1. Spotify, the music industry, and the Music Modernization Act
Or—will copyright law modernize to keep up with the music industry, what is up with the onslaught of lawsuits, and what does the IPO of Spotify mean for the music industry?

2. Spotify’s conundrum
Spotify filed papers in Late December for its (most likely) first quarter public offering on the NYSE
But…Spotify is knee-deep in litigation. Spotify was named in a lawsuit by Thomas Dolby and Wixen Music Publishers, which administers licenses for works written by Tom Petty, Neil Young, and many more
Spotify is also currently in litigation with a series of music publishers for copyright infringement
**Photo by Toru Yamanaka/AFP/Getty Images (Daniel Ek, CEO of Spotify)

3. So… Why does Spotify matter? What is with all these lawsuits?
What is the Music Modernization Act?

4. Spotify—the statistics and the history
Spotify, the biggest music, podcast, and video streaming service in the world, was established in 2008 in Stockholm, Sweden.
Spotify, to date, has roughly 140 million users, and 70 million of them are paying users. For comparison, the next largest competitor (Apple streaming music) has half as many users. Pandora has only 70 million users, and 1 million of them are paying customers.
Currently, Spotify is valued by private investors at about 8.5 billion dollars.
But, the profit to cost margin on Spotify is not entirely rosy or promising.

5. Music streaming—the Future!

6. And what does the future of the music industry do?

7. It becomes a publicly owned company!
(Imagine the next slide in a Morgan Freeman voiceover, as I give you background on the business elements that are the context to and perhaps reason for the lawsuits)

8. Spotify’s planned sale of stock
At some point in the first quarter, according to Fortune, Bloomberg, and Billboard, Spotify intends to make its first public sales of stock
Spotify filed its 20-F with the SEC in the week of December 26 through 31 (an unusual time to say the least)
First sale on the market of Spotify securities is expected to be direct listing, instead of the traditional IPO (initial Public Offering). Spotify will be the largest company ever to have gone public with a direct listing.
Initial Public Offering: the sale of securities has an investment bank underwriter, and the securities are new stocks, usually done to raise capital.
Direct trade: this is the sort of sale of securities in which there is no underwriting investment bank, the company simply underwrites own shares and selects a price. Valuation is more difficult to determine.

9. Why did she just bore us with Securities Talk?
Because of the security sales’ repercussions on the success or failure of Spotify and its statement on the fate of the entire music industry
Because of the intertwined nature of the impending public offering and the lawsuits brought against Spotify

10. What happens to Spotify’s value during the initial offering is very important for the industry
Is Spotify the 500 pound gorilla?
Or the canary in the coal mine?

11. Wheel of lawsuits!
That Spotify planned on going public was not exactly a secret. The buzz has been ongoing since early 2017 (at least), and some of that may have inspired some of the copyright lawsuits to be brought at this moment, and of course resolving those may affect the ultimate timing of the direct offering.
What’s more—resolution of some of these suits at the assigned rates they are worth could put a massive dent in Spotify’s value.

12. What are these lawsuits about?
The most recent lawsuit, Wixen v. Spotify, is over copyright infringement. Specifically, it’s that Spotify hired the Harry Fox Agency to acquire all the necessary licenses from the organizations representing the songwriters and publishers, and the agency is woefully under-prepared to assume this responsibility.

13. Lawsuit valuation Wixen: 1.6 BILLION
Ferrick v. Spotify: 43 million (settled 2017)
National Music Publisher’s Association: 30 million (settled 2016)
The relationship between the Wixen suit and the Direct Offering may be a bit circular and murky, but Randall Wixen, CEO of Wixen Publishing, has certainly established that one critical reason for the lawsuit’s timing is that the Music Modernization Act states (on page 82) that if a lawsuit is not brought against a music streaming service on or before January 1, 2018, the claimant loses all rights to compensation.

14. Music Modernization Act
Ah! There we go! Now we’re in familiar territory—copyright. And frankly, the relationship between a use-it-or-lose-it deadline and a filing is pretty clear.
The Music Modernization Act: H.R was introduced on December 21, by Rep. Doug Collins (R-GA-9).
The Act would reform sections 114 and 115 of the U.S. Copyright Act, and eliminates these lawsuits.
As well, the Act should allow streaming services to license songs more easily, and increase license rates for songwriters and publishers.
The Act had the vocal support of the National Music Publisher’s Association, the Recording Industry Association of America, the Recording Academy, the Nashville Songwriter’s Association International, and more than 16 others.

15. What the music modernization would do, specifically
A new standard for mechanical royalties, based on what a willing buyer and a willing seller would negotiate in a free market.*
A new entity to administer blanket licenses for mechanical use, which has authority to grant blanket licenses for all musical works to digital media companies. The entity will collect royalties for musical works used from digital services and pay them to copyright owners. Digital media services that use this entity will be sheltered from liability for statutory damages. The entity will be paid for by the digital music companies, ensuring that all royalties will be paid to copyright owners with no commission. Digital music companies and copyright owners will still be free to enter into their own voluntary license agreements.*
Jem Aswad, Lawmakers Introduce Music Modernization Act, Which Simplifies Digital Licensing and Increases Rates, VARIETY, 12/21/17

16. Music modernization act
Removes evidence limitations for public performance royalties: The legislation repeals section 114(i) of the copyright act, allowing rate courts to consider sound recording performance royalty rates when determining musical work performance royalties.*
Reforms the rate court system: Currently ASCAP and BMI are subject to the same two judges presiding over their rate courts indefinitely. The bill gives the PROs (performance rights organizations) the ability to have randomly selected judges decide their royalty rates.*
Jem Aswad, Lawmakers Introduce Music Modernization Act, Which Simplifies Digital Licensing and Increases Rates, VARIETY, 12/21/17

17. Types of music royalties
Mechanical (physical reproduction of artist’s work)
Public performance (royalties paid for playing a song)
Synchronization (royalties paid when music and video are set together)
Print music (actual sheet music)

18. Music Modernization Act
If it passes, the MMA could be the necessary legal support for the future of the music industry.
Digital services would pay for the licensing collective, while songwriters and publishers would manage it.
But there is no guarantee that songwriters will receive as much in royalties as they currently do, if judges may look at a market rate, and there will be no expertise expectation from the bench, as randomly assigned judges will be in charge of making these determinations.
The Songwriters Guild of America, to that point, has thus far not supported the Act. In a letter to Collins, the SGA pointed out that this is: “one of the first times or the very first time in history that any Government has acted to sanction the creation of a music copyright licensing and royalty collective over which creators themselves would not share at least equally in governance.”

19. Where does that leave spotify?
If Spotify can somehow settle the current suit for less and have a successful Public Offering, the music streaming service may be long term successful, and demonstrate that music streaming can be profitable.
And if the Act passes, Spotify may be able to acquire the licenses much more easily, and never again be in a position to answer to a massive lawsuit about the failure to acquire licenses.