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Why Spotify is the Living Dead

October 8, 2019October 8, 2019 tukaglobal530 Comments

Below I include a recent article from Barron’s Magazine, presenting the financial challenges to Spotify, the dominant music streaming service. Here’s why I believe it’s dead:

Spotify [is] a “pure play on a loss-leader category.”

Streaming music has been priced as a loss leader, in other words the costs of streaming music exceed what platforms receive from subscribers in revenue. This is not atypical for networking platforms as the platforms hope to monetize the data these networks create through their users. Of course, a network does not really become valuable until it is of dominant size and able to maintain continued user engagement. Facebook is the one we are most familiar with. And Facebook did not become profitable until it had been in operation for 6 years and experienced phenomenal user growth. Also, FB has an ad revenue model (more on this later).

The problem with Spotify is that its major product line loses money, a lot of money. Streaming unlimited music costs a lot more than $10/month per subscriber. But raising the price merely loses subscribers, and customer acquisition costs (CAC) on the margin often increase over time. So, the desperate strategy is to find a way to generate revenue from the data sharing network.

But Spotify faces some serious competition: Apple, Amazon, and Google. All three of these tech titans can afford to lose money on streaming for a long time, much longer than Spotify can stay solvent or keep the support of its investors. Spotify is a dead man walking. Its subscriber base will be auctioned off before it depreciates to zero. Or not.

For example, how does Spotify compete with this?

Facebook may be next

I expect the revenue squeeze will also hit Facebook’s main advertising model. Digital advertising is dominated by Google and Facebook. Google monetizes search routines it gathers every time you invoke its search algorithms. Facebook monetizes social sharing and likes. Each then sell access to this data to third-party advertisers. Now, search is a more robust indicator of interest than likes, so Google’s ad reach and keyword auctions offer greater value than FB “likes.” FB tries to increase its value through social network dynamics, but there is so much noise there that there’s a real question how much that is really worth in terms of advertising conversions.

But both platforms need to look at the big shadow hovering just over their shoulders and bearing down on their ad models. Amazon knows what people buy on its platform, which reveals a far more robust indicator for what people will buy again. Access to Amazon’s data will be worth that much more than FB and even Google. I expect FB has the weakest attention model and thus Amazon and Google will continue to eat into its ad revenues. I’m sure FB is working overtime trying to figure out how to pivot and leverage its massive user base. Libra Coin is a clear indicator of that. FB is hoping to use crypto tokenization to monetize peer-to-peer finance and banking. Unfortunately it faces some serious regulatory opponents in the central banks and the commercial payments industry. But I suppose FB has much cash to burn trying to find its next lily pad.

The real problem with the scramble for data real estate is that there are only so many hours in a day. On top of that, users and consumers are becoming cognizant of the value of their personal data and will be less inclined to give it away for free. This blows up most of the “mobile app” bubbles vying for attention in the digital economy. The future, if one is to believe in technological progress, is a far more decentralized digital universe where users reap much more value from the data they create and share, and successful platforms will need to deliver much more value than a free app for their users.

The question for us all is who will eat whom on the way to this future? (If we believe Elizabeth Warren, she will be eating them all. Politics is always a wild card.)

Spotify Stock Has Had a Miserable 6 Months. Wall Street’s Optimists Are Wrong.

By Avi Salzman

Barron’s October 5, 2019

A miserable few months have made Spotify’s stock as dull as elevator music. Now, some analysts think the stock is beaten down enough that a rally is coming, and Wall Street is ready to groove on the remix.

Spotify Technology (SPOT) has fallen 17% since Barron’s wrote a skeptical cover article on the company (“Spotify Stock Is Risky Because the Music Industry Isn’t Changing Fast Enough,” April 19). Short interest on the stock, which was below 3% for much of the year, is now above 5%.

Yet two formerly bearish analysts have recently shifted to a more neutral stance, on the theory that the bad news is already in the stock’s price.

Spotify is the global leader in streaming music, and it passed 100 million paying users this year. Still, doubts have grown on Wall Street about the company’s ability to sustain subscriber growth.

In August, Spotify started giving new premium users three free months of service, up from one month, which “has supported fears of negative subscriber trends,” writes Credit Suisse analyst Brian Russo, one of the analysts who has become incrementally more positive about the shares. The company has launched other offers, too, including six free months of Spotify for people who buy an Xbox Game Pass.

Investors will have to wait until Oct. 28, when Spotify reports third-quarter earnings, to find out whether the generous offers are cutting into its margins. For now, the stock still seems stretched. Its market cap is $21 billion, more than the $19.1 billion that the music industry took in worldwide in 2018—and most of that money goes to labels and artists.

Spotify, meanwhile, is expected to lose $1.92 a share this year; in April, the loss had been projected to be $1.48. Kevin Rippey, an Evercore ISI analyst, calls Spotify a “pure play on a loss-leader category.”

Spotify is looking at new revenue opportunities. The company has branched out into podcasting, with plans to spend as much as $500 million this year on acquisitions in the space. But there is no obvious payoff from those purchases; the podcast ad market in the U.S. is still below $1 billion. Spotify didn’t respond to requests to hear the company’s case from top executives.

Spotify leads rivals like Amazon.com (AMZN) and Apple (AAPL) among young customers, but it will probably need to find older fans in developed markets to hit Wall Street targets, Russo argues. That could be tough. Amazon’s smart speakers have helped it sell music packages to older customers and will make it difficult for Spotify to expand in that market, Russo says.

And Spotify’s rivals are increasing their offerings. Google-owned YouTube Music is promoting personalized playlists to help users find new music, an area that has been one of Spotify’s biggest strengths. Amazon has released a high-quality music service that costs $12.99 for Prime users—a small premium to Spotify’s $9.99—offering listeners CD-quality sound, or better. Unlike Spotify, those companies don’t depend on music to make money.

Because of the competition, Russo expects Spotify to grow disproportionately in emerging markets, “where disposable income is lower and monetization, both in terms of subscription and advertising, is more challenging.”

Spotify stock may well rise when the company reports third-quarter numbers, given the bearish setup in the market. But for it to become an attractive longer-term investment, it needs a clearer path to profitability.

Why Do Old People Hate New Music?

September 28, 2019September 28, 2019 tukaglobal453 Comments

They don’t. They just don’t hear it enough in the right context!

This is the problem tuka is trying to solve: to recreate that music sharing network you had when you were in high school and college!

The Conversation.

Why do old people hate new music?

by Frank T. McAndrew

When I was a teenager, my dad wasn’t terribly interested in the music I liked. To him, it just sounded like “a lot of noise,” while he regularly referred to the music he listened to as “beautiful.”

This attitude persisted throughout his life. Even when he was in his 80s, he once turned to me during a TV commercial featuring a 50-year-old Beatles tune and said, “You know, I just don’t like today’s music.”

It turns out that my father isn’t alone.

As I’ve grown older, I’ll often hear people my age say things like “they just don’t make good music like they used to.”

Why does this happen?

Luckily, my background as a psychologist has given me some insights into this puzzle.

We know that musical tastes begin to crystallize as early as age 13 or 14. By the time we’re in our early 20s, these tastes get locked into place pretty firmly.

In fact, studies have found that by the time we turn 33, most of us have stopped listening to new music. Meanwhile, popular songs released when you’re in your early teens are likely to remain quite popular among your age group for the rest of your life.

There could be a biological explanation for this. There’s evidence that the brain’s ability to make subtle distinctions between different chords, rhythms and melodies gets worse with age. So to older people, newer, less familiar songs might all “sound the same.”

But I believe there are some simpler reasons for older people’s aversion to newer music. One of the most researched laws of social psychology is something called the “mere exposure effect.” In a nutshell, it means that the more we’re exposed to something, the more we tend to like it.

This happens with people we know, the advertisements we see and, yes, the songs we listen to.

When you’re in your early teens, you probably spend a fair amount of time listening to music or watching music videos. Your favorite songs and artists become familiar, comforting parts of your routine.

For many people over 30, job and family obligations increase, so there’s less time to spend discovering new music. Instead, many will simply listen to old, familiar favorites from that period of their lives when they had more free time.

Of course, those teen years weren’t necessarily carefree. They’re famously confusing, which is why so many TV shows and movies – from “Glee” to “Love, Simon” to “Eighth Grade” – revolve around the high school turmoil.

Psychology research has shown that the emotions that we experience as teens seem more intense than those that comes later. We also know that intense emotions are associated with stronger memories and preferences. All of this might explain why the songs we listen to during this period become so memorable and beloved.

So there’s nothing wrong with your parents because they don’t like your music. In a way, it’s all part of the natural order of things.

At the same time, I can say from personal experience that I developed a fondness for the music I heard my own children play when they were teenagers. So it’s certainly not impossible to get your parents on board with Billie Eilish and Lil Nas X.

The Twitter Virus?

May 19, 2019May 19, 2019 tukaglobal638 Comments

Unfortunately, this is what digital media has delivered so far.

https://spectator.us/twitter-virus-mind/

The Curse of Algorithms

May 16, 2019May 16, 2019 tukaglobal475 Comments

The inherent weaknesses of data-driven analytics and algorithms. Especially when it comes to aesthetic content.

https://www.artforum.com/music/carl-stone-spotify-79794

The Dismal Future of Culture?

February 14, 2019 tukaglobal309 Comments

I reprint this article in full because this is exactly what we’ve been arguing at tuka all along. Serious dedicated writers can no longer write, as so it goes with the development of other creative professions such as music, photography, and video. So collapsing creative incomes means the dominance of mediocrity and purely commercial values for artistic expression. A good example is the proliferation of reality TV. It all becomes rather tired and boring and audiences turn to better options. It’s a vicious downward spiral.

Crashing author earnings ‘threaten future of American literature’

theguardian.com/books/2019/jan/08/crashing-author-earnings-threaten-future-of-american-literature

Alison Flood

January 8, 2019

A major survey of American authors has uncovered a crash in author earnings described as “a crisis of epic proportions” – particularly for full-time literary writers, who are “on the verge of extinction”.

Surveying its membership and that of 14 other writers’ organisations in what it said was the largest survey of US authors’ earnings ever conducted, the Authors Guild reported that the median income from writing-related work fell to a historic low in 2017 at $6,080 (£4,760), down 42% from 2009. [Yeah, who survives on $6K a year?]

Writers of literary fiction are particularly affected, said the Authors Guild, with those authors experiencing the biggest recent decline in writing-related earnings – down 43% since 2013. Isolating book-related income, the decline was even steeper, down to $3,100 in 2017 – more than 50% down on 2009’s median of $6,250. In total, 5,027 authors provided detailed responses to the survey.

The Authors Guild said the reduction in earnings for literary writers “raises serious concerns about the future of American literature – books that not only teach, inspire and elicit empathy in readers, but help define who Americans are and how the US is perceived by the world”.

“When you impoverish a nation’s authors, you impoverish its readers,” said Authors Guild president James Gleick. Vice-president Richard Russo added that “there was a time in America, not so very long ago, that dedicated, talented fiction and non-fiction writers who put in the time and learned the craft could make a living doing what they did best, while contributing enormously to American knowledge, culture and the arts. That is no longer the case for most authors, especially those trying to start careers.”

Author TJ Stiles said: “Poverty is a form of censorship. That’s because creation costs. Writing requires resources, and it imposes opportunity costs. Limiting writing to the financially independent … punishes authors based on their lack of wealth and income.”

The survey found that even those who consider themselves to be full-time writers are forced to hold down multiple jobs to earn enough money to survive. Just 21% of full-time published authors derived 100% of their income from their books in 2017, with the need to focus on other avenues for income meaning that literary authors are writing and publishing books less often.

“It takes writers longer to research and write books, since they have to do it between other money-earning ventures,” said the Guild, describing the situation as “a crisis of epic proportions”.

“The quality of books written by authors holding down other jobs may be affected since their attention is divided and writing is often pushed to what spare free time is left,” it added.

The one bright point in the survey was for self-published writers, who were the only group to experience a significant increase in earnings – up 95% in book-related income between 2013 and 2017, with the number of authors self-publishing up by 72% since 2013. But the Guild pointed out that self-published authors still earned 58% less than traditionally published peers in 2017. [Self-publishing is the best financial strategy, but how do we separate hobbyists from serious writers in a sea of content?]

The Authors Guild blamed the crisis on the “growing dominance of Amazon”, which it said forced publishers to accept narrower margins and then pass their losses on to authors, as well as publishers’ focus on blockbuster writers at the expense of lesser-known names, as well as a 25% royalty rate for ebooks.

“Amazon, but also Google, Facebook and every other company getting into the content business, devalue what we produce to lower their costs for content distribution, and then take an unfair share of the profits from what remains for delivering that reduced product,” said Russo. “We get that they like to move fast and break things, but it’s no longer in their own interest to break us. If even the most talented of authors can no longer afford to write, to create, who’s going to provide the content?” [What we have discovered is that the big digital distributors like Amazon and Apple don’t really care about the intrinsic value of the content they distribute. More is better and cheaper.]

The survey follows similar research conducted in the UK in 2018, which found that median earnings for professional writers had fallen by 42% since 2005 to under £10,500 – well below the minimum wage of £15,269.

How Facebook has Changed Us – For the Worse.

January 31, 2019 tukaglobal791 Comments

This excerpt from an article in Guardian…

…Facebook is something that too often spoils things.

This is particularly true of the way we enjoy other people’s creativity. A recent article on the music website the Quietus by the writer Jazz Monroe nails the essential point. “When we submit to a profound experience of art, it’s a rare reprieve from the everyday torrent of triviality and distraction,” he wrote. “Likewise, when you finish a great book, there’s supposed to be a moment when you reflect on it. But it’s so easy to just check your phone, or tweet some earnest statement about it.”

read more…

How Facebook Robbed Us of Our Sense of Self.

Why We’re Jaded with Facebook

December 26, 2018 tukaglobal749 Comments

Facebook has been under constant fire for more than a year now and seems unable to answer its critics. Under such criticism the company’s executive team has promised to make user privacy its primary concern, until the next revelation exposes its duplicity. Now it seems every other week another article is written demanding that Facebook be broken up or regulated by government oversight.

We might wonder what exactly is wrong with Facebook and why can’t they fix it?

The answers are in the faulty logic of Facebook as a social network that connects the world and the financial business model required to fund that mission. Both efforts are fighting a natural contradiction when it comes to real reasons people use Facebook.

Let’s address the social aspect first. Facebook started as a on-campus online gossip network at Harvard University. This is the secret of its appeal – people like to gossip about others within their network of peers. The behavior went viral and expanded from Harvard to Yale and Princeton and other Ivys. Then it spread to universities across the country. Nobody really is as concerned with social status as young people between the ages of 13 and 21.

But then Facebook decided its gossip model should go public and proudly marked its rapid growth of the social network across the globe – to the tune of more than 2 billion users. We even got a movie out of it. But let’s consider the logic of such a global gossip network because, frankly, it makes no sense.

Gossip serves a very useful social and evolutionary purpose, despite it being popularly dismissed as “small talk” or “idle talk,” or even malicious or “nosy.” Robin Dunbar (he of Dunbar’s Number = 150) explains how gossip helps us maintain social relationships in groups and also helps community members sanction free riders or those who break established social norms (“Gossip in Evolutionary Perspective”). In this way, gossip provides a means of gaining information about individuals, cementing social bonds, and engaging in indirect aggression; helping people learn about how to live in their cultural society. Gossip anecdotes communicate rules in narrative form, such as by describing how someone else came to grief by violating social norms.

Certainly there appears to be something about gossip that is innate: our entertainment world is pretty much driven commercially by celebrity gossip. But we don’t know these people!

Dunbar actually extended his research to online social networks, specifically using Facebook as a test case of whether network technology relaxes the constraints that limit the size of offline social relationships (link). What he found was that the 150 number still holds for any meaningful social networks. In other words, the human brain is developed enough to maintain 150 social connections, after which the connections fall to the level of casual acquaintances. According to surveys, this is the experience of most Facebook users. Facebook “friends” are not really friends in the vernacular meaning of the word.

So, a network that connects us to roughly 2 billion users across the globe doesn’t make a whole lot of sense for the benefits of gossip. Rather, a gossip network that extends to people we have no personal relationship with tends to reinforce the negative aspects of gossip, i.e., meanness and rudeness. We can observe that celebrity gossip tends to focus on caricatures that emphasize the extremes of hero worship and cruel pettiness. In similar fashion, Facebook is very useful for small friendship networks that cohere around common interests or personal relationships, and the limits on that tend to approximate around 150 people.

The second reason Facebook is failing as a social network relates to its ad-driven revenue model. If I am using Facebook as a way to connect to my friends, I certainly resent a third party advertiser trying to insert itself into the middle of that communication channel (just imagine advertisers interrupting in the middle of your phone call!). How many of us were turned away from Facebook about 2+ years ago when our feeds were suddenly flooded with advertisements for things we had no interest in? The network data Facebook is selling to advertisers is weak, not robust. We know what our friends like, if they are friends, and Facebook algorithms do a poor job of approximating that. “Like” clicks are not really likes and digital advertisers know it.

The problem here is that Facebook ad rates are a function of the number of users FB claims to reach and the flow of network information across those user nodes, even if it’s Candy Crush games or humorous cat tricks. Facebook cannot really evaluate the subjective value of the information flow, so it merely sells it all in targeted user bundles. This does not serve end users (or advertisers) very well and the attrition rate is evidence of general user dissatisfaction. I would guess that most users stick with Facebook for the positive value they receive from far-flung friend networks and the lack of a viable alternative. But then we end up ignoring most of the white noise on our feeds, threatening the financial viability of FB’s revenue model.

So where does this lead?

Frankly, I would argue Facebook’s longevity under its current business model is challenging. Gossip makes sense and can be tolerated in small community groups, while wider social networks make sense if they are somewhat limited to common interests. Facebook “Groups” seem to exhibit some of these qualities, so perhaps that is a direction FB can move towards. But the problem then is that it is a much less valuable Facebook under its ad revenue model. Market competitions and alternative OSNs may eat into FB’s global network, forcing FB to adapt to a smaller footprint. That is likely to be a difficult financial adjustment for a company of FB’s size and reach. But technology cuts both ways and today’s Facebook may just be tomorrow’s obsolescence. Personally, I would prefer a social network that delivers more meaningful connections to other people and allows me to filter out a lot of the white noise. That can’t happen as long as the network servers make money off white noise.

Data Land Grab

December 6, 2018 tukaglobal635 Comments

‘Good for the world’? Facebook emails reveal what really drives the site

As we can read from this article and Facebook’s internal management debates, Web 2.0 (of which the GAFA companies are the archetypes) is built on a data land grab. It’s rather similar to the actual land grab that the European powers battled over for the New World, then with the colonization of Africa and Asia.

Data is now a valuable resource that has been priced up there with land and capital. Naturally, the tech oligopolies and their startup wannabes all want to grab as much as possible. And who are they grabbing it from? The network users of course.

Web 3.0 is all about democratizing the value and monetization of personal networked data. It’s about decentralized ownership and control, much like the desire to own and control the fruits of one’s labor that ended slavery. Web 3.0 is the future, because Web 2.0 is unsustainable.