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The Curious Timing of “Spotify Untold” the Corporate Bio Book

July 25, 2019 Comments off

You may have seen the book reviews of “Spotify Untold” (or in Swedish ““Spotify Inifrån”).  The book is currently only available in Swedish, but in a new marketing twist the authors are on a book tour in the US.  Must be nice.

The writers seemed to have missed the streaming gentrification part, which is of great consequence to artists and songwriters–but those groups are pretty clearly not their audience.

If their interview with Variety is any indicator, the story line of “Spotify Untold” revolves around (1) music is a commodity (with no discussion of Spotify’s role in the commoditization of what is now openly called “streaming friendly music” not unlike “radio friendly” music–both equally loathed by artists whose name does not begin with “Justin”; and (2) Daniel Ek is a heroic genius (despite the resemblance to Damian in his teen pictures they are also handing out–he thankfully shaves his head).

But most importantly (3) Ek was pursued by Steve Jobs, the evil giant whose company he just happens to have filed a competition complaint against who was aided by the equally evil Sony and Universal as they were all in on it to keep our hero from entering the fabled land of Wall Street.  Yes, a yarn straight out of Norse mythology; perhaps a little too much so.

Or the book is a corporatized version of Joseph Campbell’s hero’s journey from The Hero With A Thousand Faces aka Star Wars).  You can plug Daniel Ek into the hero’s role pretty easily:
campbell heros journey

As reported in Variety:

Barely a page into the book “Spotify Untold,” Swedish authors Jonas Leijonhufvud (pictured at left) and Sven Carlsson paint an odd scene. The year is 2010 and Spotify co-founder and CEO Daniel Ek [the hero] is facing a succession of obstacles [the Threshold Guardians] gaining entry into the U.S. market [the region of supernatural wonder] — or, more specifically, infiltrating the tightly-networked and often nepotistic to a fault music industry. [Unwelcoming of the stranger from Asgard, so unlike Silicon Valley.]  As stress sets in [Challenges and Temptations], Ek becomes convinced that Apple’s Steve Jobs is calling his phone just to breathe deeply on the other end of the line, he purportedly confesses to a colleague [a Helper].

There’s a saying, “don’t speak ill of the dead.”  That’s probably a bit superstitious for the authors, but is good advice.  It’s unbecoming and Spotify should denounce it.  There’s also a saying, “don’t mock the afflicted,” so before you laugh hysterically at the story, realize that Steve Jobs caring enough about Daniel Ek to do such a thing (which assumes Steve knew Daniel Ek existed) was something that was very important to Daniel Ek

One thing I can tell you is that the Steve legend (a competing hero’s journey myth–a real one) has some choice tales of voice mails.  None of them involved heavy breathing, and Variety reports that the authors were not able to confirm this rather insulting and perverse allegation.

What they do say is:

To us, Ek’s claim is as a reflection of how paranoid and anxious he must have felt in 2010, when Spotify was being denied access to the U.S. market, in large part due to pressure from Apple. The major record companies seem to have been quite loyal to the iTunes Music Store, and to Jobs personally….Because Spotify was hindered by Steve Jobs [it’s called competition], it forced the company to sweeten its deals with the record companies [also called competition]….Spotify is challenging Apple on a legal level right now. We address Spotify’s constant struggle with Apple in our book. If Ek were to talk about such sensitive topics in book form, [Spotify would] do it in their own way with full control.

The first thing I thought of when reading the story of “Spotify Untold” was that very competition claim that Spotify is pursuing in Europe right now and pursued with the Obama competition authorities a few years ago.  And then of course there was the New York state competition claim that came out the same time as Apple Music launched in the US apparently led by Spotify’s very own Clintonista who was a political ally of Eric Schneiderman the former (ahem) New York Attorney General.  While the authors claim that they spoke to many Spotify executives but not Ek, the book still has curious timing as does the disclaimer that the book is not connected to Spotify directly.

And if you believe as I do that Daniel Ek actually hates the major labels (read the Spotify DPO filing an you’ll get the idea), it’s only natural that he would try to twist Sony and Universal into the story.  He just didn’t know that his negotiation experience was garden variety stuff and not unusual in any way.  They didn’t get stock in iTunes so they damn well would in everything that came after iTunes.

I would be very curious to know why the authors came away from their research thinking that the major labels were “quite loyal” to iTunes and to Steve Jobs.  While that may have been true of certain executives, the reason that the labels required licensees to sell in Windows Media DRM (i.e., the format nobody wanted) was because they wanted to compete with iTunes.  Even after they dropped that failed idea, the labels large and small did not want a single retailer dominating the digital market.

It’s also possible that the book is an answer to “Spotify Teardown” that came out earlier this year with a much less mythological and much more recognizable approach to a Spotify reality according to an NPR review:

[“Spotify Teardown”] argues that Spotify isn’t a media company per se – and…asserts that it’s structurally much closer to a Facebook or Google, particularly in its digital business model.  Indeed, Spotify was never really so much a music company as an Internet brand. “Spotify’s business model never benefited all musicians in the same manner but rather appeared — and still appears — highly skewed toward major stars and record labels, establishing a winner-takes-all market familiar from the traditional media industries.”

You won’t find that in a corporate bio.  That sounds like the streaming gentrification reality and definitely wasn’t written by anyone named Justin.  So while I don’t know what motivated the “Spotify Untold” authors, I do think that there’s a definite whiff of Astroturf in a book that tells a story that fits almost perfectly with the hero’s journey that Spotify would like to be telling competition authorities.  I think the authors are aware of this, hence their disclaimers.

And I’m still waiting for the last leg of Daniel Ek’s hero’s arc, the transformation and atonement.  Which is the part that makes the hero a hero.  As the authors tell us, “[Spotify] would probably rather tell their story themselves than have us do it for them, but I think they understand our role as journalists.”

I just bet they do.

If you think this is paranoid, watch this video from Sharyl Attkisson.  Let’s just say I don’t put anything past these guys.

 

 

 

Happy Monday: The MTP SPOTify Chart

June 3, 2019 Comments off

Spotify Chart 6-3-19

Happy Monday–here’s the Spotify chart update.  Spotify is in its second downside breakout of the consensus trading range ($145-$132).  Unless it retraces back over $132, it would appear that the next downside support level is $106 where the stock closed on 12/21/18 or thereabouts.

The company just had its second “death cross” in less than 6 months where the the 50 day moving average crosses the 100 day moving average to the downside.

It would appear that the $1 billion stock buyback that Spotify announced (because that’s a good thing to do with the investor’s money) hasn’t worked very well so far.  But pay no attention to that man behind the curtain.

MTP Podcast: Spotify’s Direct Public Offering

January 10, 2019 Comments off

 

Chris Castle explains Spotify’s direct public offering (compared to a traditional IPO) and commentary on how the stock is performing (NOT investment advice).

According to the Spotify Case Study:

As of March 28, 2018, the average first-day return for 2018 IPOs was 13.2%. [4] On April 3, 2018, when Spotify opened for trading on the NYSE, the NYSE’s initial reference price that was published to the market pre-trading was US$132.00 per share the opening price of the shares was US$165.90 per share, or approximately 25.7% higher than the NYSE reference price. Trading in Spotify’s shares closed at a price of US$149.01 per share, which was approximately 10.2% below the opening price and 12.9% above the reference price….Spotify disclosed recent high and low sales prices per share in recent private transactions on the cover page of the preliminary prospectus and the final prospectus [to arrive at the reference price of $132].

Spotify Buyback

Spotify Case Study: Structuring and Executing a Direct Listing 

MusicTech Solutions: Why Will Spotify’s Price Tank?

Barrons: Spotify Stock Is Up This Year, but Analysts Say Don’t Get Too Excited

Spotify stock, up almost 6% this year, have dropped about 27% in the last 3 months, more than twice as far as theS&P 500’s decline.

On Monday, Stifel’s John Egbert reiterated a Buy rating on the stock, while lowering his target price to $170 from $210. That’s in part based on his estimate of the fair value of its stake inTencent Music Entertainment (TME). But he also trimmed some margin estimates based on the likely costs of global expansion.

“We remain bullish on Spotify’s subscriber growth prospects and believe the company could deliver upside to our 2019 subscriber addition forecast of 24 million, particularly if newly (and soon-to-be) launched markets become material,” Egbert wrote.

Deutsche Bank ’s Lloyd Walmsley maintained a Hold rating on the shares, cutting his price target to $135 from $152 in a Sunday note. Nomura Instinet’s Mark Kelley, meanwhile, wrote Sunday that Spotify was “among the most oversold stocks in our coverage.”

Spotify SEC Ruling on Reference Price for SPOT shares

$20 Million a Month Daniel Ek Shows “Million a Month” Tim Westergren How It’s Done

October 16, 2018 Comments off

Remember when we were all appalled that Pandora founder Tim Westergren was making $1,000,000 a month from selling Pandora stock while he was behind fighting songwriters in rate court for ASCAP and BMI royalties and stiffing artists with the Internet Radio Fairness Act and refusing to pay pre-72 artists?  And then there was the 13 bathroom house in Marin.  It was all a bit hard to stomach.

According to Jem Aswad in Variety, Daniel Ek is putting Westergren in the rear view mirror for sheer excess.  Based on SEC filings made available to a Swedish publication (probably SEC Form 4):

….Ek sold 336,213 shares $61.7 million worth of stock between July and September, and late last month signaled his intent to sell another $69.9 million sold in July–September for a total of $61.7 million.

So a little over $20 million a month, and it appears that when added to the shares he already sold and will sell, Ek should gross more than all the songwriter class action settlements combined.

“Daniel will sell a small share of Spotify shares in the next nine months as part of his long-term financial strategy. This sale of shares will constitute a minimal part of his holding in the company,” Spotify rep Sofie Grant told the [Swedish] paper. Ek and Lorentzon declined comment.

Of course, it remains to be seen how Spotify does with the several individual infringement lawsuits in Nashville and the Wixen Music Publishing lawsuit in Los Angeles. (Spotify recently lost a motion to dismiss against Bluewater Music represented by attorney Richard Busch, see Order Denying Motion To Dismiss For Lack Of Standing And Failure To State A Claim, Sept. 29, 2018, Bluewater Music Services Corporation, Inc. v. Spotify USA Inc.,  Case No. 3:17-cv-01051 (D.C. W.D. Tenn.) (2017), which also happens to be a great lesson in copyright law by the judge.)

So–Mr. Ek could spend his money on building an effective licensing operation, but….nah….Sounds like Mr. Ek is a man in need of yet another safe harbor, right?

Here Come the SPOT Analysts

April 22, 2018 Comments off

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.

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

April 18, 2018 Comments off
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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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Spotify IPO Watch: Buy High, Sell Low — Music Tech Solutions

March 28, 2018 Comments off

Is Spotify’s unusual “DPO” approach and bizarre $132 selling price simply a way for insiders to short the stock? See SPOT run! Run SPOT run!

Here’s an interesting anecdote about that imminent Spotify stock offering.  Remember, Spotify is rumored to price at $132 per share based on private market trades (on a split adjusted basis, I guess).

If the Spotify “DPO” actually does trade at $132, it will probably be the highest valued IPO stock ever.  Dropbox, for example, priced at $21 and closed at $28.48 on its first day of trading.  Facebook priced at $38, Google at $85, Alibaba $68, Amazon was $18.  So Spotify will have to be pretty special to actually trade at $132 on the public market.

It’s good to remember that most of these comparisons had what’s called a “full commitment underwriting” where the company issues new shares that are purchased by an underwriting syndicate and then resold to the public.  Spotify will issue no new shares.  So–one would surmise that the only ones selling will be those who already hold Spotify shares that have been allowed to be sold on the public exchange.  That appears to mean the shares that will be trading will be the insiders (or mostly the insiders), with no restrictions on which of those insiders can sell on the first day of trading.  (Most IPOs have a restriction (called “lockup agreements”) on when employees can sell their shares to avoid a rush for the exits.)

I happened to be chatting with two sophisticated investors in recent days, one from a hedge fund and the other an entrepreneur who has taken a couple companies public.  Both of them had the same reaction after we talked through Spotify’s competitive position and some of the disclosures in Spotify’s SEC Form “F-1”.

Let’s start with Spotify’s description of who it counts as a subscriber:’

We define Premium Subscribers as Users that have completed registration with Spotify and have activated a payment method for Premium Service. Our Premium Subscribers include all registered accounts in our Family Plan. Our Family Plan consists of one primary subscriber and up to five additional sub-accounts, allowing up to six Premium Subscribers per Family Plan subscription. Premium Subscribers includes subscribers who are within a grace period of up to 30 days after failing to pay their subscription fee.

If you think that a paid subscriber means a subscriber who paid, you’re probably not wild about this definition, and both my friends thought it was not only a meaningless number but also was deceptive.  My guess is that it conservatively overstates “Premium Subscribers” by about 20% given the number of freebies that Spotify hands out.  We were all actually surprised that the Securities and Exchange Commission allowed Spotify to get away with this kind of disclosure as the definition is buried in a footnote.  Neither friend had noticed it, and these were people who are too smart to miss these things normally.

Then there was a discussion about that New York real estate–Pandora is certainly learning its lesson about sky high overhead and is migrating gradually to Atlanta.  I’ve always been mystified why money losing companies like Spotify get away with locating in some of the highest priced real estate in the world–San Francisco and Manhattan.  And also get away with complaining about royalties instead of rents.  Rather than the labels rewarding them based on subscribers, why not reward them based on subscribers if and only if they also lower their overhead (called SG&A) by a certain percentage.

Both conversations ended with a discussion of the 10 second MBA–buy low, sell high.  This is what you do with a long position in a stock.  In Spotify’s case, we were discussing another kind of position, a short position.  Short selling reverses the equation–buy high, sell low.

This is because the short seller is betting that the stock will trade lower, and usually considerably lower, than the price at the beginning of the short seller’s round trip.  In brief, what happens with short selling is that you borrow the shares from someone who holds them.  You get to borrow them for a fixed period of time.  You then sell those borrowed shares at the then-current market price.

short_sell_example

Because your bet with “directional” short selling is that the shares will decline in value over time after that initial sale of the borrowed shares, you then essentially use the proceeds from the sale of the borrowed stock to purchase the shares before your short period expires.  You then return the borrowed shares after you buy them back.

Sometimes you can make a fortune selling short (which doesn’t require shorting stocks, see George Soros shorting the UK pound stirling and The Big Short).  Of course, it can go the other way, too, and result in a short squeeze if the price of the shorted stock increases and short sellers have to “cover” at a higher price than they sold the borrowed shares so they can return the borrowed shares and not default.

“Short interest” is a published number and can be used as a measurement of market sentiment about a particular stock.  It’s the aggregated number of shares of a stock that have been sold short but haven’t been closed out or “covered.”  (Similar to the “put to call” ratio in options trading.)  So it was a bit remarkable to me that both these friends said they’d probably short Spotify as soon as they could.

That’s an interesting question–when could the Spotify stock be shorted.  In order to short, there must be some inventory of shares available to borrow and trade such as from a brokerage house (who can lend the shares from clients’ margin accounts, for example).  Typically, underwriters of an IPO are not allowed to short their IPO stock for 30 days or so.  However, there is no such restriction on retail investors–and Spotify has no underwriters.

Therefore, there may be no restriction on when the Spotify insiders can short Spotify stock.

And if my anecdotes are any guide, it certainly does look like there will be a market for short sellers.  One could even say that insiders seeking to short Spotify shares are simply acting prudently to protect their downside, not unlike a “collar” or other hedging transaction.  This will be particularly true if there is a real run on the exits and early investors or other holders (like the senior management team) start selling right away given they have none of the usual lockup agreements or restrictions on trading as far as I know.

In the words of one of the friends, the shorting will begin at 9:31 on the first day of trading.  As someone who knows the importance of a few seconds in the world of automated trading, I believe him.

 

 

via Spotify IPO Watch: Buy High, Sell Low — Music Tech Solutions

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