Spotify’s Crypto Strategy

Given the volume of chatter in the music business around blockchain and cryptocurrencies, this week’s confirmation that Spotify has signed on to Facebook’s planned launch of a cryptocurrency-based payment system called Libra will no doubt set tongues wagging anew.

So far, Spotify is the only music or media-related organization among the launch partners, but its presence and prominence is sure to fuel speculation about the intentions of other steaming services and media providers regarding blockchain.

In truth, though, the move likely reveals more about Spotify’s own ambitions that about the future prospects for blockchain in the music business.

For starters, Libra isn’t very blockchain-y. Transaction data on Libra will not be bundled into blocks and will not be chained, although transactions will be recorded sequentially by time-stamp. Nor will there be any mining. Libra coins will be backed by a reserve made up of fiat currencies and fiat-denominated instruments and will be issued by the Libra Association, a not-for-profit foundation being established in Switzerland, much as a central bank controls the fiat monetary supply.

In lieu of miners, Libra will have “validator” nodes, and consensus will be established by an internally developed protocol rather than by a proof-of-work or proof-of-stake type consensus mechanism used by fully decentralized blockchains like Bitcoin and Ethereum.

The Libra blockchain, in fact, will be permissioned, at least initially, and the right to run a node on the network will run you at least $10 million.

With no mining as an incentive, node operators will be rewarded by being granted separate, registered Libra Investment Tokens, which will appreciate in value based on earnings from the reserve.

Not exactly how Satoshi drew it up.

There are legitimate reasons to design the system that way. Mining is a slow, resource-intensive process that constrains through-put on other blockchains and undermines their scalability. Any system meant to operate at Facebook scale will need to be faster and more scalable than even Ethereum and other blockchain 2.0 protocols.

Pegging Libra coins to a reserve of fiat-based assets will enhance price stability and discourage speculation, while assuring users that they will easily be able to convert their coins to fiat.

Facebook is also launching a crypto-wallet for use with the service called Calibra, which it has registered with the U.S. Treasury Department as a money service business and will comply with anti-money laundering and know-you-customer regulations.

Still, the design smacks a bit of Facebook trying to slip into the financial services business through the back door without being licensed by dressing Libra up in the buzzy trappings of blockchain and crypto.

European financial regulators, in fact, already think they smell a rat and are calling for quick action to review Facebook’s plans.

So what’s Spotify’s angle?

In a blog post Tuesday, Spotify’s chief premium business officer Alex Norström framed it as a way for the streaming service to reach audiences that lack ready access to traditional banking and financial services.

One challenge for Spotify and its users around the world has been the lack of easily accessible payment systems – especially for those in financially underserved markets. This creates an enormous barrier to the bonds we work to foster between creators and their fans. In joining the Libra Association, there is an opportunity to better reach Spotify’s total addressable market, eliminate friction and enable payments in mass scale.

That is no doubt true. But it’s also probably not the whole story.

For all its crypto-compromises, Libra still offers elements of a peer-to-peer payment system, albeit within a walled garden. Any Facebook user can sign up for a Calibra wallet and start making and receiving payments directly.

The open-source Move programming language Libra is written in also supports smart contracts, which means users will be able to create their own applications and tokens.

It’s not hard to imagine a future integration in which artists are able to upload their music directly to Spotify, tie it to a smart contract, and receive payments for streams immediately via Libra. Married to the potential reach of Facebook, that could make for an attractive alternative to the traditional record business for artists.

Spotify, in fact, has already been learning and experimenting with how to marry a creator ecosystem with its distribution platform on the podcasts side since its acquisitions of Anchor and Gimlet Media.

Artists and songwriters could also expect to see a bigger piece of the per-stream pie than they get under the current system, especially if Spotify is successful in its effort to rollback the Copyright Royalty Board’s recent rate-setting.

Further, for a publicly traded company like Spotify, Libra’s connection to the traditional financial system is a feature, not a bug. Exposing part of its revenue to the extreme volatility of Bitcoin and other decentralized cryptocurrencies would be an accounting and reporting nightmare, and a serious risk to its valuation.

Finally, Spotify is likely to have Libra to itself among the major music streaming services, at least for a while. It’s hard to imagine Amazon, Apple or Google being in a hurry to integrate their services with a Facebook payment system. So, if Spotify were to make a serious play at luring artists away from the traditional label system, it would be unlikely to face much competition from its largest current rivals.

‘Friends’ In Need

Who needs “Friends” more, Netflix of AT&T’s WarnerMedia? 

That was the question put by this week’s headline-grabbing deal in which Netflix agreed to pay $100 million to keep streaming rights to the venerable sitcom for another year. After that, Netflix may still get access to Rachel and the gang but the series is also likely to become available on AT&T’s planned direct-to-consumer streaming service as well.

“Friends” is obviously a valuable series to Netflix, or it would not have paid so handsomely for non-exclusive rights. But calculating that price would have been a fairly straight forward process for Netflix. It knows how many of its subscribers watch the series and how often, and it can calculate its value for attracting new subscribers. For AT&T and WarnerMedia, not so much.

AT&T plans to launch its direct-to-consumer service at the end of 2019 and plans to populate it largely with its own programming, at least in the early years. While Warner has a vast library of content, going back decades, from its many film and television production studios, it doesn’t calculate the value of the movies and TV series in that library the same way Netflix would. 

Like Netflix, AT&T is in the business of selling subscriptions: to wireless service, broadband, landline phone service, and more recently pay-TV through its acquisition of DirecTV. WarnerMedia, however, is built around selling content, in discreet units, for limited times. It has to reckon not just how much a piece of content is worth, but where it worth the most, as AT&T CEO Randall Stephenson acknowledged this week

Is “Friends” worth more in broad distribution through platforms like Netflix, or being kept out of circulation to be used as an exclusive to drive subscriptions to the new streaming service? 

And “Friends” is a fairly easy case. The series is more than 20 years old and, presumably, its costs have long-since been recouped, apart from residuals. So in a sense, AT&T and Warner are playing with house money. 

AT&T also spent $104 billion to acquire Time Warner, including assumption of debt, and now has more than $180 billion in debt on its balance sheet. It can’t really afford to leave a cash cow like “Friends” in the barn without fully milking it. 

But not every series is going to command the sort of premium “Friends” can pull in for a non-exclusive deal. AT&T is going to have to make a tricky calculation for every piece of content WarnerMedia owns, and for every new production it finances: Is this movie or series worth more in distribution, or driving subscriptions? 

That could make for some difficult investment decisions, to say nothing of negotiations with potential investors, creators and other rights owners in a new piece of content. 

Over time, as AT&T collects more direct consumer viewing data, that calculation could get easier, or at least more reliable. But there’s a long way to go between now and then. 

Apple’s Latest TV Tease

For the best part of a decade, the heads of Apple, including Steve Jobs and current CEO Tim Cook, have had a side-career teasing fanboys and analysts about a major move into TV and video.

Jobs famously told his biographer, Walter Isaacson, that he “finally cracked” the secret to re-engineering the TV viewing experience, and just weeks before his death called tech columnist Walt Mossberg to say he had figured out how to “remake” television.

Whatever it was Jobs had figured out, though, he took it with him to his grave because nothing like what Jobs described to Iasaacson was ever released.

That didn’t stop his successor, Cook, from continuing the tease, however. For several years after, Cook made a habit of dropping hints about some new TV project or another, and stories leaked out of Hollywood every six months or so that Apple content chief, Eddie Cue, was talking with the studios and TV networks about licensing content for some sort of new Apple video service.

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AT&T’s Real Challenge to HBO

Media industry tongues are still wagging over AT&T executive John Stankey’s June 19 town hall meeting with HBO employees, in which he discussed the telco-giant’s plans for the network.

As first reported by the New York Times, which got its hands on an audio recording of the event, Stankey came off  like a bull in a china shop, seemingly admonishing HBOers they were in for a “tough year” to meet AT&T’s goal of making the boutique network “bigger and broader,” in the Times’ characterization, by cranking out subtantially more content to better compete with over-the-top services like Netflix.

“We need hours a day,” the Times quoted Stankey saying. “It’s not hours a week, and it’s not hours a month. We need hours a day. You are competing with devices that sit in people’s hands that capture their attention every 15 minutes.”

The goal, he said, was more engagement. Read More »

Shallow Harbors: EU Poised To Rewrite Rules For User-Generated Content

Almost from the day the Digital Millennium Copyright Act came into effect, copyright owners have sought to limit the so-called safe harbor protections against infringement liability the law grants to online service providers that host user-uploaded content.

But a series of lawsuits aimed at setting strict limits on the safe harbors, starting at least as early as Perfect 10’s 2002 litigation against CCBill and stretching through the Veoh cases and Viacom’s long-running battle with YouTube, largely failed in that regard and arguably made things worse for rights owners. The result was a series of court rulings reinforcing the strict and precise requirements of the notice-and-takedown system the law spells out for getting infringing content removed from online platforms.

Legislative efforts to limit or weaken the safe harbors fared no better, culminating in the spectacular crash-and-burn in 2012 of the Stop Online Piracy Act (SOPA) in the House and the PROTECT-IP Act (PIPA) in the Senate, which largely scared Congress off similar attempts ever since. Read More »