfortunate thing is that Spotify is another example of reacting to massive piracy with a business model that in the long-term is nearly–although not quite–as unsupportable as the piracy it promised to help fix.

Spotify”s model is essentially a variation on Web 2.0, or as we say around the Trichordist, The Man 2.0. With the usual Web 2.0 company the users provide all the content and the tech oligarchs (or wanna be oligarchs) get all the money. (Like with Facebook, Flickr, YouTube, Google, Wikipedia, Instagram in no particular order.)

Except with Spotify it is the artists (and not the users) who create all the value and get none of the profits. Like other Web 2.0 darlings, the tech oligarchs build the platform, create none of the content and will get the lion’s share of the profits on Liquidity Day. Spotify is just a couple compass points away from oligarch status—call them mini oligarchs. In the meantime, Spotify profits from the artists and pay a laughable royalty in return.

So in the words of a famous revolutionary, what is to be done?

First, consider whether there is any benefit from being a Spotify stockholder. We think we will see that there is not much financial benefit. Then we consider how you can keep your music off of Spotify, even if you are a major label artist. Then we consider how you can force the company to pay a fair rate.

What if Artists Were Stockholders?

So who makes money? First and foremost—Spotify employees starting with Daniel Ek. These guys get a steady paycheck and have equity in a dark future for artists.

Next, venture capitalists who are the 1% of the 1% don’t forget. These VCs, especially Silicon Valley VCs, are some of the richest people in America who nearly single handedly brought you the stock market crash of 2000 when the last tech bubble popped in a frenzy of irrational exuberance.

It is pretty common stuff for these people to personify the long simmering rivalry (largely one-way) between Northern and Southern California. The Internet was a force multiplier that weaponized that hatred. This, of course, results in screwing artists. (See the embarrassing post “Kill Hollywood” by elite VC Paul Graham of Y Combinator, the home of digital chickenfeed: “How do you kill the movie and TV industries? Or more precisely (since at this level, technological progress is probably predetermined) what is going to kill them?” Search for the word “artist”—no matches found.)

And of course, another group of Spotify stockholders are the major labels who extracted equity ownership in the company in return for licensing catalog at ridiculously low royalty rates. The fairly consistent rumor is that the labels own 18% of Spotify, which at its most recent valuation of $4 billion is worth $720,000,000.

Here’s the twist—because the deal with Spotify is for the entire catalog of each label and not of any particular artist, it is doubtful that any artist will ever participate in that 18% equity. If you think of that 18% as being subject to the 50/50 net receipts allocation (the issue in the Eminem case), there’s a very easy fix to this.

Spotify can allocate another 18% of its equity to an artist stock pool. Artists would not need to own that pool, but it could be held in trust for all artists who ever have participated in Spotify and all artists who will participate in Spotify before the “liquidity event” that would turn that stock into cash—an IPO or acquisition, typically. All other terms of stock ownership could be on the same terms as the labels. And, of course—an artist would be appointed to the Spotify board with full voting rights to vote the full 18% block of shares.

These don’t have to be new shares—Daniel Ek and Spotify can hand them over from previously issued stock to give to Spotify’s artist ”partners” an incentive to stay with the company.

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