COVID Misery Index Rent is Too Damn High Edition

Post-Pandemic Growth of Spotify Stock Compared to Facebook, Amazon, Apple, Netflix and Google 1/1/20-4/13/21

You will no doubt hear a lot of handwringing and excuse making from various sectors about why you only think that streaming royalties are low–Spotify will tell you that they pay billions for their 30%+ margin (comparable to luxury goods retailers). If the artists are not getting enough, that is someone else’s fault, most commonly the record companies. This kind of buckpassing is sometimes called “gaslighting”.

But here’s the real rub. In the shell game of thimblerig you have to really focus to follow the shell with the pea. In the thimblerig of streaming royalties there’s one shell they don’t want you to look under ever–the enterprise value conferred by enterprise playlists as well as interactive streaming. (Enterprise playlists are the playlists that the platform creates using what passes for artificial intelligence.)

Streaming royalties are calculated based on service revenue–this is why Spotify often says they can’t make a profit because their royalty load is so high. If you believe that one, you have your eye on the wrong shell. They clearly are not that interested in making a profit because they haven’t consistently been profitable in the history of the company. Yet they have plenty of cash to do a $1 billion stock buy back to juice the share price for insiders.

That’s typical for Silicon Valley-style companies. (See the book “Get Big Fast” for the explanation.) These companies want to get to trading on the public markets as soon as they can and then grow, grow, grow. Eventually they may get around to being concerned with profits. So if they are not that concerned with a profit, why should you tie your license fee to a revenue stream that is secondary. Why not tie it to the one that is primary so that all the interests are aligned?

Why not the share price? They are interested in getting to the public markets for the same reason that Willie Sutton robbed banks: Because that’s where the money is. Remember, share price is the net present value of future dividends, but these companies rarely pay dividends and Spotify definitely does not. The share price for companies like Spotify is based on a number of factors one of which is growth. As you can see from the chart above, the global pandemic has been rocket fuel for Spotify propelling it ahead of Facebook, Amazon, Apple, Netflix and Google on a growth basis. And they are paying fractions of a penny to artists and songwriters–pretty evil. But when it comes to streaming royalties, Satan had to take a number. Growth is their god. It is the Internet after all.

Growth for a company like Spotify means competing and since all the services acknowledge they have essentially the same offering, one way they compete is on price. On a low price. That means that any rube who agrees to accept a royalty rate based on revenue which is a function of the price of the service to consumers is getting the grift, the finesse.

Yet Spotify, like many other Big Tech companies, has everyone looking the wrong way in one of the great misdirection plays. They complain they can’t make a profit–but then again they have 16 floors of World Trade Center and they paid Daniel Ek a million dollar bonus that the board of directors he controls admit he didn’t really earn. If they really wanted to make a profit, they could find cheaper digs in many other cities. Their rent is too damn high.

Instead we should be focused on the same thing they are–share price. Is there some connection between revenue and share price? Sure. But not one we can control. We couldn’t even control it if we were actual Spotify shareholders because Daniel Ek and Martin Lorentzon control the company through dual-class supervoting stock like Facebook, Google, and…ahem…Wework.

Therefore, why don’t we get compensated based on share price. It is, after all, what made Daniel Ek a billionaire while paying fractions of a penny to his vendors.