Is posting rap lyrics on Instagram a #HateCrime?

Is posting rap lyrics on Instagram a #HateCrime?

A teenager who posted rap lyrics on Instagram has been convicted of “sending a grossly offensive message over a communications network,” which was uplifted to a hate crime. She has received a community order (probation) and must pay costs of £500 ($700 USD) together with a £85 victim surcharge.

Chelsea Russell, a 19 year-old woman from Liverpool, England posted the lyrics from American rapper Snap Dogg’s song, “I’m Trippin” (NSFW) onto her Instagram account profile, or “bio.” The lyrics in question were ‘kill a snitch n—-a and rob a rich n—-a.’

Russell claimed she posted the lyrics as a “tribute” following the death of a 13-year-old in a road traffic accident. A screen shot of her profile was sent anonymously to Merseyside Police’s Hate Crime Unit, and Russell was brought in for questioning. She attempted to claim that her Instagram was not public as only Instagram members could access it, but the Crown proved in court that anyone could see Russell’s bio.

Russell’s defence lawyer, Carole Clark, claimed that the meaning of the ‘n’ word has changed over time, and has been popularised by hugely successful and mainstream artists including Jay-Z, Eminem and Kanye West. In particular, “Jay-Z used these words in front of thousands of people at the Glastonbury festival.” Clark also pointed out that the spelling of the word ended in an “-a,” rather than the arguably more pejorative “-er.” Nevertheless, District Judge Jack McGarva found Russell guilty and added, “there is no place in civil society for language like that.”

Under section 127 of the Communications Act 2003, it is an offence to send a message that is grossly offensive by means of a public electronic communications network. Section 145 of the Criminal Justice Act 2003 provides for an increased sentence for aggravation related to race.

Under the Crown Prosecution Service’s guidelines on prosecuting cases involving communications sent via social media, before heading to trial, there must be sufficient evidence that the communication in question is more than:

  • Offensive, shocking or disturbing; or
  • Satire, parody, iconoclastic or rude; or
  • The expression of unpopular or unfashionable opinion, banter or humour, even if distasteful to some or painful to those subjected to it.
“Freedom of expression is applicable not only to ideas that are favourably received or regarded as inoffensive or as a matter of indifference, but also to those that offend, shock or disturb the State, or any sector of the population.”
—European Court of Human Rights decision in Handyside v United Kingdom (1976)
It may be tempting to see this verdict as an overreach by Crown Prosecution Services, or “political correctness” gone mad. However, the lyrics Russell chose to share don’t simply drop the N-bomb. These lyrics may be understood as encouraging killing and robbing of a particular type of person — ie, black men.

The distinction between “offensive” and “grossly offensive” is an important one and not easily made. Context and circumstances are highly relevant.  The legal test for “grossly offensive” was stated by the House of Lords in Director of Public Prosecutions v Collins [2006] UKHL 40 to be whether the message would cause gross offence to those to whom it relates – in that case ethnic minorities – who may, but need not be the recipients.

Accordingly, there is a high threshold at the evidential stage. The Crown must also consider an author’s rights of expression enshrined in the European Convention of Human Rights. Extreme racist speech is outside the protection of Article 10 because of its potential to undermine public order and the rights of the targeted minority (Kuhnen v Germany 56 RR 205).

Article 10 – Freedom of expression

1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers.

2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.

Russell’s case brings to mind the similar legal battle of Paul Chambers. Frustrated that his travel plans had been disrupted by bad weather, in 2010 he tweeted about blowing up an airport and was subsequently arrested. His conviction attracted public outroar and became a cause célèbre for freedom of speech activists before being overturned on appeal (Chambers v Director of Public Prosecutions [2012] EWHC 2157).

However, there are considerable differences of fact between Russell’s Instagram bio and Chambers’s tweet. Chambers’s tweet mentioned the weather delay — the all important context — and his “threat” lacked menace, because it did not create fear or apprehension in those who read it. Russell may have been quoting a song lyric, but isolated from any other information, her words could reasonably be (mis)interpreted as a genuine threat.

Unfortunately, only limited information is available on Russell’s case, so it is not possible to fully analyse how the Crown determined that it was indeed in the public interest to pursue prosecution. I would assume however that there were some extenuating circumstances. Perhaps Russell had a history of offensive behaviour, or maybe the prosecution proved that the lyrics were intended to cause malicious upset to a grieving family?

While the legal principles and their application may be uncertain in situations such as these, this case underscores the need for a cautious approach to social media. At times, even though I recognise intellectually that my Twitter and Instagram feeds are “public,” the fact that I share personal insights and photos makes the platform seem perhaps more intimate and secure than it really is. Social media is like any other “community,” for which certain rules of decorum do apply.

American Copyright law to get 21st century remix

American Copyright law to get 21st century remix

In my previous post, I wrote about the European Union’s sweeping new Directive on Copyright in the Digital Single Market, which is currently in draft stages. But copyright legislation is getting an update on the other side of the pond, too.

Since 1909 — before recordings of music even existed — Section 115 of the Copyright Act has regulated the licencing of musical works. Many songwriters and music publishers have trouble collecting royalties for the use of their songs played via digital streaming services. Amongst other things, the proposed Music Modernisation Act will modernise how compensation for mechanical licenses, which include digital streaming, is determined.

Last week, The United States House Judiciary Committee voted unanimously (32-0) to approve House Bill 4706, “to provide clarity and modernize the licensing system for musical works under section 115 and to ensure fairness in the establishment of certain rates and fees.” More commonly known as the Music Modernization Act (“MMA”), the bill now heads for consideration by the full House of Representatives. The MMA has received wide bipartisan support from Democrats and Republicans alike, and appears to be “on the fast track” for approval.

Importantly, the MMA will create an American agency or “mechanical licensing collective” that would house all music publishers under one roof. It is expected that the agency will have a database of ownership information, which will increase transparency and help identify music creators who are owed royalties.

Once established, the digital streaming services will pay the mechanical licensing collective, which in turn tracks and collects royalties on behalf of the artists. As explained by Committee Chairman Bob Goodlatte (a Republican from Virginia), the MMA “boosts payments for copyright owners and artists by shifting the reasonable costs of a new mechanical licensing collective onto digital music services, who themselves benefit from reduced litigation costs as a result of other provisions in the bill.”

Speaking to ABC news, John Simson noted that Americans “…have a 1909 statue trying to govern 2018 technology, and it doesn’t work.” Mr Simson is a professor at the American University and founding member of Sound Exchange, a non-profit organisation set up to collect and distribute performance royalties.

Intellectual Property Subcommittee Vice Chairman Doug Collins (a Republican from Georgia) noted that “the current music licensing landscape undervalues music creators and under-serves music consumers. Outdated copyright laws have produced unnecessary liabilities and inefficiencies within the music licensing system, and stakeholders across the music industry have called for reform. This bill moves the music industry towards a freer and a fairer market, enabling it to leverage the present and future benefits of the digital age.”

  • The first section of the bill concerns how modern digital music services operate, and will create a “blanket licensing system” to quickly license and pay for musical work copyrights. A key aim includes discouraging lawsuits in favour of simply ensuring that artists and copyright owners are paid in the first place without such litigation (see “No lawsuits over unpaid royalties after 1 January 2018?” below).
  • The second section, “Compensating Legacy Artists for their Songs, Service, and Important Contributions to Society (CLASSICS) Act” will focus on public performance rights for pre-1972 recordings. In particular, musicians with pre-1972 recordings will receive royalty payments when their tracks are played on the radio, online, or on television.
  • The third section, “Allocation for Music Producers (AMP) Act,” will ensure that record producers, sound engineers, and other creative professionals also receive compensation for their work.

No lawsuits over unpaid royalties after 1 January 2018?
Of course, the MMA is not without its detractors who are quick to point out several key issues. Firstly, the bill sets out a broad limitation of liability clause which essentially shuts down any potential lawsuits filed after January 1st 2018. That’s not a typo – Section 2(10)(A), the MMA really does apply a retrospective restriction on legal action.

Without the possibility of litigation, songwriters (and other copyright holders) who have unpaid royalties have one sole and exclusive remedy: they must go through the process set out in the legislation, governed by the dispute resolution committee of the mechanical licensing collective.

And while the mechanical licensing collective created by the MMA will have a board of directors, that board will be comprised of ten music publishers (record labels) together with only four songwriters! Furthermore, as currently written, the MMA provides no grievance process for excluded writers and those who receive unjust treatment. Is this likely to hit the right note with independent artists and smaller record labels?

 

Featured image – Francis Barraud, His Master’s Voice.

No more Safe Harbours for EU-ser Uploaded Content?

No more Safe Harbours for EU-ser Uploaded Content?

The European Union is considering a sweeping new Directive on Copyright in the Digital Single Market, currently in draft stages. Industry groups are keen to ensure their opinions are taken into consideration, especially in instances where consumers share content which belongs to artists, authors, record labels, and television channels.

Digital platforms and internet service providers which host User Uploaded Content (UUC) argue that they are not responsible for any copyright infringing material uploaded by their users. However, trade bodies representing various industries believe the incoming Copyright in the Digital Single Market Directive doesn’t go far enough to reform this safe harbour principle.

The E-commerce Directive states that EU Member States shall ensure that internet service providers are not liable for copyright infringements carried out by its customers, on condition that: (a) the ISP does not have actual knowledge of illegal activity or information;  and (b) the provider “acts expeditiously to remove or to disable access” to the illegal content, once they become aware of it (see Article 14).

This article provides ISPs with a “safe harbour” from copyright liability (also known as the “mere conduit” provision). Generally speaking, a safe harbour* is simply a protection available within a regulation that specifies that certain actions do not to violate a given rule, in particular circumstances.

1709 - EU Safe Harbour
In the United States, this principle operates under the “notice-and-take-down system”

About 18 months ago, the European Commission announced its plans to introduce a new Directive on Copyright in the Digital Single Market. As the explanatory memorandum sets out, “the evolution of digital technologies has changed the way works and other protected subjectmatter are created, produced, distributed and exploited. In the digital environment, cross-border uses have also intensified and new opportunities for consumers to access copyright-protected content have materialised. Even though the objectives and principles laid down by the EU copyright framework remain sound, there is a need to adapt it to these new realities.”

Amongst other things, the propsed Directive seeks to rebalance the position of the copyright owner against that of the internet service provider. Last week, various trade groups representing Europe’s creators and creative content producers published an open Letter to the European Council.

The authors suggest that, far from ensuring legal certainty, the Directive as currently drafted “could be detrimental to our sectors,” which include journalism, film and TV, music, and sport. While the authors support the objectives of the proposed legislation, the Letter critiques the latest draft of the directive, and expresses significant concerns about the safe harbour reforms.

In particular, the problems seem to arise with sections addressing the “use of protected content” by ISPs and other platforms which “store and give access to large amounts of works and other subject-matter uploaded by their users”. Put simply, the copyright industries want the safe harbour reformed, so that it no longer applies to user-upload sites (Complete Music Update).

This draws into question how online platforms hosting UUC should monitor user behaviour and filter their contributions. Currently, the platforms review material after it has been published and reported or “flagged” as copyright infringement. This may, as has been discussed with Facebook’s proposed use of artificial intelligence in copyright and hate speech monitoring, “inevitably require an automated system of monitoring that could not distinguish copyright infringement from legal uses such as parody” (The Guardian).

The authors of the Letter voice complaints in respect of the draft forms of Article 2, Article 13(1) and Article 13(4):

  • Article 2 defines which services fall under liability, mentioned further at Article 13. The latest draft could leave most UUC platforms outside the scope, despite the fact they continue to provide access to copyright protected works and other subject-matter. For example, music playing in the background of a makeup tutorial on YouTube.
  • The problem with Article 13(1) as currently written is that it risks narrowing the scope of the right and contravening CJEU jurisprudence. The Letter’s authors argue that “any new EU law should secure that this right is broad,” and “contain no additional criteria which could change via future CJEU rulings.”
  • As for Article 13(4) and its relevant recitals, the authors suggest the language is tantamount to a new safe harbour, which would both “seriously undermine fundamental principles of European copyright,” and pose “unwarranted liability privilege risks breaching the EU’s obligations under international copyright treaties.”

The Letter closes with the authors’ promise to “remain at the Council’s disposal to find solutions to these points.” For more on the proposed Directive, be sure to check out the IPKat’s numerous posts on the subject.

*This “Safe Harbour” in copyright law is not to be confused with the Safe Harbor Data Privacy exemptions between the US and the EU, which have since been declared invalid. On that subject, I might write on the new Privacy Sheild… at some point…

The Six Principles of Data Protection: Facebook fails

The Six Principles of Data Protection: Facebook fails

Facebook may believe that dubious data collection and security practices justify a more connected audience: the incoming General Data Protection Regulations say differently.

Once again, data privacy is in the headlines. But this time, it isn’t a credit agency or department store that has fallen short of consumer expectations: instead, it’s Facebook. Much credit is due to Carole Cadwalladr and her team at The Guardian, who first broke the the Cambridge Analytica story.

#DeleteFacebook was trending on Twitter for a while, and I myself was considering ditching my account – not least because I simply don’t use Facebook often. While I’ve decided against deletion, I was genuinely saddened – although, in retrospect, not surprised – to come across the leaked 2016 “Ugly Truth” Memo from a Facebook executive Andrew “Boz” Bosworth. You can see the Memo in full at Buzzfeed, but the part that hit me hardest reads as follows:

We connect people. Period.

That’s why all the work we do in growth is justified. All the questionable contact importing practices. All the subtle language that helps people stay searchable by friends. All of the work we do to bring more communication in. The work we will likely have to do in China some day. All of it.

The natural state of the world is not connected. It is not unified. It is fragmented by borders, languages, and increasingly by different products. The best products don’t win. The ones everyone use win.

“Questionable contact importing practices”? By Bosworth’s own admission, “the ugly truth is that we believe in connecting people so deeply that anything that allows us to connect more people more often is de facto good.”

The General Data Protection Regulations (GDPR) say differently. With less than two months to go until the implementation date of 25 May (!) I’ve set out a little refresher on the main responsibilities for organisations below.

Article 5 of the GDPR contains Six Principles of personal data collection and processing. The data controller (the company collecting or otherwise controlling the data) are responsible for, and must be able to demonstrate, compliance with these principles.

(A) Processed lawfully, fairly and in a transparent manner.
A company collecting data must make it clear as to why the data are being collected, and how the data will be used. The company must provide details surrounding the data processing when requested to do so by a person whose data is collected (the “data subject”). “Questionable practices” are likely neither fair nor transparent!

(B) Collected for specified, explicit and legitimate purposes.
Have you ever filled in a form, only to think, “why am I being asked this question?” This principle states that organisations should not collect any piece of personal data that doesn’t have a specific purpose, and a data subject must give explicit consent for each purpose. A lawful purpose could mean fulfilling a contract: for example, your address is required for shipping something you bought online.

(C) Adequate, relevant and limited to what is necessary.
Companies strive to understand customer buying behaviours and patterns based on intelligent analytics, but under this principle, only the minimum amount of data required may be stored. Asking for one scanned copy of a drivers’ licence may be adequate, but asking for a drivers’ licence, passport, and birth certificate might be more than necessary.

(D) Accurate and, where necessary, kept up to date.
Controllers must ensure personal data is accurate, valid and fit for purpose. Accordingly, data subjects have the right under Article 16 (Right of Rectification) to rectify any personal data held about themselves.

(E) Kept for no longer than is necessary.
This principle limits how data are stored and moved, and for how long. When data is no longer required, it should be deleted. This is closely related to the Right of Erasure (“Right to be Forgotten”) under Article 17, which I previously wrote about in respect of the Google case in England.

(F) Processed in a manner that ensures appropriate security.
This principle is perhaps what most people think about when they think of data protection. It means that IT systems and paper records must be secure, and the security must be proportionate to the risks and rights of individual data subjects. Negligence is no longer an excuse under GDPR!

In 2016, a Gallup study found that Millennials (those of us born between 1981 and 1996) are generally aware of potential data security risks, but less likely to be concerned about them. Prior to familiarising myself with these principles, I simply thought data protection was another phrase for “IT security”. I thought it was just about firewalls, encryption, and outsmarting hackers.

But in the months I’ve been helping clients to get ready for the GDPR, I’ve realised that compliance is about more than just having strong passwords: it really is a mindset. That’s what’s so disappointing about Facebook’s apparent attitude towards the end consumer, in which people are seen only as a series of clicks or “likes” which can be analysed, predicted, and manipulated – at any cost. My Facebook account may remain active, but I for one will certainly be less engaged.

Photo credit – Book Catalogue

Is Taylor Swift getting a copycat Reputation?

Is Taylor Swift getting a copycat Reputation?

Taylor Swift’s latest music video, Delicate, has been criticised for its obvious similarities to a 2016 Kenzo perfume advert directed by Spike Jonze.

In the Kenzo advert, we see a young woman portrayed by actress and dancer Margaret Qualley at a posh black tie event in a hotel. Looking beautiful in an evening dress but nevertheless seemingly uncomfortable and bored, she quietly slips out of the ballroom to pensively roam the hallways of the hotel alone. What made the advert so memorable was that Qualley suddenly starts a wild and garish dance to an upbeat song. W Magazine lauded the advert as “one of the best perfume commercials of all time,” and the Guardian called itone of the most engaging ads” of the year.

Earlier this month, Taylor Swift released the video for Delicate, the latest single off of her sixth studio album, Reputation. Directed by Joseph Kahn, the video follows Swift as she walks through a glamourous hotel, increasingly fatigued with the attention of the press and her adoring fans. She eventually manages to escape through the corridors and, under the premise of being invisible, performs a bizarre dance routine through the hallways.

Screenshot 2018-03-24 at 4.34.34 PM.png
the opening tracking shot in each video shows a beautiful but bored woman in an evening dress, but the similarities don’t end there…

In addition to the plot – in which a bored young woman has a crazy dance party in a fancy hotel – the videos share a colour scheme, choreography, and camera angles. Although Taylor’s dress is blue and Qualley’s is green, both are deep jewel tones and cut a similar, sleeveless silhouette. Twitter users were quick to point out that even the facial expressions of the two women appeared to mirror each other.

Kenny Wassus, New York Magazine’s senior producer of original video, called Taylor’s video “the drunk sorority knockoff” of the original Kenzo advert. Twitter users have been sharing a slew of direct comparisons between the two videos, including:

5aa6aab0a4af7819008b4636-1136-852
“gorilla” dance
5aa6aacf782fde91758b45c2-1136-852
crazy facial expressions
Screenshot 2018-03-24 at 4.32.26 PM.png
profile tracking shot of militant stomping

To be fair, there are a few differences. Qualley’s only audience remains the camera, while an “invisible” Swift can dance through crowds. Qualley wears heels, whereas Swift kicks hers off to dance barefoot. Qualley’s performance ends by jumping through a massive logo for the perfume, whereas Swift’s show ends in the rain with her meeting a mysterious person.

The Kenzo advert was a viral success because, as AdWeek explained, “the exuberantly choreographed video was less about technical innovation than about how it changes the way women are portrayed in marketing.” Fans of Swift may therefore be somewhat unnerved that the international pop star, known for being a creative, self-made woman (see Taylor Swift: from saccharine songstress to fearless feminist) has chosen in this instance to be so heavily inspired by another artist’s originality.

Despite claims that Swift’s video is a “blatant rip off”, a Kenzo representative told Dazed that they will not be making a comment on the matter. Accordingly, a lawsuit or formal complaint is unlikely. Taylor Swift’s representation are yet to respond to the criticism.

Delicate is not the first video directed by Joseph Kahn to invite copyright controversy. His earlier project for Swift, Look What You Made Me Do, was compared by many to Beyoncé’s Formation. 

Related image
Swift vs Beyoncé

In my earlier post All the Stars and Constellations, I noted that inspiration is a common and important part of most creative processes. Even the most original ideas borrow from earlier art, expressions, and themes. The question in this instance concerns the grey area between inspiration and copyright infringement. While plagarism can be easy to spot, the Taylor Swift videos present more of a challenge. Remember, copyright law only protects specific expression of an idea, and not the idea itself.

Kenzo and Spike Jonze are unlikely to pursue legal action, because one cannot obtain intellectual property rights for a vibe or feel of a video – or even the “plot” of a woman dancing through a hotel. However, it’s worth noting that this matter is already being heard in the court of public opinion, and the verdict doesn’t seem to favour Swift.

Project Gutenberg: the German edition?

Project Gutenberg: the German edition?

Project Gutenberg is an American website which digitises and archives cultural works to encourage the creation and distribution of eBooks. It currently offers 56,000 free books for download, including classics such as Pride and Prejudice, Heart of Darkness, Frankenstein, A Tale of Two Cities, Moby Dick, and Jane Eyre. Many of these titles are available because their copyright protections have expired in the United  States, and are therefore in the public domain. The website is a volunteer effort which relies mostly on donations from the public.

What does it mean if a book is in “the public domain”? This term means that something (a novel, artwork, photograph or other creation) is not protected by intellectual property law, including copyright, trade mark, or patent. Accordingly, the general public owns the work, and not the individual creator. Permission is therefore not required to use the creation.

Despite the noble cause of making literature available at no or low cost to the masses, a recent ruling against Project Gutenberg has resulted in the website being geo-blocked for all visitors attempting to access the site from Germany. The claimants in the case are the copyright owners of 18 German language books, written by three authors, each of whom died in the 1950s.

In Germany, the term of copyright protection for literary works is “life plus 70 years,” as it is in the United States. However, the United States applies different rules for works published before 1978. For works published before 1978, the maximum copyright duration is 95 years from the date of publication. In the United States, the 18 books in question are all in the public domain. For the avoidance of doubt, Project Gutenberg runs on servers at the University of North Carolina at Chapel Hill, and is classified as a non-profit charity organisation under American law.

Sharing and accessing the written word has changed since the 16th century! Engraving showing a publisher’s printing process, from the Met Museum.

The copyright holders of these works notified Project Gutenberg of their alleged infringement back in 2015. In early February 2018, the District Court of Frankfurt am Main approved the claimant’s “cease and desist” request to remove and block access to the 18 works in question. The claimants also requested administrative fines, damages, and information in respect of how many times each work was accessed from the website.

 

Our eBooks may be freely used in the United States because most are not protected by U.S. copyright law, usually because their copyrights have expired. They may not be free of copyright in other countries. Readers outside of the United States must check the copyright terms of their countries before downloading or redistributing our eBooks.

The Court reasoned that it was worth taking into account the fact that the works in dispute are in the public domain in the United States. This however “does not justify the public access provided in Germany, without regard for the fact that the works are still protected by copyright in Germany.” The simple message on the front page (cited above) may not be sufficient to draw users’ attention to the fact that what they are downloading may be in contravention of national copyright laws.

The judgement also cited Project Gutenberg’s own T&Cs in its decision, noting that the website considers its mission to be “making copies of literary works available to everyone, everywhere.” While this broad statement may seem innocuous and idealistic, the court used this to support its findings that Project Gutenberg could not reasonably limit itself as an America-only website.

A key point in this matter is the question of jurisdiction. While Project Gutenberg is based in the USA, the claimants successfully argued that as the works were in German and parts of the website itself had been translated into German, the website was indeed “targeted at Germans.” Furthermore, even if the website had not been intended for German audiences, that the infringement occured in Germany is sufficient grounds to bring the claim in German court.

While Project Gutenberg was only required to remove the 18 works listed in the lawsuit, the organisation has blocked its entire website in Germany to protect itself from any further potential lawsuits on similar grounds (see the Q&A here). Project Gutenberg is planning to appeal the decision.

This first published on the 1709 Copyright Blog. You can also read more at the IPKat here.

 

From Stockholm to Stock Market: Sweden’s Spotify set to list on NYSE

From Stockholm to Stock Market: Sweden’s Spotify set to list on NYSE

Music streaming giant Spotify recently filed its application to put shares on the New York Stock Exchange. The 264 page document details the company’s key risks and challenges: I’ve read them so you don’t have to!

The Securities Exchange Act of 1933, often called the Truth in Securities law, requires that investors receive financial and other significant information concerning financial securities. To avoid misrepresentations and other fraud, any company wishing to place its shares on an American market must submit a prospectus, formally known as an SEC Form S-1 (or an F-1 for foreign companies).

Sweden-based Spotify filed their prospectus for the New York Stock Exchange on 28 February.  Prospectuses are heavily regulated, and accuracy is vital: it is a lawyer’s job to fact-check these documents in a process known as “verification.” To allow investors to make informed decisions, a company must be honest about its particular commercial situation, and explain how share prices may decline. Spotify’s estimated valuation is nearly $20 billion, but it has never made a profit and reports net losses of €1.2bn (£1.1bn).

Spotify clearly needs a capital injection,
but given the risks below, would you invest?

Hitting the right note with listeners.
Spotify’s unique features include advanced data analytics systems and proprietary algorithms which predict music that users will enjoy. These personalised streams rely on Spotify’s ability to gather and effectively analyse large amounts of data, together with acquiring and categorising new songs that appeal to “diverse and changing tastes.” If Spotify fails to accurately recommend and play music that customers want, the company may fail to retain or attract listeners.

Screenshot 2018-03-02 at 11.16.33 PM.png
Spotify knows that 71% of my recent tunes are energetic, upbeat, and suitable for a fitness enthusiast. Touché!

Licensing and royalties.
To make its 35 million tracks available for listeners, Spotify requires licenses from the musicians and record labels who own the songs. Additionally, Spotify has a complex royalty payment scheme, and it is difficult to estimate the amount payable to musicians under their license agreements. Even if Spotify secures the necessary rights to sound recordings from record labels and other copyright owners, artists may wish to discontinue licensing rights, hold back content, or increase their royalty fees. In 2014, Taylor Swift removed her songs from the streaming service in protest, although she later added it back.

Technical glitches and data protection.
Spotify’s software and networks are highly technical and may contain undetected bugs or other vulnerabilities, which could seriously harm their systems, data, and reputation. Growing concerns regarding privacy and protection of data, together with any failure (or appearance of failure) to comply with data protection laws, could diminish the value of Spotify’s service. This especially worth noting as Europe nears the General Data Protection Regulation (GDPR) implementation date of 25 May.

spotify nyc.jpg
Spotify’s NYC offices

Innovation and skilled employees.
Rapid innovation and long-term user engagement is prioritised over short-term financial gain. Spotify admits “this strategy may yield results that sometimes do not align with the market’s expectations.” The company also depends on highly skilled personnel to operate the business, and if they are unable to attract, retain, and motivate qualified employees, the ability to develop and successfully grow the company could be harmed.

International regulation and taxation.
As Spotify expands into new territories, it must adhere to a variety of different laws, including those in respect of internet regulation and net neutrality. Spotify even admits that language barriers, cultural differences, and political instability can bring share prices down! Furthermore, public pressure continues to encourage governments to adopt tougher corporate tax regimes, and tax audits or investigations could have a material adverse effect on the company’s finances.

Image result for bloomberg spotify

Method of offering.
While Spotify may not be able to successfully overcome each challenge listed in its prospectus, many of the risks are relatively common amongst international technology and media companies. But as an additional risk, Spotify has chosen a relatively unconventional method known as a direct public offering (DPO) to bring its shares to the stock market. Unlike a traditional IPO, in a DPO a company will not use an investment bank to market or underwrite (insure) its offering. While this avoids bank fees, uncertainty can result in a discounting of share prices. This is a really technical point and somewhat nuanced (it gave me headaches in law school!) but a risk worth noting.

I’ve written previously about Spotify’s copyright challenges, as well as its controversial privacy policy