Here Come the SPOT Analysts

April 22, 2018 Leave a comment

It’s still very early days for stock analysts to reach a consensus about Spotify except for one thing–royalties are too damn high.  We have, of course, heard this one before–remember Pandora?  When Tim Westergren was cashing out his stock to the tune of $1 million a month and the company was wasting money hand over fist, the problem, you see, was those greedy artists and songwriters.

Spotify has been making the same argument for years without much care for their overhead and executive compensation.  Daniel Ek, for example, traded a high base salary for a $1 million bonus if he hit four performance targets–he hit three of the four and got his bonus anyway.  (SPOT F-1 at p. 133: “In February 2018, our board of directors determined to pay Mr. Ek the full $1,000,000 bonus based on the Company’s 2017 performance though certain performance goals were not achieved…”)  You know, just like when you promise a club owner that you’ll draw 100 people and you only draw 75.  They always pay your guarantee anyway, right?

But the analysts are starting to crunch numbers and here’s a few infographics from Simply Wall Street, a site I like a lot that started its Spotify coverage.

SPOT Share Value

This graph suggests that a fair value for Spotify stock would be closer to $85 rather than the overvalued price point of $158.45 where the shares closed on Friday.  One implication  of the inflated share price is that the direct listing strategy Spotify devised to offer shares to the public may be artificially propping up the price since most of the sellers will be “insiders” broadly defined.  If it turns out that a meaningful number of shares in the very low volume of shares changing hands is automated trading, that could help to explain why volume is low and shares are trading in a narrow price range.

Price Value

Not surprising that SPOT is significantly overvalued based on the value of its assets by comparison to the Internet industry average as well as the market overall.

SPOT Debt Service

And then there’s the debt.  Red ink as far as the eye can see.

In fairness, analysts do project significant revenue growth from Spotify as in this chart:

SPOT Growth

But note that revenue doesn’t start to convert into earnings growth until about 2021.  Which is fine as long as the company makes it to 2021.

My hunch is that it is this inflection point that will be leverage for cramming down royalties.  One thing seems certain–the current downward trend in royalty rates from Spotify is not going to turn around.  If anything, it will probably accelerate.

So remember that Wall Street’s argument is that the lower the royalties, the better for Spotify.  Wall Street is unlikely to ever say the lower the rent, or the lower the executive compensation, or the fewer loss making country operations the better for Spotify.  It will be a while before we see the insider trades that will tell you how much Mr. Ek has profited from his money losing company that is filing mass NOIs by the tens of thousands of songs, but we will find out soon enough.  My bet is that it will put old “million a month” Tim Westergren to shame.

Of course, Amazon is also a poor value by these metrics, doesn’t pay a dividend, but also has significant growth expectation.  There’s another way that Spotify is similar to Amazon.  Jeff Bezos’s core business philosophy is “Your margin is my opportunity.”

So don’t be surprised if Mr. Ek is coming after your margin just like Amazon did in one of the great income transfers of commercial history.

Remembering Levon Helm

April 19, 2018 Leave a comment

Six years ago we lost Levon Helm, one of the great groove players and blues singers.  I was lucky enough to see Levon at the Ramble before he passed, a spectacularly night for authenticity.

MTP Interview: #irespectmusic Tour Advocacy with @theBlakeMorgan

April 18, 2018 Leave a comment
An interesting interview with artist, songwriter, small business owner and advocate Blake Morgan about how he mixes his advocacy and touring as an artist, leveraging tour press for his advocacy work.
Castle:  You just came off of a West Coast tour with Tracy Bonham, how did that go?
Morgan: Honestly one of the best tours I’ve ever experienced. The audiences were amazing––we sold out almost all of the shows on the run––everyone was so engaged and energetic. And working with and alongside Tracy is a total thrill and an honor. The East Coast leg of our 2018 Tour kicks off in Boston in just a few weeks. I already can’t wait.
Castle:  There’s a balance between doing the music work for the fans and doing the advocacy work for what’s right.  How do you combine the two?
Morgan:  That’s true, it is a balancing act. But recently I’ve begun to see and experience it differently. I now see how my art and my advocacy work are related to each other, instead of different from each other, and I find myself welcoming the balancing act. I feel my job as an artist is to captivate my audience for however long I’ve asked for their attention. In my advocacy work I’ve found “justice” to be a pretty captivating force. So I bring my #IRespectMusic advocacy to my shows, on stage and off, and I now bring my guitar to Capitol Hill when I meet with members of Congress. I find that each––the art and the advocacy––underscores the other now, and I’m happy to be seen wearing both hats at the same time. 
Castle:  I noticed that you were getting questions in your tour press about your advocacy work.  How often did that subject come up?
Morgan: It comes up every time. With press, and with fans. People at shows bring #IRespectMusic signs, or ask me questions after the show about something music-related that they’ve read about this past week. They’re excited to talk to me about both my music and my music advocacy, and I’m excited to talk to them too. Same with music press––they want to talk about what I’m working on, musically, and about music rights, and what the new tour is about as well. I really love the blend.
Castle:  How did you handle those questions and how did the journalists feel about it?  Were they knowledgable?
Morgan: Well I handle them by telling the truth (as Mark Twain said, ‘it’s the easiest thing to remember’), and that makes it simple. Whether the question is about a new piece of legislation, or my recent criticisms of Spotify, or the launch and growing arc of #IRespectMusic, I try to remember that many people who will read the article may be new to these issues and I have an opportunity to reach them for the first time. For example, that artists have never been paid when their work has been played on AM/FM radio in the United States still shocks and horrifies those who are still unaware. In a funny way, it’s like voter registration (which I’ve done too) in the sense that one is getting people involved on the ground floor. It’s like you’re deputizing people––music lovers and makers alike––to the cause when they haven’t been aware of these fundamental injustices. The journalists often are knowledgeable, but they recognize that many of their readers may be new to these issues too, so they often give me the opportunity to bring those readers up to speed. I’m really grateful for that opportunity. I think the journalists are often eager to interview me about these issues because in their day-to-day music coverage of bands and artists on tour they don’t always get the chance. It’s interesting.
Castle:  I know you’ve had an over two-year sold out residency at Rockwood in NYC.  Do you think there’s a difference between how a Rockwood fan relates to you as an advocate and how someone new coming to the show for the first time reacts?
Morgan: That’s a great question. The Rockwood Music Hall audiences are also New York audiences, and that makes a difference too. But I think mostly, those shows are like “home games,” and the 100-150 shows I’ve done on the road over the past two years are obviously “road games.” The difference is simple: on the road I want to give everyone in the audience a sense of who I am and what I’m about (artistically and otherwise), and I have about 60-75 minutes to do it. I have to come at the show as if people in the audience haven’t seen me before, but with a nod to those who are coming back too. In New York, I can sort of jump in the middle of things a bit more, as that audience knows me and has been coming to other shows in the residency presumably. Plus my footprint in New York is just bigger in general, so the New York people are pretty up to speed. When I get back from a tour (I’ve traveled over 75,000 miles these past two years), I find I have a whole bunch of emails waiting for me to catch up on as fans I’ve just met or made write to me and get on board with #IRespectMusic. I see it on Twitter and Facebook in real-time when I hit a city too. It’s amazing. 
Castle:  West Wing Spoiler Alert:  Do you think there’s a grassroots value in making tour advocacy an every day thing as opposed to having “Big Block of Cheese Day” once a year in Washington?
Morgan: Ha! (You’re talking to the biggest West Wing fan you’ll ever meet, so I’m smiling at the reference in your question!) Listen, the more our leaders hear from us, every day, the more they act. It’s cliché but it’s true: Congress acts when people make them do so. In my opinion, Congressional lobbying events are important and I’m glad music has them. However, they are––at best––only part of the equation. No real hearts or minds are changed on the Hill at such events. Those events are important because we need to show strength in numbers and strength of organization. But there’s nothing more effective in my experience than one-on-one meetings with Congressional members and their staffs, because those hearts and minds can be won––and are––in such settings.
During one such meeting of mine on the Hill, a member of Congress sat up when I mentioned how badly middle-class music makers need reform. I said it was because like all middle-class Americans, we have health insurance and mortgages to pay, families to support. He said, almost with wonder, “You have a mortgage.” He shook his head with a smile of disbelief. Before I could respond––and very much to his credit––he added, “Blake I apologize for how naive that sounds. But I hope you understand: that’s not something we hear up here. The term “middle-class” when applied to musicians. Or that you, and musicians like you, have mortgages. Of course you have a mortgage, and health insurance, and a family to help support. We just don’t hear that message when we meet with the Grammys or the artists they bring here.”
He was disrespecting nobody, including the Grammys, he was simply having an “A-ha” moment in real time about what I’d said. “We talk about the American Dream and the middle class everyday in Washington, and now here you sit, representing both, talking to your representatives in Congress about what would be more fair for your profession. This is how it’s supposed to work. I’m really glad we’re talking about this.” We talked for another 30 minutes. I was genuinely moved, and I haven’t forgotten that moment…nor will I ever. It’s an example of how grassroots advocacy, propelled by grassroots support, can make the difference in getting through to our leaders. There’s nothing like it.
Castle:  Do you think that your approach to crossing over your advocacy work with your music work is unique to you, or could other artists do something similar?
Morgan:  I think the way I do it is probably unique to me, but the crossover itself is anything but unique. Artists of all genres and stripes and styles are standing up now. In their interviews, on stage, with their songs and records, on social media and through their representative organizations. All towards the same end: it’s time for American music makers to be paid fairly. Our audiences get it. Our families get it. Our friends get it. We all owe a debt of gratitude to those musicians who paved the way for us to get to this moment (Mr. Ulrich, if you’re reading this…you were first and you were right and everyone knows it now!), and we owe it to ourselves now to keep up the pressure and work harder than ever before. I have no doubt we will, and we’ll do it together.
Castle:  I remember that the first #irespectmusic show at the Bitter End had a voter registration element to it, including a speech by Rep. Jerry Nadler.  Is that something you’re planning on replicating?
Morgan: Yes. Hold on to your hats, and stay tuned. 

Spotify IPO Watch: Making it Up on Volume or See SPOT Run

April 18, 2018 Leave a comment
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Terms of service, HeyIdiot.com

It’s still early days for the Spotify public offering (more correctly called a “DPO” for “direct public offering” but since no one knows what that means, I used IPO in the headline).  But sure as a $50 handshake, interesting patterns may be developing in the basic trading elements of price and volume, courtesy of Yahoo Finance:

SPOT 4-18-18

Remember that the “direct listing” was supposed to confer various benefits to Spotify.  You know, that old canard about saving money on underwriter fees, the evil “bankers” who everyone hates, right?

But look at this chart and ask yourself if this behavior bears any resemblance to what a “normal” underwritten IPO would behave like.  I would offer that what this chart behaves like is something else–the preferred stock of a takeover target following a tender offer when preferred holders already know what the price is ultimately going to be for for their shares.  In that scenario, there is a price that is not set by traders of the shares that the shares revolve around reflecting a risk that gets lower every day closer to the closing of the transaction.

The point of the analogy being that traders already know the ultimate price they will get for their shares.  So you see low volume and a price fluctuation around a range.

In the case of Spotify, the opening price was set by a manipulation of a special ruling by the Securities and Exchange Commission that allowed Spotify to use its last trade as a private company for its first trade as a public company–as though there were some connection between these things.  There really isn’t much of a connection.  You can’t say there’s no connection, but there are so many distortions in the price and valuation of this particular private company (Tencent, large convertible debt, down round avoidance, no insider lockups, etc.) that there isn’t a whole lot of connection between the private and public valuation.

By setting its IPO price at $165.90 and a relatively small number of shares in its “float“, it was entirely predictable that Spotify would trade at a low volume at that price range (even though it closed down 20 on its first trading day).  Despite the customary restrictions on insider selling not being in place (the “lockups”), there still have to be buyers to match to the sellers.  At a $100+ price point for a company that lives high on the hog while losing the stockholders money hand over fist, it’s clear that Spotify is not directing its shares at a retail customer who will ask one question.

What do I sell to buy SPOT?  The answer–in a world where you can buy a share of Apple for roughly the same price on a down day–probably nothing.  Which I think is a fair explanation of why SPOT volume is so low.  An absence of buyers, especially retail buyers.

One other measurement of sentiment:  Short selling.  With a low number of shares trading and no underwriting syndicate, there are fewer places to go to borrow the shares.  Although put options at a $100 strike price are already available.

As you can see from the chart, after the first week of trade, the volume has settled into a pattern of approximately 1.5 million shares trading daily.  Whether these are real traders, market making activity by the company’s insiders or some combination remains to be seen.  But at this rate, it’s going to take a very long time for insiders to sell their shares.

Of course, if anyone wanted to sell a block of shares, all they’d have to do is price the shares at a lower share price, which might cause trading to pick up at a more realistic price point.

But anyone who did that would probably not be too well received around the kale bar or whatever is is they have at Spotify.  Because it sure seems that all the Spotify insiders, like the takeover’s preferred holders, already know the price they are expected to sell at. Or maybe they just know something we don’t.

Time will tell but it’s worth watching.  For a lot of people.

 

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Please Support Tipitina’s Foundation on Give NOLA Day!

April 17, 2018 Leave a comment

Must read: @creativefuture: #PlatformResponsibility Starts with Facebook – but All of Silicon Valley Must Step Up — Artist Rights Watch

April 17, 2018 Leave a comment

More excellent argumentation from Creative Future.

Last month, CreativeFuture asked you, our followers, what you thought about platform responsibility. Little did we know that, in the meantime, the issue would start taking over the front pages of our newspapers and websites!

In a nutshell, the issue is whether Google, Facebook, and their Silicon Valley peers should take responsibility for the ways their platforms are used to violate our laws and harm society.

Even before the House and Senate passed landmark legislation to demand accountability from the tech giants and even before Facebook’s Cambridge Analytica mess exploded, we asked your views on a few simple questions that came down to one thing: do you believe that Google and Facebook should be more responsible?

The answer, overwhelmingly, was that you do – and you had a lot to add in response. Here are just some of your comments:

  • “The organizations who own these platforms make enormous profits. They have a responsibility to make sure the platforms are not being used to harm others.”
  • “They have the greatest ability to do so. And a moral responsibility. Just because it’s a newer technology doesn’t exempt them.”
  • “Because if they are able to control it, and I believe that they can, then they should be held accountable and responsible if they don’t.”
  • “They are providing the service that is being used for these malicious acts. They are responsible! They need to find a solution and be held accountable!”
  • “Violations of the law should be prosecuted. To avoid prosecution, they should take proactive steps to prevent violations.”
  • “They created these platforms, they should be responsible for them. They are beyond wealthy from them and can afford to police them. U.S. laws should apply everywhere in the U.S., including [the internet]!”
  • “Times change, services change, service providers change. Rules must keep up with changes.”
  • “Hostile foreign governments are using internet social platforms to publish untrue propaganda in order to destabilize our nation … if they can’t or won’t [monitor their platforms], they should be heavily fined and shut down. It is their responsibility for doing business in this country.”
  • “Responsibility is part of having a business.”
  • “[Google and Facebook] are no different from any other corporation which has the responsibility not to enable breaking the law. They are complicit and just a guilty as those breaking the law.”
  • “I can’t believe we even have to ask this question. I am sick and tired of corporations bearing no responsibility for the effects of their services on people. If a crime is occurring and the corporation looks the other way, that cannot be allowed any longer.”
  • “They don’t want the responsibility of accountability because complying would eat into profits with no returns. So, it will NEVER happen unless it is legislated.”
  • “The internet has become perhaps the single most important source of information and communication in the world. It cannot just rake in profits and not be responsible for what they have created.”

This week, on April 10 and 11, Facebook’s CEO Mark Zuckerberg will testify twice before Congress on the issues facing his company, and Silicon Valley generally. We expect that Zuckerberg will be very well prepped by his army of lawyers. We anticipate that he will try to reassure Congress that Facebook is doing all it can to (1) protect the privacy of its users; (2) prevent foreign influence on its advertising networks; and (3) stop rampant violations of the law from being carried out on their platform.

But Congress should not settle for head-pats and platitudes. They need to ask some hard and direct questions. We hope they will include the following…

Read the post on Creative Future

 

Guts is Enough: RIP R. Lee Ermey

April 16, 2018 Leave a comment

Private Joker is silly and he’s ignorant, but he’s got guts and guts is enough.  Now you ladies carry on.

If anyone was the personification of the universal soldier it was R. Lee Ermey.  Gunny Ermey portrayed the quintessential sergeant who is and always has been the backbone and institutional memory of every military since man crawled out of the swamp.

I’ve seen a lot of actors try to evoke the bone rattling and mind bending edge of the senior noncommissioned officer delivering a dressing down two inches from your nose while the recipient struggles to sustain their composure.  They pretty much all fail.  Kubrick’s genius was in finding the real thing for Full Metal Jacket.  It would not have been the same movie without Gunny Ermey.

But the pivotal line that Ermey delivered in the boot camp scenes was not the better known opening stalk (with its variant on the “one celled amoeba crawling in Paleozoic ooze at the bottom of the ocean).  Rather it was what’s sometimes called the Virgin Mary scene when he promotes Joker to squad leader.  It’s often overlooked that they break you down, but they also build you up again.

And “guts is enough” is what it’s really all about.

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