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Spotify founders will retain control after stock market listing

By | Published on Wednesday 21 February 2018


It turns out that Spotify is not going to become some sort of utopian democracy when it finally lists of the stock market. Not just because OBVIOUSLY, but also because founders Daniel Ek and Martin Lorentzon have made moves to ensure that they will keep control of the company even once it’s publicly listed.

According to Bloomberg, inspired by the founders of Google and Facebook the two men who launched the company in 2006 both own a class of share that gives them “super voting power”. Shares bought on the open market will have just boring normal voting power. This will mean that new shareholders will have much less influence on the future of the streaming service than the likes of Ek and Lorentzon.

Although a stock market floatation by Spotify has been rumoured for several years, it’s thought that that it is now actually imminent. It’s been known for a while that Spotify plans to go with a direct listing on the New York Stock Exchange, rather than the customary IPO which also raises new finance.

The jury is still out on whether or not this unusual method of listing will work. It means fewer presentations and less schmoozing ahead of the company’s arrival on the stock market. But that also makes it harder to assess interest among the investment community. Some reckon the innovative approach gives the company an advantage. Some reckon it’s doomed to failure. So, situation normal for anything Spotify does really.

Either way, the stock market listing will put ever more scrutiny on the operations and finances of the market-leading streaming firm. Which is probably why Ek and Lorentzon are keen to retain control of the business once they are properly in the glare of Wall Street.

As for where Ek and Lorentzon might take Spotify next, it appears that the firm might be planning to enter the increasingly crowded smart speaker market. This assumption is based on the fact company is currently advertising three jobs based in Stockholm related to “hardware production”.

“Spotify is on its way to creating its first physical products and setting up an operational organisation for manufacturing, supply chain, sales and marketing”, says an ad for an Operations Manager. Once recruited, the new Senior Project Manager and Project Manager“will contribute in the creation of innovative Spotify experiences via connected hardware”.

It has long been suggested that Spotify might move into hardware at some point. Several years ago, launching a physical speaker was put forward as a possible way for the company to engage more mainstream music listeners. These remain a difficult demographic for streaming services to crack, most people not being particularly turned on by simply having access to tens of millions of tracks on-demand. A physical device that works more like traditional radio could be one way of drawing customers like this in.

Elsewhere on the Spotify jobs site, the company is also seeking a Head Of Fraud Prevention. This may be useful, given that Music Business Worldwide has just put the spotlight on an alleged scam that may have occurred on the Spotify platform resulting in a chunk of the streaming firm’s monthly royalty pay-out going to the scammer. Although, as MBW points out, the scam doesn’t necessarily constitute actual fraud. But some terms and conditions may have been breached.

MBW reckons that a Bulgarian company uploaded hundreds of short songs to Spotify’s servers, then signed up for 1200 premium accounts from which to play back that music, probably 24/7. With enough plays, the potential royalties from this would be vastly higher than the money spent on the premium accounts.

Of course, this scam only works because of the way Spotify income is shared with the music industry. Currently, all monies received by any streaming service is put into one pot each month and then divided up based on consumption share across the entire platform in any one market. Many feel that this system skews in favour of big rights owners and superstar artists. And Bulgarian scammers.

Some advocate an alternative ‘user-centric’ royalty distribution system. In particular Deezer, which is busy trying to persuade the labels to pilot that approach to sharing out the money each month. Under the ‘user-centric’ system each user’s subscription fee is individually divided up between the artists that they have specifically listened to. The per-stream rate would then vary greatly depending on how much music each user streams.

Under that system, the Bulgarian scam wouldn’t work, because if only the scammers themselves were streaming their music, they would only get their own subscription money back. Minus sales tax and Spotify’s cut.

User-centric royalty distribution is explained in more detail in this recent CMU Trends article on the streaming business. And you can read all about how exactly streaming services are licensed, and how the money flows through the system, in ‘Dissecting The Digital Dollar’ – available to buy in print form from Amazon here.

Of course, however the money is made through music, it seems certain that someone somewhere will always find a way to scam the system.

In 2009, twelve people were arrested over a credit card scam, where they fraudulently bought their own music off iTunes with other people’s cards. Thus getting nice clean royalties in their bank account. Although, as noted, in the new alleged scam on Spotify, it appears that no actual crime has been committed. Therefore the police probably wouldn’t get involved. Instead, Spotify’s new Head Of Fraud Prevention might have to take on the scammers alone.