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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

You Can’t Find What You Don’t Look For: @theDavidCrosby Gets Screwed Twice by Big Tech

March 9, 2018 Comments off

From Spotify’s F-1:  “Spotify was founded on the belief that music is universal and that streaming is a more robust and seamless access model that benefits both artists and music fans.”

Now bend over for that truly seemless access.

David Crosby is one of the most influential musicians, songwriters, vocalists and performers of his generation.  From The Byrds to Crosby, Stills, Nash & Young, to his duo with Graham Nash and his solo work, David Crosby is truly one of the most gifted artists you will ever encounter.  If you don’t know his work, he’s not hard to find–start with the move Woodstock and go from there.  And, of course, his music is readily available on any streaming service or the decade-themed channels on SiriusXM.

But David Crosby has a problem–he recorded much of his seminal work in the wrong year for the digerati and for the warm hearted folk like Jim Meyer at SiriusXM, Tim Westergren while at Pandora, the Digital Media Association and the MIC Coalition who oppose treating pre-72 recordings like all others for digtial sound recording performance royalties.

So David gets screwed on the sound recordings.  Not being content with one sleazeball move, Spotify, Google, Amazon and iHeart also screw him on his songs by filing “address unknown” notices with the Copyright Office.  (And, it must be said, the Copyright Office gets their licks in, too, by allowing this to happen.)

Here’s a run on David Crosby’s recordings for which these monopolists have filed at least 156 “address unknown” NOIs:

David Crosby

In a recent interview with Rolling Stone, David Crosby said:

Spotify’s plan to go public, filed last week, could generate $23 billion and make the world’s biggest record labels hundreds of millions of dollars richer — but the Swedish streaming giant has yet to soothe grumbling and litigious artists and songwriters who say its royalty payments are unfairly low. “They rigged it so they don’t pay the artist,” David Crosby tells Rolling Stone. “I’ve lost half of my income because of these clever fellas. I used to make money off my records, but now I don’t make any.”

This gives doubling down a whole new meaning.

But Daniel Ek is about to make serious bank while he has many outstanding bills to songwriters and artists, including David Crosby.  And the one thing we know for sure when Spotify files an NOI is that they can’t say “but we paid the labels” or “we paid the publishers”.  They are not paying at all because they use a loophole to get out of any royalty obligation–while getting all the liability insulation of the compulsory license.

Thanks, Copyright Office.

Here’s another thing that’s about to happen to Daniel Ek.  Remember old “million a month” Tim Westergren who sold Pandora stock every month netting him over $1 million a month?  Want to bet that Daniel Ek does the same and that he’s going to make way more than $1 million a month?

We will be happy to bring you that news that you won’t read in the mainstream media as soon as Ek’s filings start to go through the SEC.  Then he can explain to David Crosby how it feels to be a billionaire off the backs of the songwriters and artists he stiffs.

How Shareholder Lawsuits Against Spotify May Have Just Gotten Easier

February 25, 2018 2 comments
maginot-line

The Maginot Line

The Digital Media Association is as obsessed with crushing the ability of independent songwriters and small publishers to sue companies like Spotify for copyright infringement as the industry negotiators are with presenting a new safe harbor for infringers like it was a fantastic give in the Music Modernization Act.  But at least where Spotify is concerned, as a public company they may be begging for the very statutory damages they are so anxious to eliminate.

Spotify lawyers like Christopher Sprigman and his compadre Lawrence Lessig have been trying to get rid of statutory damages and bring back 1909-style copyright registration for years.  (See also Pamela Samuelson and the list goes on.)

But now that the industry has acquiesced in both of those long cherished goals of the anti-copyright crowd, songwriters will have to look elsewhere to regain the kind of punch that they got with the statutory damages stick.  Why?  Because  a benevolent and patriarchal government is taking that stick away from the little guy and giving it to the largest corporations in commercial history.  (And recording artists and record companies–you’re next and you’ll know who to thank.  See Transparency in Music Licensing and Ownership Act that is quietly adding co-sponsors.)

But you say, what could be a bigger stick than statutory damages?  It might be shareholder derivative suits.  And Sprigman’s benefactor Google is a great example of what that means.

MTP readers will recall that we have written before about Google’s “dual class shares” that created 10 for 1 supervoting stock that is owned only by insiders like Eric “Uncle Sugar” Schmidt, Larry Page and Sergey Brin.  If you’ve ever watched the video of a Google shareholder meeting, you’ll have seen David Drummond (who has his own problems) reading out the news of how any shareholder motion that was not supported by the insiders was defeated–and massively defeated due to the supervoting stock.  The only thing that’s remarkable is that the shareholders keep trying.  Because while all shareholders are equal, at Google, some shareholders are more equal than others.  Ten times more equal if they give you voting stock at all.  Google shareholders give the right to be forgotten a whole new meaning.

That’s right–Google has what I call the “you break it, you bought it” class of stock that gives the insiders total control over all aspects of their corporation.  If you’re not an insider, your role is to shut up and enjoy the ride.  Don’t get me wrong–lots of people do.

But some don’t.  Most recently, a Google shareholder tried to question the company’s top executives about their pre-#metoo opposition to the Stop Enabling Sex Traffickers Act.

If you watch the video, you’ll get the idea.  Google is comfortable with their opposition to stopping sex trafficking in favor of profitable safe harbors, so sit down, shut up and count your money.  That should demonstrate two things:  First, the Alphas are not interested in anything anyone else has to say although they will go through the motions to tolerate the poor Epsilons.  Second, these policy positions and more importantly corporate actions are solely the responsibility of the insiders in the More Equal Than You system of corporate governance.

And guess what?  Bloomberg reports that Silicon Valley mogul wanna be Daniel Ek mimicked the Google model with the supposedly egalitarian Spotify.

Chief Executive Officer Daniel Ek and Vice Chairman Martin Lorentzon own a class of stock that assures their hold on the company after the shares begin trading, said the people, who asked not to be identified because the terms aren’t public. Another class will be tradeable by investors.

That means public investors will be able to own part of the world’s largest paid music service in the next couple of months, but won’t have much say about its future. Years after going public, some of the biggest technology companies, including Google parent Alphabet Inc. and Facebook Inc., remain under the control of founders who hold shares with super-voting rights.

Company founders employ so-called dual-class structures to take advantage of the perks of being publicly traded without surrendering control. Such owners can make acquisitions that dilute their economic interest without loosing their grip.

Ek, who co-founded Spotify about a decade ago in Stockholm, has looked to such companies for direction. He invited Facebook founder Mark Zuckerberg to his wedding and has publicly praised the leadership of Snap Inc., which gave its investors no voting rights in its initial public offering last March.

If the Google shareholder meetings are any guide, it’s not that investors won’t have much say, they won’t have any say at all.  Unless they are sued by their stockholders in what is called a shareholder derivative suit.  A shareholder suit is when a shareholder sues the corporation’s officers or board of directors for a cause of action against the corporation that isn’t being brought because it would require the board of directors to sue itself.  These are often based on breach of fiduciary duty.

Case in point:  Google’s sale of advertising promoting the sale and distribution of illegal drugs.  Google signed a nonprosecution agreement with the Department of Justice, second cousin to a plea bargain, after a four year grand jury investigation, producing four million documents to the investigators and paying a $500,000,000 fine.  Walking around money for Google, but nobody was fired and according to the U.S. Attorney bringing the case, the paper trail implicated Google’s senior management including Larry Page (which disclosure resulted in an apology to Google from the DOJ and the “muzzling” of the US Attorney,)

Shareholders were pissed and a pension fund brought a derivative case (read the complaint) against the Google board including Page, Brin, Schmidt, John Doerr and Sheryl Sandberg.  (Yes, that Sheryl Sandberg.)  This case resulted in a settlement that required Google to spend over $250,000,000.

Shareholder Suite

So this is the kind of thing that stockholders bring themselves when they know that the government never will and there’s a case to be made.  Shareholder suits are kind of like the “private attorney general” laws that used to be in the Copyright Act where the government avoided the burden of actually enforcing its laws itself and instead relied on the market to do so.  How did they do this?  By giving private actors a big stick like the statutory damages and attorneys’ fees (recent precedent notwithstanding) they are now taking away from songwriters in the Music Modernization Act.

But never fear–songwriters who are also Spotify stockholders will still have the stick of shareholder derivative suits to go after malfeasance in the boardroom.  Shareholder derivative suits are in a very broad sense kind of like class actions, something Spotify is very familiar with.  The class is stockholders and the defendants are often limited to the officers and directors of the company for doing things like, oh, say, committing massive acts of willful copyright infringement that probably could be criminally prosecuted if there were any prosecutors with the chutzpah to actually enforce the copyright law.

And once Spotify sells shares to the public, the insiders may control the infringement but they can’t control who buys their stock.

Since Mr. Ek seems to want to be just like Google, maybe he’ll be just like Google in another way, too.  And remember–this is just the beginning of the disclosure of the inner workings of Spotify that will start to dribble out as its SEC disclosures become due and payable.  And these supervoting stock classes are a very good way to demonstrate that you broke it, you bought it.

You want all the control?  Well, you got it.  And having all the control means having all the responsibility, too.  Just ask Uncle Sugar.

 

So Much for Conversion: Apple Set to Pass Spotify in Subscribers

February 4, 2018 Comments off

Remember this one?

070715-daniel_ek-wired

Spotify was saving us all from piracy by giving the music for free in its ad supported tier. And if you had any doubts about that, just ask any Spotify employee, particularly circa 2011 or so.  They’d tell you in no uncertain terms that not only did you just not get it, you were failing on a cosmological level not to understand that that person you saw in the distance walking on water was not Jesus.  It was you know who.

Some of us believe that most people have an ambivalent relationship with advertising.  Some tolerate it, and of course you do hear people saying in their best automoton impression how advertising is “useful” which if it’s said just right can send a chill up the spine at the sheer Stepfordness of it all.  Many people, however, loathe advertising, which is why you constantly hear “leave it there” or “don’t move” from some on-air folk before a commercial break.  Some of those advertising loathers are themselves artists, which is why they have restrictions in their contracts about how their music can be used in advertising.

All of which went out the window with Spotify, because Spotify was going to save us all from piracy.  (We’ll leave out the Daniel Ek/U-torrent part today.)

And when Apple launched Apple Music as a subscription only service, Spotify had a meltdown–staring with Daniel Ek himself who Tweeted “Oh ok” which I guess he thought was something of a put down.

But–what about the conversion bit?  Apple is into conversion, too, but a different kind.  As of January 2018, the Apple installed base was over 1.3 billion.  Set aside what’s probably relatively minor overlap (mulitple phones on same billing account), one way or another that’s an existing customer base of over 1 billion people that already have iTunes installed, already have a billing relationship with Apple and are already predisposed to buy an Apple Music subscription.  What you might call economy of scale.

Spotify on the other hand wants you to believe that they can some how take people who have many, many commercial alternatives to theft–all of which they’ve ignored–and get them to use an advertising supported model.  A larger potential market, but people who don’t know you, don’t pay money for music online (yes, I know there’s an argument that they buy other things, which I don’t buy), and for many of them, people who don’t like us much.  Dedicated followers of Lessig in many cases.

So it should be no surprise that Anne Steele in the Wall Street Journal is reporting that if you include users who have subscribed to free or discounted subscriptions, Apple is actually ahead of Spotify in the US:

Apple Music has already passed Spotify. Including people who are still in free or deeply discounted trial periods leading up to paid subscription, Apple Music has a slight edge on Spotify in the U.S., according to one of the people familiar with the figures.

Apple Music has three to four times the number of such trial users as Spotify, according to this person, in part because it doesn’t offer a free tier. Also, all Apple Music subscribers are entered automatically into a free initial three-month period. Excluding those trial users, Spotify is ahead, but by a small amount—and that gap is closing.

And that’s kind of the point–Apple already has the billing relationship with their users so any resources they spend to convert users to subscribers is money well spent with a much higher likelihood of return.

But Anne Steele is one of the only journalists I’ve ever read who even mentions the possiblity that Spotify’s subscriber numbers are…let’s say exaggerated.   As she notes:

One question lingering in the industry is what metrics Spotify will have to disclose once it becomes a publicly traded company. The service has periodically released global subscriber totals and just last month touted a new high of 70 million.

Pop quiz–and be honest now–how many times have you thought that Spotify has 70 million paying subscribers?  Meaning users who are not on their 14th 90 day free trial?  If you look carefully you will see that Spotify itself doesn’t ever say 70 million paid subscribers.  The hoorah Spotify boosters in the press add “paid”.  But when the cold hand of the Sarbanes-Oxley truth in public company reporting law comes into Spotify’s post-IPO life like it does Apple’s, that 70 million number may get clarified–a lot.  And my bet is it will move downward or that there will start to be a greater distinction drawn by Spotify between subscribers and paying subscribers.

And that restatement of subcribers is not the kind of conversion that Spotify wants.

 

The Slippery Slope of Censorship: @HuffPost Pulls Story Critical of @Spotify Ahead of IPO — The Trichordist

January 9, 2018 Comments off

Artists Rights advocate Blake Morgan (#IRespectMusic) published a story in the Huffington Post this morning critical of Spotify. The story was rapidly gaining traction when it was suddenly deleted and Morgan received this email from the Huffington Post telling him he’d been censored From: Bryan Maygers Subject: Spotify’s Fatal Flaw Exposed Date: January 8, 2018 at 11:43:41 AM EST […]

Here’s Blake’s piece in its entirety.

Spotify’s Fatal Flaw Exposed: How My Closed-Door Meeting with Execs Ended in a Shouting Match

I love streaming.

I love making playlists, I love being able to download streamed music so I can listen when I’m offline, and I love being able to bring that music with me. In short, I think it’s a great distribution method.

What I don’t love is how little musicians get paid for all that streaming. It’s not fair––not even close. What’s more, middle-class music makers are the ones who are hit hardest, whose businesses are threatened, and whose families are put at risk. So how can I be against the way streaming companies treat musicians but not be
against streaming itself?

The same way I’m against the electric chair, but not against electricity.

Read the complete post on The Trichordist:  The Slippery Slope of Censorship: @HuffPost Pulls Story Critical of @Spotify Ahead of IPO — The Trichordist

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